WHO SHOULD READ THIS
- Company directors, executive officers and in-house counsel.
THINGS YOU NEED TO KNOW
- Deeds of Access, Insurance and Indemnity are an important element of protection for directors and officers against personal liability;
- The company constitution and an indemnity can provide a high level of protection against personal liability; and
- A policy of D&O insurance is essential to provide protection for liability arising after the director ceases to hold office.
WHAT YOU NEED TO DO
- If directors and officers do not have a Deed of Access, Insurance and Indemnity in effect, then they should seek to secure one.
In Part 1 of this focus series, we touched on how companies usually protect their directors and officers from personal liability through the company constitution or a formal deed of indemnity.
In this final article, we take a closer look at deeds of indemnity and why directors and senior officers should have them and how they work together with D&O insurance policies.
What is a Deed of Access, Insurance and Indemnity?
A Deed of Access, Insurance and Indemnity is an agreement between the company and a director or company officer. As the name suggests it provides:
- access to company documents which the company must maintain and the D&O insurance policy;
- an indemnity for the directors and officers to the extent permitted by law; and
- the benefit of D&O insurance that the company must arrange on their behalf and pay for the premium.
Why have one?
There is no single means by which a company director or officer can gain protection from all personal liability arising from company related activities. A Deed of Access, Insurance and Indemnity is one of the key means by which directors and officers can manage their personal risk and liability.
Directors may also be entitled to an indemnity pursuant to the terms of the company constitution. However, this alone may not offer sufficient protection because it will usually not be binding once a person ceases to be a director or if the company constitution is changed.
Access to documents
When faced with a claim against them in their personal capacity, a director will most likely require access to company records in order to defend the claim. The Corporations Act 2001 (Cth) permits current directors to access company books (other than financial records) but only for the purposes of a legal proceeding to which the person is a party, proposes to bring or believes will be brought against them. Former directors have the same right for a period of seven years after they cease to be a director.
Entering into a deed can broaden and regulate access to documents by stipulating:
- that the company must maintain specific books and records for a nominated period;
- the classes of documents which the director can have access to and the permitted purposes for which access will be granted. This might include board papers and minutes, documents mentioned in them and legal opinions necessary to defend claims;
- a framework for access to any privileged documents in a way which ensures that the company's privilege is protected; and
- the period of time access is permitted. This may be unlimited but should be for at least seven years after the directors ceases to hold office.
A company is permitted to indemnify its directors against liabilities that they incur while acting in that capacity, including for legal costs. However, there are limits on the extent to which a company can indemnify a director. The Corporations Act prohibits indemnifying a director against liabilities:
- owed to the company itself or a related entity;
- for certain pecuniary penalties or compensation orders; and
- owed to someone other than the company that did not arise out of conduct in good faith.
There are also limits on the extent to which a company may indemnify a director for legal costs incurred in the defence of proceedings. These include proceedings:
- where the director is found to have a liability for which they are not permitted to be indemnified;
- involving criminal charges for which the director has been found guilty;
- brought by ASIC or a liquidator for a court order if the grounds for making the order are established; and
- for relief under the Corporations Act where the Court denies relief.
Despite these restrictions, it is permissible for a company to agree to advance payment of legal costs to defend an action against a director up to the point where any adverse finding is made in the proceedings that would prohibit the indemnification. If such a finding is made, the director will be required to repay the costs.
A company is also permitted to pay the premium for a policy of D&O insurance, provided that it does not cover liability arising out of conduct involving a wilful breach of duty or misuse of their position or information gained in their capacity as a director. Ordinarily, a D&O insurance policy will exclude cover for such events meaning that these restrictions will not affect the ability of the company to obtain cover for the directors.
Although an indemnity from a company can provide financial protection to a director, it will be of no use in the event of corporate insolvency. Further, a company may not automatically agree to indemnify a director in the event of a claim. For these reasons, D&O insurance is also essential financial protection for directors.
The Deed of Access, Insurance and Indemnity should deal with the following issues pertaining to D&O insurance:
- The period of time for which cover must be maintained. Ideally, this should be for at least seven years after the director ceases to hold office;
- The amount and terms of cover. These should reflect the size and complexity of the company operations and the industry in which it operates;
- The right of the director to access a copy of the policy terms and conditions. Self evidently, the director should have access to the policy documents; and
- The company will pay the premium for the policy.
For more information about the cover afforded by a D&O insurance policy, see Part 1 of this Focus Series here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.