Being appointed as a director can be a time of great excitement, and many people see this as a stepping stone to a new phase of their career.  Often the new director is extremely flattered to have been invited to join the Board, and as with many new ventures, unsure about the sensible steps which should be taken prior to agreeing to become a director.  Both new and existing directors should consider the potential liabilities and protections which may be available.  There are three main protections which are available.

D&O Insurance

These are policies which are designed to indemnify directors from personal liability resulting from the work they undertake as a director of a company.  There is an increasing trend for litigants to commence action against directors, often at the same time as the litigant commences action against the company.  For example, when Kristy Fraser-Kirk commenced her sexual harassment action against David Jones, her statement of claim specifically named each director as a co-defendant.  The terms of D&O Insurance are extremely variable (it is sometimes said that D&O policies are the most variable of all the types of insurance policies).  It is a mistake to compare costs of policies without comparing what is actually covered by the policies.  You should satisfy yourself as to what is actually covered under the company's D&O policy - this probably means taking advice due to the complexity of some of these policies.

Deeds of Indemnity

This is an agreement between the director and the company.  A well-drafted deed provides very substantial protection, and can cover topics such as maintenance and access to documents, indemnity for legal costs (and to advance these prior to finalisation of any case), a requirement that the company take out D&O insurance, notification of claims and so on.  The deed can be more extensive than the terms of the insurance policy or the company constitution.

Company Constitution

Section 140 of the Corporations Act 2001 provides that the constitution is a contract between, among others, the company and each director, and can potentially provide protections.  However, as many constitutions are not updated regularly, they are often out of date.  It can be difficult to ensure that a constitution remains updated, as shareholder approval will generally be required.  We regularly see constitutions which have not been updated for many years, and the terms of these constitutions could be most generously described as archaic.

It is also possible that the constitution can be changed once you have departed the Board, meaning that you may not in the future have the protection which you might have achieved had you executed a deed of indemnity.

Action

Before you agree to become a director, you should obtain independent legal advice in respect of the company's D&O insurance, any deed of indemnity and the constitution of the company.  If the company cannot or will not provide you with adequate protection, you should consider carefully whether you are really prepared to assume the risks. 

If you are a director, and the appropriate protections are not yet in place, it is not too late if the Board and the company are prepared to act together to provide protection.

Halseys is experienced in providing advice in this area.

Note

This article is the first in a series of four articles relating to director protection.  In the next three newsletters, deeds of indemnity, D&O insurance and company constitutions will be considered in greater detail.