Insurance and indemnity
15.14Generally, a company must not indemnify or insure its directors or employees against liability in connection with their role, or defending or settling claims arising out of that liability, unless it is expressly authorised by the company’s constitution. In that case:
- a director or employee may be indemnified for costs related to proceedings in his or her favour, or in which he or she is acquitted;
- a director or employee may be indemnified for liability to parties other than the company, but not for criminal liability or for breach of a fiduciary duty to the company or section 131 of the Companies Act; and
- a director or employee may be insured for: (i) liability in connection with their role; or (ii) costs incurred in proceedings related to that liability, or (iii) costs incurred in criminal proceedings where the person is acquitted. The directors must certify that the insurance is fair to the company.
15.15The Financial Markets Conduct Act extends the rules concerning indemnities and insurance established by the Companies Act to entities that are not New Zealand companies. It also prohibits a “specified person” from providing an indemnity or insurance to an auditor except where a judgment is in favour of the auditor or the proceedings are discontinued.
15.16Under section 162(2) of the Companies Act, any indemnity given in breach of the Companies Act procedure is void. The indemnification procedure is reinforced by the directors’ duty in section 134 of the Companies Act to comply with the provisions of the Act and the company’s constitution. Nevertheless, any failure to comply with section 162, for example by granting a broader indemnity than envisaged by section 162, is not specifically an offence.
15.17The consequences are described by Jurgeleit, in the context of breaches of the Resource Management Act 1991:
Technically, the contract will be unenforceable against the insurer. Directors who have entered into such contracts on behalf of their company or who have caused their company to grant indemnities or effect insurance in breach of the Companies legislation could face claims from shareholders or from the company. Directors may have to pay the costs of the insurance personally. Otherwise there appear to be no sanctions against companies or directors who might take insurance of this sort.
It is probably unlikely, except perhaps in the event of a change in company shareholding or upon liquidation of a company, that there would be any internal company dispute over the enforceability of an indemnity or the effecting of directors’ and officers’ insurance. Similarly, except where an insurance company changes hands or goes into liquidation, it is improbable that an insurer would refuse to honour a fines policy, because of the damage that would do to its commercial reputation.
15.18The prohibition on indemnification in the health and safety legislation is strengthened by inclusion of an offence provision for policies or contracts of indemnity that purport to indemnify a person against their liability to pay a fine or infringement fee under that legislation.
15.19A similar approach has been taken in relation to price fixing under the Commerce Act 1986. Section 80A prohibits a body corporate from indemnifying a director, servant or agent against liability for pecuniary penalties imposed for price fixing, or for costs incurred in penalty proceedings. A breach of that provision in turn gives rise to a pecuniary penalty that may be imposed on the company.
15.20The clause in the Commerce Amendment Bill 1999, as introduced, applied to all contraventions of the Commerce Act. Following outcry that such a clause was harsh and unworkable, it was amended so that it only applied to price fixing arrangements under section 30. The rationale for this amendment was that individuals engaged in such behaviour were likely to be aware that it was illegal.