Who wants to be a director these days? Not an easy question to answer these days, with over 700 laws that can make you personally liable for various actions (or inactions) of your company.
For small companies, the question of who should (or will agree to) be a director is usually quite simple. The owner/founder is generally the only person willing to put up their hand to be the fall-guy. The ‘family’ assets are then held by the owner’s spouse, or in some trust structure.
However, for medium sized companies, or the Australian subsidiaries of foreign companies, the question of who should take on the role of director is less clear.
To start with, you need at least one local director to form a subsidiary of a foreign enterprise. For medium and larger enterprises, the introduction of professional ‘management’ and independent or non-executive directors, becomes more of an issue. The concept of separating ‘ownership’ (in the form of shares) and responsibility (as a director/manager) becomes more real.
The key thing to note is that you may be personally liable for some action (or inaction) on the part of the company.
If you are taking on this role, then we strongly suggest that you let us assist you put in place a number of reasonable protections:-
Get an indemnity
The first, and most important, thing to have in place is an indemnity from the company for the liabilities that you may incur in your role as a director. If you are made personally liable, you can then turn around to the company and ask to be reimbursed.
Many people think this is a standard right of a director – but it is not. Furthermore, an agreement by the company to indemnify you after a liability has arisen may fail the ‘benefit to the company’ test, i.e. it may not be in the company’s best interests and therefore not be able to be agreed to by the other directors.
There are some limitations on the ability of a company to agree to an indemnity (in 199A of the Corporations Act). These limits apply to certain liabilities you may have to the company itself, as well as liabilities arising out of criminal matters and actions not taken by you in good faith.
Get access to important company information
Next, you need to ensure that you have ongoing access to the book and records of the company (and each relevant subsidiary), so that you can obtain any information necessary to defend yourself from a claim.
This may also include an obligation on the company to maintain a set of documents for you, so that you do not need to maintain your own personal copy (such as board papers).
There are now statutory rights for former directors to obtain certain information from a company. However, we generally recommend more comprehensive retention obligations and access rights.
Finally, you should request that the company puts in place a policy of insurance to provide sufficient funding to meet these costs and liabilities (referred to as a ‘D&O Policy’).
You should ensure that the policy covers you directly, rather than through the company – although the company should pay the premiums. It is common for these policies to have quite broad exclusions, so advice from a quality broker on the wording of these policies is always a good idea.
Get a parent guarantee
You should also note that an indemnity from your company is only as good as the financial standing of the company – especially if a D&O Policy is not in place. Therefore, you may also wish to get another company within the group to ‘guarantee‘ the indemnity.
For example, if the company you are a director of becomes insolvent, and you are made personally liable, an indemnity from the company would be worthless. However, an indemnity from a parent may be of real value.
Many of the laws that may make you personally liable can apply for a long period after you cease to be a director. Therefore, we recommend that the indemnity be drafted to continue to apply for a period after you cease being a director. This is generally 5 to 10 years. The same applies to requiring the company to maintain a ‘run-off’ D&O Policy to cover the same period.
A final note – these protections are not just for medium and large companies. If you own a small company and it gets into trouble, chances are it will be an external administrator or liquidator who will be calling the shots when you need some protection. Agree now, while you are in control, for your company to do what it can to protect you should things turn south.