Can a Director be Insured or Indemnified by a Company?

It is not uncommon for a director of a company to be insured and/or indemnified against liabilities they may incur whilst acting as a director of the company.

However, there are a number of restrictions that need to be considered before a director is exempt from liabilities a company incurs as a consequence of the director acting for a company.

Indemnities for Liabilities other than Legal Costs

Section 199A(2) of the Corporations Act 2001 (Cth) provides that a company or a related company must not indemnify a person against any of the following liabilities incurred as a director of the company:

1. a liability owed to the company or a related company;
2. a liability to pay a pecuniary [monetary] penalty or compensation ordered under the Corporations Act 2001 (Cth); or
3. a liability that is owed to someone other than the company or a related company and which did not arise out of conduct in good faith.

Indemnities for Legal Costs

Section 199A(3) of the Corporations Act 2001 (Cth) states that a company or a related company must not indemnify a person against legal costs incurred in defending an action for a liability incurred as a director of the company if:

1. the director is found to have a liability for which they could not be indemnified under section 199A(2) of the Corporations Act 2001 (Cth) as set out above;
2. the director is found guilty in criminal proceedings;
3. the proceedings are brought by ASIC or a liquidator and the grounds for making the order sought are established; or
4. the costs are incurred in connection with proceedings for relief to the director under the Corporations Act 2001 (Cth) and the relief is not granted.

Restrictions on Insuring Directors

Where section 199A of the Corporations Act 2001 (Cth) deals with indemnifying directors of a company, section 199B of the Corporations Act 2001 (Cth) deals with paying insurance to protect a director from liabilities incurred as a director of a company.

Section 199B of the Corporations Act 2001 (Cth) provides that a company or a related company must not pay (or agree to pay) a premium for a contract insuring a present or former director of the company against a liability, other than for legal costs, arising out of:

1. conduct involving a wilful breach of duty in relation to the company; or
2. a breach of the duties not to improperly use their position or information.

How we can assist?

We implore our clients who have been indemnified or insured in respect to liabilities which may be incurred by them whilst acting as a director of a company to contact our office so that we can:

1. prepare an agreement which validly insured and indemnifies you from any liabilities which arise during your time as director of a company;
2. consider the insurance and indemnity clauses contained in any agreement you have with the company;
3. determine whether the insurance and indemnity clauses referred to above comply with section 199A and 199B of the Corporations Act;
4. advise you on the consequences of being liable during your time as director of a company;
5. assist in the structuring of your affairs so that you can best protect yourself while acting as a director of a company (including after you resign as a director of a company); or
6. represent you against any claim from ASIC, the company or a liquidator in respect to your time as a director of the company.

Contact our expert team of corporate and commercial lawyers on (02) 9964 0499 for a no-obligation consultation.