What Is a Deed Of Indemnity?

Being a company director comes with many legal duties and obligations. If things go wrong or you breach your duties, you can be personally responsible for any resulting costs. One way to minimise your risks is to sign a deed of indemnity when you become director. A deed of indemnity is a legal agreement between a director and a company. It ensures that you, the director, are not personally responsible for the costs of any breaches. This article will explain: 

• how deeds of indemnity work;
• the types of costs and risks they cover; and 
• the essential terms a deed of indemnity should include.

Why Do I Need a Deed of Indemnity?

A deed of indemnity can give you a number of safeguards against the personal risks and costs you may face as a company director. A director is personally responsible for any breaches of their legal duties and obligations, such as breaching their duty to: 

• prevent the company from insolvent trading (i.e. incurring new debts when the company is already in debt); and
• avoid conflicts of interest. 

Breaches can result in legal penalties such as: 

• fines; 
• bans; and 
• costly legal disputes. 

A deed of indemnity means that your company will cover any costs that result from your breaches as director. The deed usually also includes other protections for directors, such as:

• insurance; and 
• access to documents. 

Company constitutions often include indemnity clauses that cover directors in certain circumstances. These will not apply if you stop being a director, however, even though many of the obligations and risks will continue past this time. A deed of indemnity may also cover any costs you incur in performing your duties as a director of the company. 

Essential Elements of a Deed of Indemnity

Although every deed of indemnity should be tailored to suit the company, they should all include the following essential elements.

Definitions and Scope

Make sure the deed of indemnity has clear definitions for all key terms, such as: 

• liability; 
• claim; and 
• company.

The coverage the deed provides should also be clearly set out. The deed should provide unlimited coverage, so it applies even if you are no longer a director. 

Indemnity Clause

The indemnity clause should outline the extent to which the company will cover your legal responsibility as a director. A standard indemnity clause will say the company indemnifies the director to ‘the maximum extent permitted by law’. This means that most clauses will exclude indemnity in certain circumstances, such as for fraudulent, dishonest or criminal behaviour. 

Document Access

Directors generally have a legal right to access a company’s documents in certain circumstances. However, a deed of indemnity ensures this access is granted in a wider range of circumstances. Most importantly, it allows you to access the documents if you need to prepare for any court proceedings. 

Insurance

Companies will usually hold separate insurance for directors and officers, called D&O insurance. A deed of indemnity can ensure that the company holds this insurance and that the minimum requirements of the insurance are met by including a clause that requires the company to: 

• maintain the D&O insurance for the time the director holds office and at least seven years following; 
• pay the insurance premium; and 
• provide proof of the policy to the director.

Extra Protections

A deed of indemnity will not help you if the company faces financial difficulties and is unable to afford any of the costs you would otherwise have to cover. However, if your company is part of a wider group of companies, you could get the parent company or another company to guarantee your company’s indemnity. This will give you additional protection if you face penalties or risks as a director. 

Key Takeaways

Company directors can be personally responsible if things go wrong at a company or they breach any of their legal duties and obligations. However, a deed of indemnity between the director and company can minimise the risks for the director and ensure that the company covers all costs in most circumstances. If you have any questions about deeds of indemnity or need assistance in relation to directors’ duties, please call LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.