Company Directors – Are Your Personal Assets Exposed?

As a new director, stepping into a leadership role can be both exhilarating and daunting. While the position offers the opportunity to shape the strategic direction of the organisation, it also comes with significant responsibilities and potential personal liabilities. Protecting yourself from these liabilities is crucial for maintaining both your professional reputation and financial security.

There are several key layers to protect yourself from personal liability.

Understanding Your Obligations

First and foremost, familiarise yourself with the legal obligations owed by you as the director to the company. A director owes strict duties to the company and its owners to act in good faith and in the company’s best interest.

Another consideration is to avoid a conflict of interest, which can arise when a director’s personal interests conflict with their duty to the company. To protect yourself, always disclose any potential conflicts to the board and recuse yourself from related discussions and decisions.

Transparency and integrity are key to maintaining trust and avoiding legal complications. For further information, please refer to the following article Directors Duties: A Quick Guide from the Parliament of Australia.

Obtain Directors and Officers (D&O) Insurance

D&O insurance is a common (and important) mechanism to mitigate a director’s risk. This type of insurance provides coverage for legal costs and potential damages arising from lawsuits alleging wrongful acts committed in your capacity as a director. Ensure that the policy covers the full scope of your responsibilities, any potential risks and that you are named in a policy that is in force.

Secure a Director’s Deed of Indemnity

A Director Deed of Indemnity is an agreement between the company and the director that provides the director with indemnification against certain liabilities and legal costs arising from their role. This deed can offer additional protection beyond what is covered by D&O insurance and typically includes provisions for, but not limited to:

• indemnification for legal costs and liabilities incurred in defending against lawsuits;
• advancing funds for legal expenses;
• coverage for actions taken in good faith and in the best interest of the company; and
• access to records and company documentation, even well after you cease acting as a director for that company.

Ensure that the deed is reviewed by your lawyer to confirm that it provides comprehensive protection and complies with relevant laws and regulations.

What isn’t covered by D&O and the Deed of Indemnity

Director’s deeds of indemnity and D&O are strictly limited by sections 199A and 199B of the Corporations Act 2001 (Cth) (Act). The Act is clear that there is no indemnity permissible, by insurance or by deed, for breach of an obligation that the director owes to the company itself. This extends to the costs and legal fees which arise as a result of this breach. Where it does, it may risk being invalidated by section 199C of the Act.

Similarly, any loan or advance for legal fees, where related to an action brought for breach of the directors’ obligations owed to the organisation must be repaid in full.

Minimising risk where you are not covered by D&O or the Deed of Indemnity

Keeping detailed and accurate records of board meetings, decisions, and actions is essential. This documentation can serve as evidence that you have acted responsibly and in accordance with your duties. Make sure that minutes of meetings are comprehensive and reflect the deliberations and decisions made.

Regularly assess the risks facing the company and implement appropriate risk management strategies. This proactive approach can help mitigate potential liabilities. As a director, you should be involved in the development and review of the company’s risk management policies and procedures.

How We Can Help

Our Corporate & Commercial team is available to assist with any questions you may have. Please email us your enquiry.

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