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The Trade Practices Amendment (Australian Consumer Law) Bill 2009 (Cth) (Bill) was recently introduced into Federal Parliament. In this alert, we consider issues that involve payment of premiums for directors and officers’ liability insurance cover (D&O Insurance).
Overview
Under the Bill, certain liabilities incurred by directors and officers are prohibited from being indemnified by a company or a related company. This gives rise to a question whether the Bill precludes payment of premiums by companies to arms length insurers for D&O Insurance which cover such liabilities.
Submissions can be made to the Senate Economics Legislation Committee for the ambiguity to be clarified before the Bill is passed.
General information on the Bill is included in our alerts of 24 June 2009 and 30 June 2009.
Indemnification of Officers
Schedule 3, Part 2, Item 9 of the Bill inserts a new s 12GBD(1) into the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act). This subsection provides that a company or a related company “must not indemnify (whether by agreement or by making a payment and whether directly or through an interposed entity) [an officer] against … a liability to pay a pecuniary penalty under section 12GBA [of the Bill] or legal costs incurred in defending or resisting proceedings in which the person is found to have such a liability” where such liability was incurred as an officer of the company (Prohibited Liabilities).
Pecuniary penalties under section 12GBA are awarded for contraventions of subdivisions C, D or GC of the ASIC Act which deal with unconscionable conduct, consumer protection and substantiation notices and accessorial conduct in connection with such contraventions.
Anything that purports to indemnify a person against the Prohibited Liabilities is void to the extent that it contravenes 12GBD(1). Contravention of the sub section may result in a pecuniary penalty of 25 units and individuals may be implicated in the contravention which is punishable by a fine not exceeding 5 penalty units.
Payment of premiums for D&O Insurance
D&O Insurance policies provide insurance cover for directors and officers against the risk of liabilities incurred in their capacity as directors and officers. A D&O Insurance policy may also provide cover to the company effecting the policy by way of reimbursement for amounts lawfully paid by the company to its directors and officers for such liabilities.
If an insurer is an “interposed entity” for the purpose of s 12GBD(1), then it is arguable that the company, by paying the premium, is providing an indemnity through an interposed entity. If there is no exclusion in the policy for the Prohibited Liabilities, then procuring cover for such liabilities may be a contravention of s 12GBD(1) and the cover void to the extent of the contravention.
Section 12GBD mirrors s 77A of the Trade Practices Act 1974 (Cth). Both these sections closely follow s 199A of the Corporations Act 2001 (Cth) (Corporations Act).
However, unlike s 199B of the Corporations Act, which sets out the liabilities for which a company cannot pay an insurance premium, neither the Bill nor the Trade Practices Act sets out when payment of premiums for D&O Insurance is prohibited - leaving at large whether s 12GBD prohibits the payment of an insurance premium altogether by a company for a policy which covers the Prohibited Liabilities.
Differing views
The view that s 12GBD(1) prohibits the payment of a premium by a company for a policy which covers the Prohibited Liabilities is based on a literal reading of s 12GBD(1) (and s 77A of the Trade Practices Act). It is reasonably arguable, however, that the literal meaning should not apply and that “interposed entity” should be interpreted to mean an entity that is controlled by the company or which the company uses to achieve a result indirectly that it cannot achieve directly. An arm’s length insurer charging a commercial premium should not be an “interposed entity” in this sense.
As there has been no case law on the interpretation of s 77A of the Trade Practices Act which would assist in the interpretation of s 12GBD(1) of the Bill, it is unclear what view the courts will adopt.
If s 12GBD(1) does prohibit a company from paying a commercial premium to an arm’s length insurer for cover for the Prohibited Liabilities, one option may be for a D&O Insurance policy to provide this cover in a discrete section of the policy and for a separate (actuarially proportioned) premium to be charged for that cover which is paid by the officers rather than the company. Another option is for the D&O Insurance policy to exclude cover for the Prohibited Liabilities.
What’s next?
On 25 June 2009 the Senate referred the Bill to the Senate Economics Legislation Committee for report by 7 September 2009. The closing date for submissions to the Committee is 31 July 2009.
Readers of this alert may consider making submissions to clarify the position for the payment of premiums by a company for D&O Insurance which does not exclude the Prohibited Liabilities under s 12 GBD(1) of the Bill. Any Senate response to these submissions may also assist in the practical interpretation of s 77A of the Trade Practices Act.
We can assist you in considering the impact of the Bill on your business and in preparing any submissions in response to the draft legislation. We have extensive experience in this area.