Are you a director of a company and want to be protected in case anything goes wrong? Thankfully, company directors can breathe easier knowing that they have a Deed of Indemnity in place.
So you’ve just set up your own company and registered your board of directors with ASIC. Perhaps you’ve also trademarked your logo and started marketing your brand. In the early stages of starting a company, it can be easy to neglect important risk-reduction strategies.
Although insurance can provide some protections, they are not all-encompassing. For company directors, a Deed of Indemnity can make all the difference by affording protection this way. This is a legal document which will prove immensely important if the company ever gets into hot water. In this guide, we’ll explain how a Deed of Indemnity works and why every company director should have one.
What is a Deed of Indemnity?
A Deed of Indemnity is a legal agreement between a company and a company director or company officer. This Deed contains terms of how a company will indemnify a company director. Further, it can also cover the costs incurred by a director or officer while performing their role.
Why use one?
Under the Corporations Act 2001 (Cth), a director is subject to many duties and obligations. These include the duty to avoid conflicts of interest and the duty to prevent the company from trading if insolvent. If a director breaches one of their duties, this can result in serious legal penalties such as fines and bans. Further, legal costs in matters such as these can escalate rapidly.
A director is personally liable if they are found to be in breach of their duties. Similarly, the company is not accountable for the costs incurred. With a Deed of Indemnity, a company can pay for these costs for the director. However, this may vary depending on the scope determined in the agreement.
Although there may be a indemnity clause in the company constitution, this may not apply to a director or officer that has left the company. A Deed of Indemnity can clarify a lot of misconceptions about liability and be applicable to a former director. A Deed of Indemnity is a great way to avoid directors paying costs out of their own pocket. Doubly, it works as a good incentive for directors and officers to work at your company.
What to include in your deed
1. Clear definitions
As with any contract, deed or agreement, have clear and unambiguous definitions is crucial. When it comes to Deeds of Indemnity, particular terms that should be defined include ‘liability’, ‘claim’ and ‘company’ amongst others.
2. Indemnity clause
You should detail to what extent your company is willing to cover for the liability and legal costs of a director or officer when they are carrying out their role. Many Deeds of Indemnity specify that a company will protect a director or officer “to the maximum extent permitted by law.” However, the scope can be tailored for each company.
There are some circumstances which won’t be covered by a Deed of Indemnity. These are the categories that the law prohibits the company from paying for, such as:
- Liability for fraudulent, dishonest or criminal behaviour;
- Liability for certain compensation and penalty orders; and
- Liability to the company.
Directors’ and Officers’ Insurance work as another form of protection for the director or officer, and can provide additional protection for the above prohibited fields, amongst other situations. The Deed should cover the scope and terms of the insurance, and cover who is obliged to maintain the insurance.
4. Access to Documents
Directors have a right to access company documents to assist their case if they are taken to court, and Deeds of Indemnity can provide either a broader or narrower access to a range of documents, depending on the company’s needs.
5. Execution clause
A deed or contract has no use if it’s not executed. The execution clause lives at the end of the document, giving effect to the terms listed above. Parties to the Deed need to sign the execution clause to make it legally binding.
If you require a Deed of Indemnity to indemnify your company’s directors or officers, there are simple and smart ways you can do this. If you find that you have more questions or want professional advice, a commercial lawyer can assist you.
Don’t know where to start? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.