Paul Hubbard, a solicitor with the Dunedin and Queenstown Lawlink firm of Anderson Lloyd Caudwell, suggests that company directors take steps to protect themselves from being personally liable for the actions they take in their capacity as directors.
The risks inherent in the role of a company director suggest that the prudent director would obtain an indemnity from the company as a matter of course when appointed. The fact that this does not generally happen leads one to ask 'why not?' and 'are there some directors out there who are relying on dodging bullets instead of protecting themselves beforehand?'
What Is An Indemnity And Why Do You Need One?Broadly speaking, an indemnity is a promise to assume or compensate for loss. For directors, it typically entails the company signing a document (a deed of indemnity) promising to indemnify a director in respect of liability to any person other than the company or a related company for an act or omission in his or her capacity as a director. This is only possible if the company's constitution permits it. Of course, an indemnity does not cover everything that directors might do: the law does not allow directors to be indemnified for criminal acts or breaching their duties to the company itself.
Directors need an indemnity for the simple reason that they can incur substantial personal liability for what they do as directors of a company. For instance:
directors have the responsibility to manage the company under the Companies Act 1993; there is a large amount of legislation making directors personally liable for penalties for failings of the company itself eg Resource Management Act 1991; and it is becoming increasingly expensive to take or defend legal action.Typically directors will request indemnities from the company when they become involved in a claim or if they are successful in defending a claim made against them. Directors should insist, however, on their right to an indemnity up front. They should not rely on the company deciding to meet their costs when the fight has already begun.
Why Insist On An Indemnity Now Instead Of Later?The alternative to giving a general indemnity now is granting them on a case by case basis. Working case by case can lead to inconsistencies and practical problems such as:
the need to consider giving an indemnity may not coincide with the timing of board meetings; the directors may be seriously affected by their personal circumstances, which can open a director up to claims of "covering one's back"; and an indemnity is more likely to be challenged as being given in breach of directors' duties.Sign Now Rather Than WaitA significant advantage and incentive for adopting general indemnities now rather than later is that the directors would not be presently facing any specific claim. They would merely be endeavouring to establish a policy for indemnities. They would then need advice as to the appropriateness, timing, and the form for applying the indemnity.
Indemnities should be signed before any specific claims arise. Indemnities should be drafted as widely as the law permits. This necessarily involves the board members passing various resolutions and giving certificates as set out in the Companies Act 1993.
ConclusionIndemnities given on a case by case basis can create practical problems. Indemnities entered into after legal action has commenced can bring the indemnity's effectiveness into question. When the bullets are flying, directors should not be scrambling to put their protective devices in place when they could have done it from a safe distance.
Copyright The Lawlink Group Ltd 2001
Every effort has been made to ensure that this information is accurate. However, it is general introductory information only. It does not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters. Any reference to law and legislation is to New Zealand law and legislation.
Paul Hubbard is a solicitor in the Lawlink firm of Anderson Lloyd Caudwell. His practice is in general commercial work, with a particular focus on company matters and financing transactions.
Email paul.hubbard@alclegal.com
Website:
Anderson Lloyd Caudwell November 2001