How companies can protect their directors and officers

Company directors and officers face growing risk issues as regulation rises in Australia. It’s, therefore, important for companies to safeguard individuals exposed to risk on the business’s behalf.

The penalties for wrongdoing if a director breaches their statutory duties can be significant, as can the legal and professional costs of defending allegations in court. There are many regulators in Australia with the power to investigate and pursue civil or criminal penalties for wrongful conduct by directors and officers, including the Australian Securities and Investment Commission (ASIC), the Australian Taxation Office (ATO), the Australian Competition and Consumer Commission (ACCC), the Australian Federal Police (AFP) and many others.

The sources of financial protection to directors and officers include indemnity under a company’s constitution or a Deed of Access, Indemnity and Insurance, as well as Directors and Officers Insurance, otherwise known as D&O Insurance.

The important thing for directors and officers to know is that there are limitations on the extent to which they can be indemnified by the company or covered under D&O insurance.

All about indemnity

While companies can agree to indemnify directors and officers for liability, and the corporate constitution generally sets out those rights and provides for D&O insurance, it’s wise for office bearers to also enter into a Deed of Access, Indemnity and Insurance.

This Deed is an agreement between the company and the director giving the director access to company records, even after they’ve ceased their role. It also indemnifies directors and officers for legal costs and liabilities relating to their role, and can mandate that the company arrange D&O insurance on their behalf. 

But there are limitations. The law sets minimum standards required for a director to be indemnified or insured and conversely, what conduct could expose the director to personal liability without the protection of an indemnity or insurance. 

For example, the Corporations Act 2001 (Cth) (CA Act) prohibits companies from indemnifying a director or officer for a range of liabilities (not including legal costs) such as liabilities owed to the company, or a liability which the director owes to someone outside of the company which did not arise out of conduct by the person acting in good faith. 

Companies also can’t indemnify an officer or director for defending or resisting criminal proceedings for which they’re found guilty, nor can they indemnify for costs in defending proceedings brought by ASIC or a liquidator if the court finds the grounds for making the order are valid.

Inside D&O Insurance

D&O Insurance is an important protection for directors and officers against liability resulting from claims relating to their managerial actions and decisions.

There are usually three separate parts – Side A, B and C – to D&O insurance. Side A covers directors and officers not indemnified by the company (e.g. in the case of its insolvency), while Side B provides reimbursement to the company for indemnifying directors and officers. Side C is triggered when a securities class action is made against a public entity. 

As with any form of insurance, you need to do your due diligence. Coverage depends on the policy’s provisions and may contain exclusions ranging from insolvency through to non-disclosure.

The CA Act also prevents a company from claiming on D&O Insurance against certain liabilities including conduct involving a wilful breach of duty in relation to the company and a director or officer using their position or information they have for personal gain.

Do your homework

If you’re looking to take on a director’s or officer’s role, then it pays to do your homework. Carefully check the company constitution, any Deed of Access, Indemnity and Insurance, and D&O insurance policy documents to ensure you’re covered against financial risk.

If a claim is made, or an investigation is launched, you should seek legal advice about the financial protection provided as it relates to the claim made against you.

Byline by Holding Redlich Partner Howard Rapke and Associate Anthea McGurty

Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

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