The Corporations Act prohibits companies indemnifying their Directors. Or does it?
Company directors generally will be aware that sections 199A and 199B of the Corporations Act 2001 (the Act) prohibit companies from indemnifying directors for penalties imposed upon them for breaches of the Act, and for breaches of other legislation, where penalties may be imposed. There are, however, still good reasons why directors (and other officers), should negotiate appropriate deeds of indemnity.
So advises Professor Bob Baxt, an Emeritus Partner at Freehills and the former Dean of Law at Monash University.
He makes his case in more detail in this technical piece he published for the Australian Institute of Company Directors.
In summary, he argues that companies can legally provide directors with a satisfactory financial indemnity, at least on a temporary basis, for his or her legal costs, provided:
Indemnity documents are drafted in a “commercially sensible" way; and,
The director is found not to have breached the Act.
If a director is shown to have broken the Act the indemnification will be invalidated, and the director will be personally liable; and,
If companies have previously advanced funds to directors who are eventually found guilty, those funds have to be paid back.
Bruce Mulvaney is a Fellow of the Australian Institute of Company Directors.
He is also a Fellow Chartered Accountant and Turnaround and Insolvency Practitioner operating from Melbourne's eastern suburbs. He is a past State Chairman and National Board Member of the Institute of Chartered Accountants in Australia.
He is freely available to business groups and industry associations for speaking engagements.