When a company asks someone to join its board, the conversation usually reaches the same question: if something goes wrong, who pays? A deed of indemnity is the document that answers that question in writing. It is a formal promise by the company to cover certain liabilities and legal costs a director or officer incurs while acting in the role, made as a deed so it binds the company without the usual need for the person to give anything in return.
The protection is not unlimited. The Corporations Act 2001 (Cth) (the Act) draws a precise boundary around what a company may promise, and any promise that crosses it is void. This article explains how the scheme works in practice: who is covered, what the Act allows and prohibits, how the standard deed of access, indemnity and insurance fits together, when the protection actually bites, and where drafting makes the difference between a document that delivers and one that fails exactly when it is needed.
Who is involved in a deed of indemnity
Several parties have a hand in how a deed operates, and each one's interest is slightly different:
- The company: makes the promise and ultimately pays. The indemnity is a claim on the company's own assets, so the company's solvency is part of the value of the promise.
- The director or officer: holds the protection. The Act's definition of officer covers directors and secretaries, people who make or participate in decisions affecting the whole or a substantial part of the business, and people with the capacity to significantly affect the company's financial standing (s 9AD).
- The board: approves each deed and decides whether to advance or pay out under it. Those decisions should be recorded in minutes or written resolutions.
- Shareholders: can amend the company's constitution by special resolution, which requires at least 75% of the votes cast (s 136(2) and s 250MA). That power to change the rules is the reason personal deed rights matter.
- The D&O insurer: usually the first layer a claim hits. The deed typically operates in the shadow of whatever insurance responds, and the two documents need to agree on who pays first.
- ASIC and the courts: police the boundaries. ASIC can bring civil penalty and disqualification proceedings, and the courts decide what a deed's words actually mean when a company and its former director disagree.
What the Corporations Act allows a company to promise
The core restrictions sit in Part 2D.2 of the Act. They apply to indemnities, exemptions and insurance given to officers and auditors, whether by agreement or by making a payment, and whether given directly or through an interposed entity.
Indemnities that are off the table
Under s 199A, a company or a related body corporate must not indemnify an officer or auditor against:
- A liability owed to the company or a related body corporate: a director cannot be indemnified against amounts they owe the company itself. This is why a company can pursue its own former director and the deed will not answer for it.
- A pecuniary penalty or compensation order: civil penalties ordered under s 1317G, and compensation orders made under the civil penalty provisions, cannot be the subject of an indemnity.
- A liability to a third party that did not arise from conduct in good faith: the indemnity only reaches conduct undertaken honestly and in the performance of the role.
The Act also bans outright exemption: a company cannot simply exempt an officer from a liability to the company (s 199A(1)).
Legal costs: the heart of the deed
Most of the practical value in a deed sits in the legal costs clause, and this is where the law is most precise. The Act does not ban indemnifying legal costs. It bans indemnifying costs incurred in four defined situations (s 199A(3)):
- defending or resisting proceedings in which the person is found to have a liability for which they could not be indemnified;
- defending or resisting criminal proceedings in which the person is found guilty;
- defending or resisting proceedings brought by ASIC or a liquidator for a court order, if the grounds for the order are found to be established (though the costs of responding to investigation before proceedings commence are not caught);
- proceedings for relief under the Act in which the court denies the relief.
The outcome of a proceeding includes any appeal (s 199A(4)).
The word "found" does a lot of work in this scheme. In Rickus v Motor Trades Association of Australia Superannuation Fund Pty Ltd [2010] FCAFC 16, the Full Federal Court held that the prohibition only bites once a court actually makes the relevant finding in the very proceedings being defended. Before that finding, the indemnity is live. If proceedings are settled or abandoned without any finding of liability, the bar never activates, and the director can be indemnified for the costs of defending them. The same reasoning was applied to criminal proceedings: an obligation to pay defence costs subsists until and unless a verdict of guilty is actually reached.
The practical consequence was tested directly in William John Jeffries v Indigenous Land Corporation [2015] NSWSC 1616. Two former directors received a letter from the company asserting breaches of duty and demanding AUD 50 million in settlement, before any proceedings were commenced. The company argued the indemnity in their deed only engaged once a court action was filed and a court had ruled in the directors' favour. The Supreme Court of New South Wales rejected both arguments. The directors were entitled to be indemnified for the costs they had already incurred responding to the threatened claim, because steps taken to defend an action can occur before the action is commenced. The carve-outs in their deed mirrored the statutory prohibitions, and none of them applied on the facts.
This is also why the standard deed separates an indemnity from an advance. Because a company cannot know until the end of a proceeding whether one of the carve-outs will apply, the deed typically gives the director a right to advances for legal costs as they are incurred, with an obligation to repay if the outcome triggers a carve-out. The courts have accepted that a repayable advance is not a prohibited indemnity at all: Note Printing Australia Ltd v Leckenby [2015] VSCA 105, an approach applied in Jeffries and in Bentley Capital Ltd v Keybridge Capital Ltd (No 3) [2024] FCA 1139. Note 2 to s 199A(3) notes that the company may be able to give the person a loan or advance in respect of the legal costs (see s 212). For public companies, s 212 confirms that member approval is not needed for reasonable officer indemnities and insurance premiums, or for payments and advances of legal costs incurred in defending certain actions.
Insurance: what premiums cannot buy
D&O insurance is the companion layer, and it has its own statutory limit. Under s 199B, a company must not pay a premium for insurance against a liability (other than one for legal costs) arising out of a wilful breach of duty or a contravention of s 182 or s 183, which cover improper use of position and improper use of information. Standard D&O policies in any case exclude fines, penalties and deliberately dishonest conduct as a matter of their own terms and of public policy. Insurance therefore responds within its own boundaries, and a deed should be drafted to work alongside it rather than to promise things the policy will not cover.
What happens if a promise crosses the line
A deed that promises more than the Act allows does not get the benefit of a gentle correction. Under s 199C(2), anything that purports to indemnify, insure or exempt a person is void to the extent that it contravenes s 199A or s 199B. The excess is unenforceable, which means a template promising blanket cover can leave a director with a false sense of security at exactly the moment they rely on it.
The three pillars of the standard deed
The market standard is a combined deed of access, indemnity and insurance, and each pillar does a different job:
- Indemnity: the company promises to cover liabilities and legal costs within the s 199A boundaries, subject to the deed's exclusions.
- Access: the Act already gives a current director a right to inspect the company's books at reasonable times for legal proceedings (s 198F(1)), and financial records at all reasonable times (s 290). It also gives a person who has ceased to be a director a right to inspect books, including financial records, for the same purposes for seven years after they leave (s 198F(2)), with a right to take copies (s 198F(3)). A deed of access converts those statutory rights into contractual rights, extends the windows and the scope of records, and obliges the company to cooperate rather than litigate over access.
- Insurance: the company commits to take out and maintain D&O insurance on reasonable terms, noting that the policy responds only within its own terms and the law.
Why a deed rather than a clause in the constitution? The constitution has effect as a contract between the company and each director (s 140(1)), and many constitutions contain indemnity provisions. But shareholders can modify or repeal the constitution by special resolution (s 136(2)), and directors have no veto over that vote. A deed is a personal agreement between the company and the individual, binding for its term and incapable of being varied without the director's consent. That is why directors and their advisers treat a stand-alone deed as the enforceable promise and the constitution as a fallback.
When the protection actually bites
The trigger is a claim. A director or former director gives notice to the company; the company assesses the claim against the scope of the deed; the D&O insurer responds first where the policy applies; advances keep the director's cash flow alive while the outcome is unknown; and at the end of the proceeding the true indemnity is reconciled against the carve-outs, with advances repaid or converted.
Two real disputes show how this operates. In Jeffries, the company tried to postpone any payment until a court had ruled in the directors' favour. The court held the directors were entitled to an indemnity as soon as they incurred the costs, with repayment obligations operating only if a later finding engaged a carve-out. The dispute took years and cost both sides a full hearing, all over a clause that could have been drafted to say what happened at each stage.
In Bentley, a director held two deeds of indemnity on identical terms, one from the listed company he served and one from the shareholder that had nominated him. Both D&O policies had declined cover. The nominating company had funded him with interest-free advances while the question of who should indemnify him was fought over. The Federal Court held that the advances were not indemnity payments, because they were repayable; both companies remained obliged to indemnify the director to the extent he was not otherwise covered; and because the two indemnifiers were under coordinate liabilities, they had to contribute equally. The case is a reminder that when more than one deed or policy can respond to the same claim, the documents need to say who pays first, or the cost of finding out falls on everyone.
Where deeds commonly go wrong
The failures that show up most often in practice fall into a handful of recurring categories:
- Blanket promises: a template that promises to indemnify "all liabilities" without the statutory carve-outs is void in part (s 199C(2)) and misleads the director about the real level of protection.
- Missing advance machinery: without an advance clause, a director can carry years of personal defence costs while the indemnity question waits for an outcome that may never come.
- Uncoordinated documents: a deed that conflicts with the constitution or the D&O policy invites a dispute over who pays first, of the kind that consumed the Bentley litigation.
- No access rights: without a deed of access, a former director's statutory inspection rights expire seven years after leaving, and may not cover everything needed to defend an old claim.
- Sloppy execution: a document intended as a deed must be expressed to be a deed and executed properly. Under s 127, a company executes without a seal if the document is signed by two directors, or a director and a company secretary, or, for a proprietary company with a sole director, by that director. No common seal is required, no witnessing of the company's execution is required (s 127(3A)), and delivery is not necessary (s 127(3B)). Signatures may be electronic under the technology neutral signing provisions (s 110A). If the director also signs as an individual, the witnessing requirements of the relevant state law may still apply, and a lawyer should confirm what is needed for the jurisdiction.
- Unrecorded approvals: board resolutions approving each deed, each advance and each indemnity payment should be made and minuted, so that the company can show the decision was a considered one.
Where a lawyer earns the fee
An Artificer Legal practitioner adds value at the drafting stage, not just at the dispute stage. The carve-outs in a deed should mirror s 199A(3) precisely, because a clause that drifts from the statutory language invites the kind of argument that produced Rickus, Jeffries and Bentley. The advance mechanism needs repayment triggers that line up with the carve-outs. The deed needs to identify the right people, using the Act's definition of officer so that cover reaches directors, secretaries, senior managers and advisory board members who act in an officer-like capacity. It needs to be reconciled with the constitution and the D&O policy so payment priority is clear. And it needs to be executed correctly under s 127, including electronically where appropriate.
It is also worth reviewing a deed when the company's risk profile changes, when it expands into new jurisdictions or regulated activities, when the D&O policy is renewed on different terms, or when the board composition changes. The deed should be checked against the law as it stands at each of those points, because the Act's boundaries have moved over time and may move again.
Read the legal costs clause before anyone signs
The strongest signal in this area of law is that almost every litigated dispute about a deed of indemnity has been a dispute about the legal costs clause: when it triggers, what counts as an advance, and who pays first. The risk a director actually carries is the risk of years of defence costs, and a deed whose costs clause is ambiguous, or whose advance machinery is missing, fails precisely when it is needed. Getting the clause right at the start is not expensive relative to the exposure it manages, and a review before appointment, or before a new deed is issued, is a modest step that prevents an expensive argument later. Artificer Legal reviews and drafts deeds of indemnity for boards and companies, and the first consultation is free.