Lawpath - Deed of indemnity for directors
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- Deed of indemnity for directors
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Company directors are subjected to a wide range of obligations. If something goes wrong, as a director you could be personally liable for any resulting costs. A good way to mitigate this risk is by using a deed of indemnity. Keen to know more? Then, keep reading.
A deed of indemnity is an agreement between a company and one of its directors. Its purpose as a contract offers the director protections under the Australian Corporations Act 2001. The deed ensures that the director will not be personally liable for any costs incurred due to any breach of the Act. Or, at least limit the liability a director could face from the discharge of their duties while managing the company.
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A Deed of Indemnity should be used by executives of a company to protect themselves against liabilities that may arise. The Act is lengthy and complex. Under the Act, directors have many legal obligations. While not meeting all of those obligations isn't criminal, it could be in breach of regulations under the Act. Often this can occur without the director's or the company's knowledge. These kinds of liabilities can be huge financial burdens. If in that position, you should use a deed of indemnity to protect yourself against that happening.
Deeds of indemnity and Directors' and Officers' (D&O) Insurance are different kinds of legal contracts. D&O insurance is usually an insurance policy taken out by companies in order to protect its directors and officers against potential breaches of the Act. Deeds of indemnity insurance has the same function. However, this kind of contract is usually taken out by a director in agreement with the company.
What this means is that companies take out D&O insurance to protect its executive staff. With deeds of indemnity, the difference is that directors themselves seek to insure against breaches of the Act when acting as director for the company.
A deed of indemnity should all include the following essential components:
The deed of indemnity should include a list of definitions. This might include how the document refers to the Act in the document and other key terms. Scope of the contract could also include indemnity after their time as director has finished.
The indemnity clause should state the extent to which the company will be liable. As director it would be best to provide clauses to the effect that the company is liable to the maximum extent permitted by law. It could also include indemnity against legal costs arising from a breach of the Act.
Any deed of indemnity must include a clause setting out the director's access to documents. Should litigation against the director occur, the best way for them to defend a legal challenge will be with company documents. Even if litigation is by the company against the director this clause will ensure the right of the director to necessary documents in their legal defence.
While a deed of indemnity is a kind of insurance, for legal purposes it is not an insurance contract. There can be circumstances where an insurance contract can make part of the deed. However, this will almost always include a third party insurer. Any D&O insurance policy or any other third party insurance policy relevant to the duties of director should be included on the deed of indemnity.
The execution clause should be at the end of the Deed of Indemnity document. Executing the contract means both parties sign the deed. This gives effect to the terms and conditions listed on the document making it a legally binding contract.
A deed of indemnity can only be as wide as the Corporations Act allows. What this means is that a deed of indemnity cannot protect against offences which are applicable to the criminal code. By including terms that are outside the protections offered in the Corporations Act, there is the risk that any deed of indemnity could be considered void.
A contract lawyer is typically considered to be necessary for finalising a deed of indemnity. Templates for deeds of indemnity are available and it is possible to draft a document of this kind by yourself, or with the help of other staff in your company. However, it is strongly recommended that a lawyer specialising in contracts is consulted to finalise the contract. The reason for this is that should the deed be presented in a civil litigation case the deed will have a stronger legal grounding.
When drafting deeds of indemnity it must be remembered that it is best to have a contracts lawyer finalise the document. With that in mind, starting with a template will be the best way to begin drafting the document. This will allow you to put in all the key information relating to the job description and the details of the director and company. When you have drafted the essential components of the deed — as mentioned above — the document is ready for review with a contract lawyer.
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