Two in three companies leaving directors and employees exposed
8 July 2022
Startling figures from the Ministry of Business, Innovation & Employment confirm that of the 701,710 companies on the New Zealand register, 469,951 companies do not have constitutions. This means two thirds of companies in New Zealand cannot provide insurance for their directors or employees leaving the directors and employees of these companies exposed to full personal liability.
Directors & Offices (D&O) insurance is widely available, either as a stand-alone insurance contract or as part of a broader group of policies, often referred to as Management Liability. But what many people don’t realise is if an organisation has taken out Directors and Officers insurance and they do not have a constitution, that insurance policy has been obtained in direct contravention with The Companies Act 1993.
Similarly, if any indemnity has been given to directors or employees, where there is no constitution, that indemnity is void. Section 162 (2) of the Act states, “An indemnity given in breach of this section is void.”
What the Companies Act 1993 says about insuring directors and employees
The Companies Act 1993 specifically prohibits a company indemnifying or providing insurance for a director or employee. Section 162 (1) states:
Except as provided in this section, a company must not indemnify, or directly or indirectly effect insurance for, a director or employee of the company or a related company in respect of—
1. liability for any act or omission in his or her capacity as a director or employee; or
2. costs incurred by that director or employee in defending or settling any claim or proceeding relating to any such liability.
The Companies Act 1993 also states that indemnity and/or insurance can only be provided, “if expressly authorised by its constitution.”
Sections 162 (3), (4) & (5) state:
3. A company may, if expressly authorised by its constitution, indemnify a director or employee of the company or a related company for any costs incurred by him or her in any proceeding—
a) that relates to liability for any act or omission in his or her capacity as a director or employee; and
b) in which judgment is given in his or her favour, or in which he or she is acquitted, or which is discontinued.
4. A company may, if expressly authorised by its constitution, indemnify a director or employee of the company or a related company in respect of—
a)liability to any person other than the company or a related company for any act or omission in his or her capacity as a director or employee; or
b) costs incurred by that director or employee in defending or settling any claim or proceeding relating to any such liability,—
not being criminal liability or liability in respect of a breach, in the case of a director, of the duty specified in section 131 or, in the case of an employee, of any fiduciary duty owed to the company or related company.
5. A company may, if expressly authorised by its constitution and with the prior approval of the board, effect insurance for a director or employee of the company or a related company in respect of—
a) liability, not being criminal liability, for any act or omission in his or her capacity as a director or employee; or
b) costs incurred by that director or employee in defending or settling any claim or proceeding relating to any such liability; or
c) costs incurred by that director or employee in defending any criminal proceedings—
ii) that have been brought against the director or employee in relation to any act or omission in his or her capacity as a director or employee; and
iii) in which he or she is acquitted.
Put simply, if the organisation does not have a constitution and something goes wrong, it is up to the director or employee to engage their own legal counsel to defend a claim and rely on their own personal insurance policies (if any) to come to their aid.
How to find out if your organisation has a constitution
If your company does not have a constitution, it should have. While the Companies Act provides the central framework for compliance, this does not allow for some commonly helpful provisions relating to insurance, indemnities, and pre-emptive rights.
You can find out if your company has a constitution by looking up the Companies Office register. On the Company Summary page, you will see a Yes or No for ‘Constitution filed’.
If there is a constitution, it would be wise to read it to ensure this allows for the company to indemnify and insure directors, as contemplated in sections 162 (3) to (5).
If there is no constitution, or the one you have is lacking, a lawyer will be able to assist you with the drafting of a constitution. Once finalised, this can be filed with the Companies Office.
Next steps for directors and employees
In a time when Director’s liability is constantly being questioned, it is inconceivable that 479,000 companies, and as a result, a minimum of 479,000 directors, are operating at a level where insurance is not needed or sensible.
Good governance requires Boards to be on top of this. It is also a must do for any new director. You must check that the company you are being invited to assist has a constitution and can provide you with an indemnity and insurance.
To ascertain what insurance you need, it’s important to discuss your situation with an insurance broker. A lawyer will also be able to guide you as to any indemnities you should have in place, which would allow the company to step in front of you and engage legal council should a director or employee be taken to task.
Are your directors and employees exposed?
On Tuesday 19 July at 10am, Paul Moodie and the team will be joined by a legal expert to discuss why most companies in NZ cannot insure or indemnify their directors, the risk for companies who have insurance but are in breach of the Companies Act, the impact of a “hard claims” market for insurance companies and some solutions to fix this quickly and simply.