Do you understand your deed of indemnity? Reduce your personal liability risk with a deed of indemnity.
What does a deed of indemnity include?
Companies usually provide directors and/ or officers with indemnities, via their constitution and deed of indemnity. The table below provides an overview of a typical deed of indemnity.
Deeds of indemnity should be regularly reviewed, and you should consider obtaining independent advice to assist you to do so.
Usually unlimited - responding to liabilities incurred by directors and officers, regardless of when claim is made. However, if the company is deregistered and ceases to exist, this will impact the enforceability of the deed of indemnity.
Usually no monetary cap, providing broad cover.
Usually covers current and former directors and officers.
Should provide an indemnity (e.g. for a director for all liabilities incurred, to the extent permitted by law), to be covered by D&O insurance and rights of access to documents including the D&O insurance policy.
Usually provides access to immediate funding for defence costs, irrespective of progress of a claim under D&O insurance.
What is covered?
Indemnities contained in the company constitution and deed of indemnity
You should consider the extent of legal protections afforded by the constitution of the company and the deed of indemnity.
It is important that the constitution and deed of indemnity are consistent, to avoid disputes over the different provisions in the two documents.
A deed of indemnity is desirable in addition to the indemnity provided in a constitution because the company’s constitution alone may not offer you sufficient protection. For example, the constitution:
- Does not usually bind the company once you cease to be a director.
- Can be changed.
Many company constitutions set out rights of indemnity for directors, and often also include provision for directors and officers (D&O) insurance. Alternatively, they may simply provide that the company may indemnify directors.
Deed of indemnity
The deed of indemnity is an agreement between the company and a director. It may give current and former directors:
- the benefit of an indemnity
- D&O insurance
- Access to documents and D&O insurance policy, during and after the period they hold the position of director.
The deed of indemnity may also require approval by the company in a general meeting.
Duration of company indemnity
Ideally, a deed of indemnity:
- Is not limited to a certain period of time — responding to liabilities incurred by directors and officers, regardless of when a claim is made.
- Covers claims made against a director or officer after they cease being a director or officer.
You should give careful consideration to any provision in the deed of indemnity which reserves a right in the company to revoke the indemnity or to amend it without your consent.
Legal limits on the indemnities a company can provide to a director
Australian companies are prohibited by law (Corporations Act 2001 s199A) from indemnifying a director against:
- Liabilities the director owes to the company or a related company.
- Liabilities for certain pecuniary penalties or compensation orders.
- Liabilities the director owes to someone other than the company which did not arise out of conduct by the person acting in good faith.
In addition, companies are prohibited from indemnifying a director for legal costs where the costs are incurred:
- In defending an action for a liability where the director is found to have a liability referred to above.
- In defending criminal proceedings in which the director is found guilty.
- In defending proceedings brought by ASIC or a liquidator for a court order if the grounds for making the order are found by a court to have been established.
- In connection with proceedings for relief under the Corporations Act where the Court denies relief.
In effect, legislation limits the ability of the company to indemnify you. One of the primary reasons that companies take out D&O insurance is to cover the 'gaps' left by these legal limits.
Deeds of indemnity ideally provide that the reasonable costs and expenses of defending proceedings against a director will be paid by the company.
You should also consider whether the company deed of indemnity provides for the advancement of legal costs. A significant risk faced by directors is that legal proceedings will be commenced against them, and they will need to seek potentially costly legal advice immediately in order to defend themselves in those proceedings. It can take a long time for legal costs to be advanced under the terms of a directors and officers (D&O) insurance policy.
In many instances, deeds of indemnity will provide for the advancement of legal costs, even in circumstances where the director may not ultimately be entitled to be indemnified for those costs, for example where there is an allegation of dishonesty or bad faith, so that the director is treated as being innocent until a court determines otherwise.
The deed of indemnity is likely to provide that the director is required to repay legal costs that have been advanced, if a court makes an adverse finding of dishonesty or bad faith against the director.
Conduct of legal proceedings
You should consider the level of control that you would have over the way legal proceedings against you could be conducted.
Many deeds of indemnity provide that the company and/or D&O insurer have the right to defend claims on behalf of a director. They may also place an obligation on directors to co-operate with the company and D&O insurer in the conduct of legal proceedings.
Ideally, the deed on indemnity prevents the company from settling proceedings against a director without the director’s consent, and provides for a fair dispute resolution process in the event that there is a dispute as to whether a matter should be settled.
Separate legal representatives
In some disputes there may be a conflict between your interests and those of the company. Ideally, the deed of indemnity provides the director with the right to instruct a separate legal representative in the circumstances of a conflict of interest.
Rights of access and insurance
Deeds of indemnity are sometimes referred to as 'deeds of indemnity, access and insurance' because they cover a range of rights and obligations.
Right of access to company records
It is important that a director has a right to access company documents, as these can provide a director with the evidence they need to mount a defence.
By law, companies are required to keep certain documents, and directors have a right of access to company documents for certain purposes (Corporations Act 2001 ss198F, 290).
Ideally, the deed of indemnity provides a right for directors to access company documents, including board papers and a mechanism for practical access to documents.
Obligation on company to obtain D&O insurance
Ideally, the deed of indemnity requires the company to:
- Maintain directors and officers (D&O) insurance for the director during the time that they hold office and for at least seven years after they cease to hold office.
- Pay the premium.
- Provide the director with access to the insurance policy and evidence of payment of the premium.
Joint legal professional privilege
In some circumstances, your interests as a director may differ from the interests of the company, but one firm of lawyers is instructed for you both. Issues of joint legal professional privilege may arise in the context of, for example, regulatory investigations.
A deed of indemnity may impose an obligation on the company to instruct its legal advisers to provide their advice for the benefit of both the company and the directors. The intention behind this is that both the company and its directors may claim privilege in the advice.
Ideally, the deed of indemnity goes further, providing that the company must not do anything to waive privilege in advice that has been prepared for the joint benefit of the company and its directors.
Appointments to other companies
Sometimes a company may nominate a member of its board to become a member of the board of another company.
If this situation applies to you, or may apply to you, then you should consider whether the deed of indemnity will provide a primary source of protection.
Before accepting such an appointment, you should consider the interaction between the company’s indemnities and D&O insurance, and those of the other company.
Negotiating and reviewing the deed of indemnity
- Consider obtaining independent legal advice and representation and conducting negotiations on an arm's-length-basis. If feasible, your independent legal advisor should produce a draft deed for review by the company.
- Consider whether the company has a process for reviewing the deed of indemnity. Ideally, the deed of indemnity and D&O insurance arrangements should be reviewed every 12 months.
- Consider whether the company has the assets to fund the indemnities.
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