So you have a nice office, a comfortable and secure job with a well established company, competitive salary and influence with your colleagues and the directors of your company. In fact, over the last few years you have effectively been running the company. The future looks promising and there doesn’t appear to be anything to really worry about. After all, you only work there and it’s only the directors who have their necks on the line right?
Directors and corporate officers
The reality is that often when a company is sued a plaintiff would include the directors or some company officers in the proceedings.
Sometimes legislation also provides for directors or certain company officers to be held personally liable where the company have breached rules or failed obligations.
A company’s directors and certain of its officers bear a heavy responsibility in representing the company, and are often in the line of fire when things go wrong.
They also have the duty to ensure that the company plays by the rules, and this is a responsibility that is increasingly being punished by holding the directors or officers personally liable for breaches.
The title of "director" sometimes goes further than just the directors formally appointed to the position of a director. It also includes individuals that maybe appointed to the position of an alternate director or are acting in the capacity of director, regardless of the name that is given to their position.
If you are not "formally" appointed as a director but act in the position of a director, or, if the other directors of the company are accustomed to act in accordance with your instructions or wishes, you may be a "deemed director" or a "shadow director".
The title a person is given within the company, and whether they are noted as a director or officer in the company’s records, will not necessarily determine whether the law considers them to be a director or officer. A Court will instead consider the particular duties a person undertakes in the individual circumstances of each case, and compare those duties with the duties normally performed by directors or officers of a company.
This approach has been confirmed by the Federal Court in the case of Grimaldi v Chameleon Mining NL (No 2)  FCAFC 6, where the court remarked in relation to the Corporations Act 2001 (Cth) (Corporations Act) that:
“The Corporations Act’s definition of ‘director’ … extends to a person who though not appointed as a director, nonetheless assumes to act in the position of a director …”; and
“whether a person has acted in the position of a director is a question of substance, and not simply of how that person has been nominated in, or by, the company.”
These type of decision making positions are often held by employees in the role of Chief Financial Officer, General Counsel or General Manager.
What can a deemed/shadow director do about this?
Broadly speaking a company could cover its directors and officers by indemnifying them against loss in the event they are personally sued.
Companies regularly provide these indemnities, and it should be a priority for any director or deemed/shadow director to ensure that an appropriate indemnity is in place.
But an indemnity will only go so far.
Directors and officers may not only be sued by the company’s creditors but could also become personally liable towards third parties or regulators for breaching certain statutory obligations, including under the Corporations Act or the Competition and Consumer Act 2010 (Cth) (CC Act), just to name two of many.
Also, some matter reduce the efficiency of an indemnity. For instance, section 199C of the Corporations Act voids any indemnity provided by a company to an officer or auditor in relation to:
- a liability owing to the company; or
- fines or penalties imposed under certain provisions of the Corporations Act; or
- a liability that is not owed to the company that does not arise out of good faith; or
- legal costs in certain circumstances.
Similarly the CC Act provides in section 229 of Schedule 2 that a company is not allowed to indemnify directors and officers against liability for breaches or for or against legal costs to defend a claim if such liability is established. Again, if a company provides such an indemnity it will be void, and therefore useless to you.
In addition, section 272 of the Work Health and Safety Act 2011 (Qld) (WHS Act) also voids any indemnity covering breaches under that act.
Although other liabilities are certainly not wholly excluded, broadly it can be expected that companies may not indemnify directors or deemed/shadow directors against fines and penalties imposed on directors of officers for breaches under the above legislation.
It could also be that a company, even though it has indemnified its directors or officers against personal loss, may not be in a financial position to honour such an indemnity.
To overcome the shortcomings of a mere indemnity, companies or businesses often purchase insurance cover for losses covered by the indemnity.
This is possible because, as opposed to the granting of an indemnity for personal liability and legal costs in
certain circumstances, the purchase of insurance cover for this purpose is not prohibited by the Corporations Act, the CC Act or the WHS Act (for example).
This type of insurance is generally referred to as “Director & Officer” (D&O) insurance. As well as protecting corporate directors and officers, D&O insurance may offer added security to future investors and bring certainty to the directors and offers that the company will have the funds to honour its indemnity.
D&O cover reflects the indemnity possibilities and sometimes consists of two types of cover depending on who is indemnified. These different types of cover are generally referred to as “Side A,” and, “Side B,” cover where
- Side A cover protects directors and officers from personal financial liability when the company cannot indemnify the director or officer. This can happen during liquidation or deregistration.
- Side B cover protects the company when the company indemnifies the directors and officers. For example, when shareholders file suit against the directors.
D&O policies may even include a third type of cover which could dictate what happens when both the company and individual officers and directors are named.
Deed of Access and Indemnity
If an indemnity is offered by a company or business it is common, and preferred, for the indemnity to be recorded in the form of a Deed of Access and Indemnity.
However, the Deed of Access and Indemnity often goes further than simply recording the indemnity. It can also deal with other relevant and very important aspects, such as:
- Providing timeframes within which the company and the party who is indemnified must act to claim under the indemnity and insurance.
- Specifying minimum requirements relating to the maintenance of the insurance and the payment of premiums by the company (for example providing that if the company fails to pay the insurance premiums the director or deemed/shadow director may do so on behalf on the company and be entitled to a refund).
- Dealing with security options that may support the indemnity, and whether the security is enforceable against known statutory limitations.
- Providing for the continuation of the indemnity and/or the insurance cover and/or the securities after the resignation of the director of shadow director. This may be required to cover any claims that may arise after a director has left the Board, or a deemed/shadow director has left the company’s employment, but for which the director or deemed/shadow director may have incurred liability while still employed by the company or serving on the Board.
- Providing continued access to the records of the company for the director and deemed/shadow director, even after his or her resignation from the Board or employment. Access may be required to formulate a claim under the insurance policy or defend any claims that may be brought at a later stage.
What should a potential shadow/deemed director do?
- Firstly, don’t assume that bad things or accidents only happen only to other people.
- Make sure you know what your risks are. Even if you are not “formally” a director you may still be vulnerable if you are in a commanding position within your company. Sole managers of small companies and CFOs may find themselves in this position.
- Make sure you know what your options are, having regards to the different types of indemnity and insurance cover that is available. Don’t assume that “one size fits all”.
- If necessary, approach you employer or the board, and negotiate for an indemnity to be provided backed by appropriate insurance cover.
- If you are covered already, make sure that the cover is suitable and sufficient. Scrutinise the small print.
- If you are uncertain, discuss these insuring concepts with your solicitor or insurance professional so you adequately understand your risks and insurance options.
- Ensure that you go all the way by also negotiating and executing a Deed of Access and Indemnity, which records the indemnity and also deals with incidental aspects relevant to the indemnity and the insurance cover.
- Last but not least, make sure your company, its directors, officers and employees comply with their obligations under the law. The better your company complies, the less liability you can incur.