With increased risks, more legal and regulatory compliance obligations to stay on top of, significant funding boosts to regulators, increased use of Royal Commissions, regulator investigations and ASIC’s recent adoption of a ‘Why not litigate?’ approach, the reality is that most directors and company officers will experience some form of claim, litigation or Commission during their professional career.
Why do you need a Deed of Indemnity?
A well drafted, comprehensive Deed of Indemnity is an important contractual protection which requires a company to indemnify you, as an individual director, against potential claims, liabilities, penalties, legal costs and expenses, including when you are no longer a director of the company.
Often a company’s Constitution will include some form of indemnity, however it rarely goes far enough to provide directors with sufficient protections. Plus, the terms of the Constitution:
- will not usually apply once you cease to be a director of the company; and
- can be changed.
What does a Deed of Indemnity cover?
A Deed of Indemnity, on the other hand, is a contract between the company and a director that usually provides an indemnity plus some additional useful rights, should a claim arise that relates to the period when you are or were a director of the company. Usually, your protections under the Deed continue indefinitely.
Importantly, a Deed of Indemnity (when drafted correctly) gives current and former directors:
- Indemnity - the benefit of an indemnity from the company against claims, penalties, legal costs and expenses, subject to some limitations under the Corporations Act (for example, acts by the individual director that were not in good faith, and trading while insolvent).
- Access - the right to access company records and documents, including board papers and minutes, which may be critical evidence for your defence of a claim.
- D&O insurance - obligations on the company to:
- Pay for and maintain a directors and officers (D&O) insurance policy during the period you hold office as a director and for at least seven years after you cease to be a director or officer of the company, and
- Provide the director with access to the insurance policy (both during and post your director term).
Director legal defence costs
Ideally, deeds of indemnity should also provide for the company to pay your reasonable costs and expenses of defending proceedings against you as a director. You should also contemplate the advancement of legal costs, including for the duration of investigations and defence of initial allegations, at least until a court determines the matter. Often, there are significant costs faced by directors in the first instance when legal proceedings are commenced against them and they require costly legal advice and representation immediately to defend themselves. Meanwhile, D&O Insurance policy claims can take a very long time to be processed and legal costs to be advanced.
Questions for your Board
If you don’t have a Deed of Indemnity in place, it is time to put it top of your Board agenda. Consider the following key questions:
- Do you have a quality deed of indemnity from the company that responds to and indemnifies you for liabilities incurred by current and former directors and officers, regardless of when the claim is made?
- Does the indemnity cover directors for all liabilities incurred, to the extent permitted by law, covered by D&O insurance?
- Do you have rights of access to documents and the company’s D&O insurance policy, including after you cease your director position?
- What exactly does your D&O insurance cover, when does it kick in and who decides when to settle and choice of legal representation? The level of control of legal proceedings against you can be critical to both the outcome and your career. If the insurer decides to settle, that can have significant reputational implications for you as a director, and you may prefer to appoint separate legal representation where your interests and the company’s interests conflict.
- Does the Deed of Indemnity provide for the advancement of legal costs, at least until any allegations of dishonesty or bad faith (which cannot be indemnified) have been determined by a court?
In short, a Deed of Indemnity is a critical form of protection for all directors and officers in companies of all sizes.