What Is a Deed of Indemnity?

Articles > Contracts

What Is a Deed of Indemnity?

July 24, 2021         Liv Chum

A deed of indemnity refers to a contractual agreement between a company and a company director or officer. Whilst having a deed of indemnity is not a requirement for either a company or a company director, this legal agreement is highly recommended as it is a measure that safeguards company directors from personal risks and exposure. 

The importance of a Deed of Indemnity 

The role of a company director is one which comes with many legal duties and responsibilities. These duties are specified under the Corporations Act 2001 (Cth) and include obligations such as:

  • To avoid conflicts of interest
  • To prevent the company from trading if insolvent 

A breach of these obligations results in liabilities being incurred by the director. Liabilities include:

  • Fines 
  • Bans 
  • Legal disputes 

Consequently, although a company’s constitution may provide a clause of indemnity to a director, it is much preferred that a company director enters into a separate deed of indemnity to ensure that they are protected for a wider range of circumstances. As a result, this means that the company will cover costs for costs incurred as a director of the company and other costs that are incurred from breaches. It is also important not to rely on a company constitution as the indemnity clause will not be applicable if you stop being a director or if you leave the company. 

Limitations of a Deed of Indemnity 

Nonetheless, the deed of indemnity does have limitations. Although we have established that the deed of indemnity covers the costs of most breaches that a director may incur, The Corporations Act 2001 (Cth) also identifies the instances where a deed of indemnity cannot indemnify a company director or officer. Examples of circumstances where a company director cannot be indemnified includes:

  • Criminal behaviour 
  • Fraudulent behaviour
  • Dishonest behaviour 

What are the Crucial elements of a Deed of Indemnity?

Typically, a deed of indemnity must cover the following:

  1. Definitions 
    • The Deed of indemnity must cover essential contractual terms which include:
      1. Papers
      2. Claim
      3. Liability 
  2. Indemnity Clause 
    • This clause will cover the degree to which the company will be indemnifying in favour of the director. Essentially, how much of the director’s costs and penalties is the company willing to cover as the director or officer performs their obligations and duties?
  3. Access to Documents 
    • Although as a director, access to legal documents is already granted in certain situations, the deed of indemnity should either give a director a wider or narrower access to company documents. 
  4. D&O Insurance
    • The deed will cover the scope of the Directors and officers insurance: providing information on the terms of the insurance and which party has the obligation of maintaining the insurance
    • A Directors’ and officers’ insurance provides additional protection by being applied where the deed of indemnity cannot be applied.  
  5. Execution Clause 
    • This is a clause found at the end of the deed. This requires the parties to the deed to sign (ie. the director and a representative of the company must sign)

In Summary 

It is strongly recommended that a deed of indemnity is formed to ensure that the company covers most costs and mitigates how personally liable a director is for the costs incurred through breaches or for performing typical obligations. If you have any further questions about deeds of indemnity, contact one of our experienced business lawyers now at 1300 337 997. 

About Liv Chum

Liv is one of OpenLegal's paralegals. Liv is a passionate student of the law, with a real interest in the way that business and legal requirements intersect.