As a Director of a company, you may be at personal risk for decisions made in the best interests of the company unless your company indemnifies you. A Director’s indemnity involves a company undertaking to protect its directors against liabilities that they may incur in the course of performing their company duties. A Director’s indemnity may be required (as in some instances by ASIC) or a company can choose to indemnify their directors.

Whether your company is a small business or an entrepreneurial juggernaut- a director’s indemnity is vital. A Director’s indemnity protects corporate directors in the event they are personally sued. Contrary to popular belief, a company does not need to have an action launched by its shareholders for its directors to be made personally liable. Often when a company is sued, directors are brought into legal proceedings by investors, employees, vendors, competitors, and customers just to name a few.

In addition to director’s indemnity, a company can choose to take up director’s and officer’s insurance (D & O insurance). This will depend on the activities your company carries out and the nature of your business. Law Central offers 2 types of Director’s Indemnity Agreements. The Director’s Indemnity Agreement - No Insurance document for when no D & O Insurance is taken, and the Director’s Indemnity Agreement - Compulsory Insurance document for circumstances where the company agrees to hold D & O insurance.

To insure or not to insure?
Law Central’s Director’s Indemnity Agreements offer protection to directors for up to 7 years after they resign from office. This ensures that company directors are protected from actions brought within the limitation period and any tax audits that may be conducted. However, there are some limitations of a director’s indemnity that may warrant additional cover.

Director’s indemnity will only go so far…
Directors and officers may be personally liable for breaching the Corporations Act 2001 (Cth) or the Competition and Consumer Act 2010 (Cth). Under section 229 of Schedule 2 of the Competition and Consumer Act 2010 (Cth), a company is not allowed to indemnify directors and officers against liability for these breaches or against legal defence costs if such liability is established. Any attempt to indemnify these personal liabilities will be declared void under section 230 of Schedule 2 of the Competition and Consumer Act 2010 (Cth).

However, companies are not prohibited by the Competition and Consumer Act 2010 (Cth) or the Corporations Act 2001 (Cth) from arranging D & O insurance for directors and officers. Depending on the insurance policy, directors and officers can be covered against liabilities for these breaches and the associated legal defence costs. As well as protecting corporate directors and officers, D & O insurance may offer added security to future investors.

It is important to remember that a company’s undertaking to indemnify a director will only be of use where there are company funds in place to meet the liabilities incurred. Where a company faces insolvency, D & O insurance provides a stronger guarantee that liabilities will be met. D & O insurance also provides security to employees and people looking to invest in the company.

The company should also consider whether any D & O insurance policy includes or separates the liability for the breach from the Director’s defence costs in the insurance limit.  Gold and Platinum members read on for how Australian Courts may treat D & O insurance policies when charges are made over policies by shareholders anxious to prevent Director’s defence costs eating into the insurance limit.

Final Considerations
It should be a very wary director that operates without any form of indemnification from their company. If your company has chosen to indemnify or insure its directors and officers, make sure it is done correctly. Law Central’s Director’s Indemnity Agreements are a clear and simple way of ensuring that the director is properly protected.