Company officers often enjoy the benefits of an indemnity provided by their company. Generally speaking, such an indemnity operates to protect the officer from any personal liability they may incur when acting in their capacity as officer of the company. While obviously a very attractive benefit accompanying the role, directors and other officers should be aware that indemnities will only take you so far.
Cue Sections of the Corporations Act You May Have Missed #007, where we examine s 199A of the Corporations Act (Act), the indemnities it excludes, and when an officer will be forced to foot the bill.

What indemnities does s 199A preclude?

S 199A of the Act precludes a company from:

1. exempting a person from a liability owed to the company which was incurred as an officer of that company (s 199A(1));
2. indemnifying a person against: a liability owed to the company; liability a pecuniary penalty or compensation order made under the Act; or any liability owed to another that was not in good faith. Again, the liability must have been incurred in that person’s capacity as an officer of the company (s 199A(2)); and
3. indemnifying a person against legal costs for, among other things, defending proceedings in which the person is found to have a s 199A(2) liability, or defending criminal proceedings in which the person is found guilty (s 199A(3)).

So… who’s footing the bill?

S 199A does not mean a company is prevented altogether from entering into indemnity arrangements with its officers. In fact, case law shows that companies may still indemnify their officers for legal costs, even legal costs in respect of an allegation of liability to the company, provided that such indemnities still comply with s 199A. Whether such an indemnity is effective often depends upon the particular allegations against the officer (is it an alleged liability to the company?), and whether such liability is made out.

I’ve got this one – when have courts upheld indemnities?
Because s 199A(3) only prevents an indemnity for legal costs where a liability is found, or a criminal charge made out, companies are not prevented from offering indemnities against legal costs incurred in successfully defending proceedings for such a liability or charge (ASIC v Lanepoint Enterprises Pty Ltd (No 2) [2006] FCA 1493.

Indemnities against legal costs may also be offered (and paid) to officers during proceedings, before any liability is determined, provided that the officer refunds any such indemnity if they are ultimately found liable or guilty (Note Printing Australia Ltd v Leckenby [2015] VSCA 105).

Our thoughts

S 199A is a significant carrier for public policy. Often, proceedings against directors and other officers for a liability owed to the company are initiated by the company itself or those acting on its behalf (such as liquidators). Allowing directors and other officers to be fully indemnified by their company for the costs of such proceedings would significantly reduce any incentive for the company to initiate proceedings, because the officer’s costs to be indemnified would offset any benefit arising from the liability.

Further, if officers risk no loss, through fees or liability, as a result of their actions, there would be no incentive to act in the best interests of their company. Whilst commercial adventurism by company officers should be encouraged to a certain extent, it should not go so far as to encourage recklessness. S 199A is a useful control in this regard.