What is usually covered in a deed of indemnity?
A typical deed of indemnity is structured in the following way:
- Recitals – These describe the background to the deed,
including the date the director was appointed.
- Definitions – These cover key contractual terms such as
“papers”, “claim” and “liability”.
- Access to documents – These clauses often cover the
rights and obligations of the parties in relation to company
documents and related matters, including matters such
as confidentiality and legal professional privilege.
- Indemnity – The indemnity clauses detail the scope
of the company’s indemnity in favour of the director and
the rights and obligations of the parties in the event that
a party seeks to rely on the indemnity.
- Insurance – The insurance clauses deal with the parties’
rights and obligations in relation to directors’ and officers’
(D&O) liability insurance which can include the type and
term of insurance cover to be maintained.
- Legal ‘boilerplate’ clauses – These clauses cover areas
such as governing law and notice provisions.
- Execution clause – This clause is found at the end of the
deed (but usually before any schedules or annexures)
for signature by the director and a representative
of the company
Points to consider
- A company director is subject to many legal duties.
A breach of those duties for any reason, intentional
or otherwise, may result in the director incurring
either a liability – for example, a damages judgment
– or legal costs to defend a claim. The director may
also become involved in a regulatory investigation
by bodies such as ASIC.
- In some circumstances the company’s constitution
may provide an indemnity to a director. However,
as the constitution can be amended without the
director’s specific consent, it is preferable for
a director to enter into a separate deed with the
company to provide protection for a director,
particularly for that period of time after they
cease serving as a director of the company.
- The scope of each deed of indemnity will depend
on the position agreed by the company and the
director. It is therefore prudent for the director
to obtain independent legal advice before entering
the deed of indemnity.
In a corporate group context, it is common for directors
of the holding company and subsidiaries to receive an
indemnity from the holding company (or sometimes the
main operating subsidiary) rather than each subsidiary
entering into separate deeds with its directors. Where this
occurs, the legal restrictions on the scope of the indemnity
are noted below (see Restrictions on indemnity).
The contents of a typical deed of indemnity
Access to documents
The deed should require the company to retain appropriate
company records so that the director has access to relevant
documents in the event of a claim.
Directors have the right to access company documents
under the Corporations Act 2001 however these rights
of access can be affected by whether the director
is currently sitting on the company’s board or not.
Deeds of indemnity can reflect the statutory position
in the Corporations Act 2001 or provide access to a
broader or narrower range of documents. At a minimum, a
director should be able to access all board papers, minutes,
memoranda and legal opinions provided to the board
during the period he or she served as a director, including
financial statements, subcommittee papers and advices and
documents referred to in those documents.
Companies are often reluctant to provide directors with
unfettered access to company documents. The right
of access is commonly triggered by a claim, proceedings
or regulatory investigation, so it is preferable that the
terms of access are broadly defined and include civil,
criminal or administrative claims, either commenced or
threatened, and regulatory proceedings or investigations.
Access to documents is usually provided for a period
of seven years after the person ceases to be a director,
or up to the conclusion of any claim or proceedings
if this takes longer.
Deeds of indemnity often also cover:
- ownership of the documents, which is typically retained
by the company;
- confidentiality; and
- a process to preserve legal professional privilege
in legal advices or any other communications between
the company and its lawyers.
Many deeds provide indemnity ’to the maximum extent
permitted by law’. This is the best option for a director.
Some deeds specifically reference the legal restrictions
referred to below (see Restrictions on indemnity)
or introduce additional restrictions.
Ideally, from a director’s perspective, the company will
indemnify the director for all claims arising from any acts
or omissions and the indemnity will not be limited by time.
However, companies may seek to impose a limit on the
indemnity of seven years after a director leaves, which
reflects the usual limitation periods in civil claims.
It is also ideal for a deed to provide for legal costs to be
indemnified as they arise or in advance rather than once
the claim is resolved, which can leave the director exposed
to significant legal bills while the claim is in process.
For example, the claim could be resolved as a result
of a judgement handed down by a court after a full trial.
When a company pays a director’s legal costs it frequently
acquires rights in relation to the conduct of the claim –
typically it will either control the defence of a claim or have
a right to ‘associate’ in the defence of a claim. There can
be sound reasons for this – for example, co-ordinating the
defence of claims against multiple directors can be more
efficient and less costly. However, there is a balancing act
between the interests of the company and those of the
director. A common compromise is for the company
to control the defence of a claim against one or more
directors subject to certain provisions.
These might include a:
- requirement for the company to have regard for potential
damage to a director’s reputation;
- requirement for the director’s consent to the settlement
of a claim;
- right for the director to engage separate legal
representation, which would be paid for by the company,
in the event of a conflict of interest with the company
or another director.
Restrictions on indemnity
The scope of the indemnity will depend on the terms
of the deed negotiated between the company and the
director. A company may indemnify a director for liabilities
and costs incurred while acting as a director of the
company, however this is subject to the restrictions in
relation to liabilities in s199A (2) of the Corporations Act
2001 that provides that a company must not indemnify
a director against:
- a liability owed to the company or a related
- a liability for certain pecuniary penalty orders
or compensation orders;
- a liability that is owed to someone other than the
company or a related body corporate and did not arise
out of conduct in good faith.
As to legal costs, s 199A (3) provides that a company must
not indemnify against legal costs if the costs are incurred:
- in defending or resisting proceedings in which the
director is found to have a liability for which they could
not be indemnified by reason of s 199A (2) above;
- in defending or resisting criminal proceedings in which
the director is found guilty;
- in defending or resisting proceedings brought
by ASIC or a liquidator for a court order if
the grounds for making the order are found
by the court to have been established.
Although a company is prohibited
from indemnifying a director for some
liabilities such as fraud, companies
can advance defence costs to defend
claims alleging these matters provided
that these costs are repaid if the
director is not successful in defending
the claim. Companies can also pay
premiums for insurance relating
to many of these liabilities.
D&O (directors and officers) insurance indemnifies a
director for liabilities incurred in the role of director.
It is similar to a deed of indemnity but provides important
additional protection where the company:
- is legally prohibited from indemnifying a director
- decides not to indemnify a director; and/or
- is unable to indemnify a director because, for example,
it is insolvent.
Except in a small number of circumstances, a company
is permitted to pay the premium for a director’s D&O
insurance policy. As a result, deeds of indemnity commonly
deal with rights and obligations relating to D&O insurance.
The D&O insurance should address the following key areas:
- The primary obligation of the company to ensure
continuity of cover for the director by procuring and
maintaining D&O insurance. This obligation will usually
continue for seven years after a director ceases to serve
as a director for the company.
- The scope and terms of the D&O insurance.
This will ordinarily require that the terms of the policy
are consistent with the coverage obtained by comparable
companies. The deed may also deal with the financial
limits of the D&O insurances – again with reference
to comparable companies – and the minimum security
rating of the D&O insurer.
- The ongoing rights and obligations of both parties.
These can include:
- the right of a director to obtain a copy of the
D&O policy and a certificate of currency;
- an obligation for the director to provide
information required by the company to obtain
the D&O insurance – for example for the purposes
of disclosure to the insurer;
- an obligation for the company to do to nothing which
prejudices a director’s rights under the D&O insurance.
This document is part of a Director Tools series prepared by the Australian Institute of Company Directors. This series has been designed to provide general background information and as a
starting point for undertaking a board-related activity. It is not designed to replace legal advice or a detailed review of the subject matter. The material in this document does not constitute
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