Long gone are the days when accepting a directorship meant occasionally turning up to a company’s annual general meeting, accepting a director’s fee and having a basic knowledge of the activities of the company.
In recent years, and with increasing regularity and at time severity, Australian Courts have made it clear that directors have significant personal responsibilities and duties and may be held to be personally accountable and liable for breaches of those duties.
Given the risk that directors’ face of being held personally liable for certain liabilities of the company, directors:
· must understand the scope and extent of directors’ duties;
· must understand the circumstances in which they can be held accountable for the liabilities of the company; and
· should avail themselves of the cover afforded to them under a directors’ and officers’ insurance policy (D&O policy).
Steps you can a take to mitigate against personal liability
The Corporations Act 2001 (Cth) (the Act) codifies many of the duties that apply at general law to directors. Directors are required to not only understand what those duties entail but must also take proactive steps to meet their obligations under the Act as a preliminary step towards mitigating potential personal liability.
Other potential personal liabilities to be aware of
In addition to the obligations under the Act, directors may also incur personal liability for breaches committed by a company under the Competition and Consumer Act 2010 (Cth), various occupational health and safety laws, environmental protection laws and a plethora of tax and superannuation laws.
A number of regulators including the Australian Securities and Investment Commission (ASIC) and the Australian Prudential Regulatory Authority (APRA) have the power to bring proceedings against directors personally.
Can a company indemnify a director for certain liabilities?
The Act has various provisions that restrict a company from indemnifying a director against certain liabilities.
For example, the Act prohibits companies from providing its directors with indemnity for liabilities that are owed to the company itself or a related entity. Companies are also prohibited by the Act from indemnifying directors from any monetary penalty payable as a result of a compensation order or in respect of a liability that arises to a third party where the director did not act in good faith.
Companies are prohibited from protecting and indemnifying directors for legal costs that may be incurred in defending proceedings in certain circumstances where a director’s liability or guilt is established.
No matter how prudently they act and how strong their business acumen is, it is always conceivable and possible for directors’ or officers’ decisions to result in losses for the company or a third party, and the directors and officers who made those decisions can be held personally liable for those losses and can be involved in costly litigation.
A D&O policy is an important part of corporate risk management. Although publicly listed companies may have the highest risk of attracting D&O claims, any entity, whether publicly or private, as well as any non-profit organization, has potential D&O exposure.
Companies need to ensure that their directors and officers have the room to make decisions and a D&O policy may make the risks of these decisions manageable and transparent.
The core purpose of a D&O policy is to provide financial protection for directors and officers against the consequences of actual or alleged “wrongful acts” when acting in the scope of their managerial duties.