Why? Because you don't have a company constitution. Without this, a company is prohibited from indemnifying you or taking out insurance to protect you.
Setting up a company is an easy task and for many of us in business this would have been done some years ago. With the ever growing scrutiny on company directors, we do need to give more thought to the personal liabilities directors are exposed to.
The first step is often to discuss this with your business advisor and then meet with your insurance broker to see what policies are available and appropriate for both the directors and the company.
Before doing so however, it is important you revisit the core documents of your company. If your company hasn't adopted a constitution, the Companies Act comes in to play.
Under section 28 of the Companies Act 1993, "If a company does not have a constitution, the company, the board, each director, and each shareholder of the company have the rights, powers, duties and obligations set out in this Act."
If your company doesn't have a constitution, you are bound by the default obligations in the Act where some activities are prohibited unless you do have an appropriate constitution.
One of those provisions is detailed in Section 162 of the Act:
(1) 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
(a) 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.
(2) An indemnity given in breach of this section is void.
In Sections 162(3), (4) and (5), there is provision for a company to indemnify and insure a director but only "...if expressly authorised by its constitution...".
If your company does not have a constitution, there is no ability for the company to indemnify or take out insurance to protect you.
If your company does not have a constitution, there is no ability for the company to indemnify or take out insurance to protect you.
The Act is silent on what happens if insurance has been taken out in breach of this provision but the concern would clearly be that this could give an insurer grounds to reject a claim depending on the wording of the policy. That is a risk you can quickly and simply avoid.
The solution is not difficult. It's knowing you may have a problem that's important. Go on to the Companies Office website and make sure your company has a constitution. You will find this on the "Company summary" tab on the first page of your search.
If you don't have a constitution, it's a simple matter to arrange one. A constitution essentially sets out the rights, powers and duties of the company, the board, each director and each shareholder.
Adopting a constitution gives a company the flexibility to vary the provisions set out in the Companies Act and its regulations, provided the provisions in the constitution are consistent with the Act.
There are two options - third party constitutions or write your own.
Third party constitutions are available online for around $24 from parties such as Auckland District Law Society or CCH. There is ample information about constitutions on the Companies Office website. If you decide to write your own it is important to seek legal or professional advice and talk to your lawyer at the same time about an indemnity.
In summary, first check your company has a constitution - you can find out on the Companies Office website by searching the register. Then check with your insurance broker to review what policies are available, their terms and conditions and then perhaps talk about an update. If in doubt as to what to do, seek professional business advice.
Paul Moodie is Principal - Business Advisory with national business advisors and accountants Crowe Horwath (NZ) Limited.
