A deed of access, indemnity and insurance is often entered into between a company and a director or senior executive to provide for the indemnification of the officer, extend rights of access to the books of the company, and to provide for the insurance of the officer during the access period. These protections are often given by a company as a subsidiary and by its ultimate holding company, each of which may be located in a different jurisdiction.
A brief overview of the deeds of access, indemnity and insurance
An indemnity provides for a director to be identified to the maximum extent permitted by law. The Corporations Act 2001 (Cth) (Corporations Act) contains express limitations on the scope of indemnities. Essentially, the Corporations Act allows a company to indemnify its directors for liabilities to third parties (that is, liabilities other than to the company or a related body corporate) where those liabilities arise out of the officer acting in good faith. A deed of indemnity is generally given by the company in which the relevant person being indemnified is a director. Where that company is a subsidiary, a further indemnity is generally given by the ultimate holding company so as to increase the likelihood of there being financial substance behind the indemnity. In relation to access, the Corporations Act provides rights for a person who has ceased to be a director of a company to inspect the books of the company of which the person was a director for the purposes of legal proceedings. Often the rights of access are expanded through a deed of access but these rights should only be offered in respect of the company of which the person is a director, not in respect of the ultimate holding company.
The insurance provisions in a deed require the director to be insured by the company’s insurance policy. Generally, the company that takes out the insurance policy for the group would enter into a deed agreeing to provide insurance. However, if that company is a thinly capitalised subsidiary, the ultimate holding company may also need to procure that the company take up the insurance.
The best way to deal with the different rights discussed above is for separate deeds to be used. The subsidiary typically enters into an appropriate deed to provide access and indemnity (but not insurance) and, depending on the circumstances, the ultimate holding company would enter into an appropriate deed to provide indemnity and insurance (but not access).
Why should a company offer these rights?
In deciding whether to offer deeds of access, indemnity and insurance to directors and to employees who act as directors of subsidiaries, a company needs to undertake a process of balancing its rights against the rights of its directors and key employees. If the company decides to offer indemnities to its directors and employees, on a narrow view, the employees’ interests are necessarily being put ahead of the company’s interests.
However, one key aspect of advancing the company’s interests is to ensure that it is able to get the best and most appropriate personnel to take on roles involving some level of personal risk, such as foreign and domestic directorships. By looking at the company’s broader commercial interests, it is clear that the company’s board could form the view that offering rights of access, indemnity and insurance to its employees in this manner is in the best interests of the company as a whole.
If the ultimate holding company and the subsidiaries are located in different jurisdictions, consideration must be given to the appropriate governing law. Generally, the appropriate governing law for the deeds of access and indemnity (that is, the deeds from the subsidiaries) should be the jurisdiction in which the subsidiary is incorporated. In relation to the deeds of indemnity and insurance (that is, the deeds from the holding company) the jurisdiction in which the subsidiary is incorporated could be used for these deeds, but only where it is in a country with which Australia has reciprocal enforcement arrangements. It is therefore important when determining the appropriate governing jurisdiction of such deeds to take into consideration:
- whether there is a reciprocal enforcement arrangement with the country in question, and
- whether the countries in which the holding company or its subsidiaries are incorporated are party to an international convention to allow for enforcement.
In this context, Australia is a party to reciprocal enforcement arrangements with the countries identified in the Schedule to the Foreign Judgments Regulations 1992 (Cth). Further, the Foreign Judgments Act 1991 (Cth) offers significant assistance to a party seeking to enforce a foreign judgment.
When enforcing an Australian judgment in a foreign jurisdiction in circumstances where the country has a reciprocal arrangement with Australia, the laws of the foreign country will govern the enforcement process, and consideration must be given to such legislation to identify which Australian courts are recognised in each foreign jurisdiction.
Where the governing laws are not Australian, the deeds would need to be modified to suit the laws of the relevant jurisdictions.
A company’s board can form the view that offering rights of access, indemnity and insurance to its employees is in the best interests of the company as a whole. If a board reaches this conclusion, the next step is to consider the rights to be offered. This depends on the entity of which the person receiving the rights is a director. Where the ultimate holding company and the subsidiaries are located in different jurisdictions, consideration must be given to the appropriate governing law. Advice should be obtained as to the appropriate process to go through to consider giving rights of access, indemnity and insurance, the appropriate terms of those rights and the appropriate governing law.