16 May 2017

Directors liability - 8 ways to limit your personal exposure

Company directors have a number of different duties and obligations, and a breach can have serious consequences for you personally. There are several things you can (and should) do to reduce your personal exposure.


1. Don't be a director just for the sake of it.

It sounds obvious, but think twice before accepting any director appointment. Directors liability applies to both executive and non-executive roles. The easiest way to reduce the risk of being sued as a director is to not be a director in the first place.

2. Do your homework before accepting the appointment.

Before accepting an appointment, take the time to ensure you are dealing with a company that is serious about managing risk and complying with its legal obligations. Look at the accounts and other corporate records, ask about its claims history and meet key members of the management team. Keep in mind that if something goes wrong, it's not just your personal reputation at stake.

3. Disclose other directorships and potential conflicts in writing.

As a director, you have duties to avoid and disclose potential conflicts of interests. It is therefore critical that you are transparent with the company about situations in which conflicts could arise.

At the time of becoming a director, you should disclose all other directorships and provide details of any relevant interests you might have (such as owning shares in a competitor or related business) that could create a potential conflict. This should be done in writing, to ensure the disclosure is recorded if the question ever arises.

4. Ensure the company has adequate D&O insurance.

Directors & Officers insurance or ('D&O insurance') is designed specifically to address potential directors liability. You should ensure the company has a policy and understand how it works.

Note that, under the Corporations Act, there are limits on the types of claims that can be protected by D&O insurance. For example, it can't cover criminal conduct. Although D&O insurance is important, don't assume that it will protect you against all claims that might be made against you. 

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5. Have the company sign an Officer's Deed of Indemnity & Access

An Officer's Deed of Indemnity & Access is a deed signed by the company (and/or its parent company) to give express rights and protections to its officers.

As the name suggests, a Deed of Indemnity & Access serves two purposes.

First, it provides indemnities in respect of claims that arise in connection with a person acting as an officer of a company. These protections are separate from those provided under a D&O insurance policy. For example, the deed might apply where the insurance does not. Also, a Deed of Indemnity & Access will often require the company to loan or pay the officer's legal costs of defending a claim.

Second, it provides specific rights of access to the company's books and records, including in respect of the period after you cease to be an officer. This can be particularly useful if a claim is made against you after you have ceased to be an officer.

6. Consider your personal asset structure.

There are circumstances in which a claim could be made against you as a director that will not be covered by insurance or an Officer's Deed of Indemnity. If that happens, your personal assets could be at risk. For this reason, it is important to structure your personal assets so that they will be out of the reach of potential creditors.

7. Be diligent in the role.

As a director, you have a statutory obligation to discharge your duties with care and diligence. This applies regardless of whether you are an executive or non-executive director.

This means attending board meetings, asking questions and seeking information, being familiar with the company's financial and operating position, contributing to decision-making and otherwise actively participating in the functioning of the board.

Not only will this reduce the chances of things going wrong, it can also provide a potential defence to a claim made against you if they do.

8. Resign if you have to. 

If you are unable to fulfil your duties as a director, or if you have concerns about the company's position or the direction it is heading, you should consider resigning.

You will continue to assume (and accumulate) personal exposure for as long as you continue to be a director. This comes back to the first point above - if you are concerned to minimise the risks to your personal position, don't be a director just for the sake of it.  

About the Author

Greg Henry | Principal

Greg is a principal at Turtons and a senior commercial lawyer who acts for a range of clients mainly in the construction and technology sectors. Greg advises on both transactional and contentious matters.


greg.henry@turtons.com | (02) 9229 2904

About Turtons

Turtons is a commercial law firm in Sydney with specialist expertise in privately owned construction and technology businesses.

Greg Henry | Principal

Author

Greg Henry | Principal

greg.henry@turtons.com

Greg is a principal at Turtons and a senior commercial lawyer who acts for a range of clients mainly in the construction and technology sectors. Greg advises on both transactional and contentious matters.


greg.henry@turtons.com | (02) 9229 2904

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