There are increased personal liability risks for directors in the modern corporate environment. This prompts renewed focus on director protection devices.
It is best practice for company directors to negotiate specific contractual obligations providing access to documents, indemnity and insurance, during, and after a director's term of service.
This post highlights the range of issues that arise when negotiating the precise form of deed. Of course, obtaining independent legal advice, attuned to a director's personal circumstances, will be a career investment worth making.
A promise of indemnity is important because although a company's constitution may provide for an indemnity, it may not apply after the role of director ceases. Further, the constitution might only impose a discretionary obligation on the company ('may' rather than 'must') to make good a loss suffered in consequence of the act or default of the director.
Prudent directors will often push for a deed of indemnity:
- by which the company agrees to indemnify all claims arising from any acts or omissions "to the maximum extent permitted by law";
- not limited in time (but if limited, at least 7 years post ceasing as a director, to allow for the expiry of the 6 year limitation period for civil claims);
- for legal costs as they arise, or in advance (not reimbursement);
- giving the company the right to associate in the defence (but not control);
- where company controls the defence of a claim, making that control subject to company having regard to potential for directors' reputation, directors' consent to any settlement, and right to engage separate representation where interests in conflict.
The Corporations Act does control the width of an indemnity that a company may provide to a director. Section 199A(1) provides that, whilst a director/officer, the company cannot exempt a director (or officer) from any liability to the organisation incurred; or indemnify a Director (or officer) against the following liabilities incurred (s 199A(2)):
- a liability owed to the company;
- liabilities for a pecuniary penalty order under s 1317G, or compensation orders under ss 961M, 1317H, 1317HA and 1317HB;
- a liability to another party which did not arise out of conduct in good faith.
Directors' and Officers' Insurance
The indemnity a director ordinarily obtains direct from a company is likely to be wider than that capable of being obtained through any policy of insurance. Even so, insurance helps minimise a director's exposure to corporate insolvency risk, and the need to incur the costs (and delay) of enforcing an indemnity against an uncooperative board. Section 199B permits companies to pay the insurance premium except for cover for certain liabilities.
Today's blog is not the occasion to debate the public policy considerations (including 'gatekeeper' theory) that operate as a limit or bar on indemnity or insurance for directors' misconduct, suffice to concede they quite properly exclude cover for liability arising from a dishonest or fraudulent act or omission by the insured.
"The rationale for providing such insurance is clear. In its absence, capable and talented individuals may be unwilling to join boards of directors, particularly as non-executive directors, or may become excessively risk averse on boards, to the detriment of the individual company and the broader commercial community. D&O insurance also recognises that company officers may become personally liable in circumstances where they have scant moral responsibility, for example where uncertainty in the law means that while company directors may subjectively believe they are acting in accordance with their duties, they are later found not to be."
Something to bear in mind is that most directors' and officers' insurance policies in the Australian market are "claims made" policies. This means that, unless the company continues to obtain and maintain D&O insurance after a directors' term of office, the former director will be left uninsured against subsequently emerging claims.
Directors will often seek to require the company to obtain and maintain D&O insurance:
- for at least 7 years post the director's term;
- with coverage terms at least equivalent to those of comparable companies;
- with financial limits as high (or higher) than comparable companies;
- provided by a D&O insurer with a minimum specified security rating;
- giving a right of access by the director to a copy of the policy and certificate of currency; and
- obliging the company not to do anything which prejudices the directors' rights under the policy.
Access to Documents
Keeping a duplicate set of board records on the off chance a claim might later arise is inconvenient and inefficient, as the hoard will probably be insufficient for the director's purposes.
The Corporations Act 2001 (Cth) provides various statutory rights of access to documents:
- s 198F(1) provides existing directors with a statutory right to inspect and take copies of the books of the organisation for the purposes of a legal proceeding to which the director is or may be a party;
- s 290 additionally provides for a director to inspect the financial records of the organisation;
- s 198F (2) allows similar access to both the books and financial records for 7 years after ceasing to be a director.
A former director may require documents for legitimate purposes, such as appearing before a Royal Commission or an ASIC investigation, or to respond to an audit by the Australian Taxation Office. However, as Justice Black recently confirmed (In the matter of Motasea Pty Ltd  NSWSC 69 at ) it is essential to the exercise of a director's right to inspect books under these sections that the director be, actually or prospectively, a party to litigation, and the director must establish the factual background to the application by more than unsubstantiated assertions: (see cases there cited). This section also does not support a director's inspection of books of a company in his or her capacity as a shareholder, for example in order to bring oppression proceedings.
Planning ahead by agitating for broad access rights is a sensible precaution. Such a deed can:
- oblige the company to retain certain company records in the first place;
- give access to a wide range of company records: i.e. board minutes, board papers, financial statements, subcommittee minutes and papers, documents referred to in the minutes, memoranda and legal opinions provided to the board during a director's term;
- be triggered by a broad range of occurrences e.g. civil, criminal, regulatory/administrative [ie ASIC, APRA, ICAC investigation], either threatened or commenced; and
- be unlimited in time (but at least 7 years post ceasing as a director, to allow for expiry of 6 year limitation period for civil claims).
How have you faired in negotiating a deed of access, indemnity and insurance? Drop me a line to discuss: firstname.lastname@example.org.
25 October 2015
Dominique Hogan-Doran SC is a commercial barrister, based in Sydney.
This blog does not constitute legal advice.
Liability limited pursuant to a scheme approve under professional standards legislation.