Indemnities for directors

Introduction

Officers (as defined in the Corporations Act 2001 (Cth) (Corporations Act)) can be held personally liable for losses suffered by various parties as a consequence of their acts or omissions as officers of the company (for example as directors).

As such, to protect directors against such circumstances, it is common practice for companies and directors to have in place Deeds of Indemnity, Insurance and Access and Directors’ and Officers’ Insurance under which the company indemnifies and insures the director against losses suffered by the director in its capacity as director of the company.

To this end, there are prohibitions on the indemnity which companies can provide with respect to acts committed by company officers (including directors), in the Corporations Act. 

Importantly, the ambit of such prohibitions has recently been expanded through the restrictions in the new Competition and Consumer Act 2010 (Cth) (CCA).

Corporations Act

Section 199A of the Corporations Act prohibits a company from indemnifying its officers against:

  • liabilities owed to the company or to a related body corporate;

  • liabilities for certain pecuniary penalty orders or compensation orders under the Corporations Act; and

  • liabilities owed to third parties which did not arise out of conduct in good faith.

Section 199A also prohibits a company from indemnifying its officers against legal costs incurred in defending claims in certain circumstances, such as:

 

  • proceedings in which the officer is found to have a liability for which they could not be indemnified (as above);

  • criminal proceedings in which the director is found guilty; and

  • proceedings brought by ASIC or a liquidator for orders where grounds for making the order are established.

 

New prohibitions against corporate indemnities – CCA

Section 229 of the new CCA widens the circumstances in which a company is prohibited from indemnifying its officers.  Under this section, a company is prohibited from indemnifying its officers (whether by agreement or by making a payment whether directly or through an interposed entity) against either of the following liabilities incurred by the officer:

  • a liability to pay a pecuniary penalty under the consumer protection provisions of the CCA; or

  • legal costs incurred in defending or resisting proceedings in which the person is found to have such a liability.

The penalty for such offence is $2,750.

Furthermore, anything that purports to indemnify a person against such liability (ie a deed of access, insurance and indemnity) is void to the extent that it contravenes section 229 of the CCA.

Lavan Legal comment

The upshot of the current law is that a company cannot indemnify its directors and officers for pecuniary penalties and legal costs, if they are found personally liable for contraventions of consumer protection provisions in the CCA or liabilities detailed in section 199A of the Corporations Act.

When entering into Deeds of Indemnity, Insurance and Access, directors should ensure their company indemnifies them and insures them, to the full extent permitted by law.  Given the significant expansion in the limitations imposed on companies indemnifying their directors, both companies and directors should review the indemnity provisions in their Deeds of Access, Insurance and Indemnity to ensure they comply with the new law.

As part of this process, it would also be prudent for companies and directors to review their relevant directors’ and officers’ insurance policies to ensure that the policies are compliant with the new law and cover the directors to the maximum extent permitted under the law.

For further information on this matter please contact partner Tony Chong on (08) 9288 6843 / tony.chong@lavanlegal.com.au.