From a legal perspective, CFOs can be considered an officer of the company even if they are not a director of the business.
As an officer of the company, CFOs could be held personally liable if the business breaches certain laws. This means that if the business breaches the law, officers of the business are found to have committed a crime, potentially putting their personal assets - including the family home - at risk.
There are a range of mechanisms CFOs could explore that could help protect their personal assets in such a situation.
Sarah Bartholomeusz, CEO of You Legals, thinks there are many instances in which a CFO may be personally liable for breaches of the law and that a broad range of legislation potentially imposes personal liability on directors and officers.
“The most well-known provisions come from the Corporations Act. These include insider trading and the duty not to trade while the company is insolvent," she says.
“It sounds quite simple but sometimes the waters of insolvency are a little murky. It's really important for directors and officers to properly understand insolvency and where their personal obligations arise," she says.
The Competition and Consumer Act is another law that can make directors personally liable for false or misleading statements.
Additionally, each state and territory has enacted environmental protection laws that place obligations on corporations and their directors for environmental offences.
OHS legislation, for example, requires directors to actively exercise diligence in matters of workplace health and safety.
“Offences under the OHS legislation are divided into three broad categories that impose penalties from corporate fines to personal fines and even imprisonment in cases of recklessness," she adds.
There are potentially serious consequences if a CFO does not have proper protections in place if they are sued.
“If a director does not have insurance or indemnity and they are personally liable to whichever party seeks redress, it will be necessary to provide the funds to compensate the other party, whether that is through personal investments or holdings, including their house," Bartholomeusz says.
Insurance is essential
Insurance is often a first line of defence and the main means of protection for many CFOs. As an officer of the business, CFOs could help safeguard against potential risk by conducting due diligence when looking at the insurance policies that cover current directors and officers.
“Read the policy or speak with your company's insurance broker and make sure you understand the scope of the cover," says Bartholomeusz.
Most insurance policies will cover three main types of liability:
1. Personal liability insurance in circumstances where the company is unable to indemnify its officers
2. Reimbursement to the company when it has indemnified its officers
3. Legal insurance and liability coverage for defending a shareholder or other third-party claim.
Bartholomeusz explains The Corporations Act prevents companies from indemnifying an officer or director who is involved in any dishonest or illegal activities such as:
· Wilful breach of a certain duty
· Improper use of positions
· Improper use of information.
“In these circumstances, your insurance policy will be rendered null and void," she warns.
Deed of Indemnity
Aside from insurance, an option for CFOs to help prevent personal liability is to ask the company to provide a deed of indemnity.
“An indemnity deed can provide significant protection for officers by assigning losses they would otherwise personally incur to the company," says Bartholomeusz.
“It is an extremely useful tool officers can use to manage the legal risks associated with their role," she adds.
The scope of an indemnity deed is usually agreed between the CFO and the company, although this may not always be the case.
Bartholomeusz says that there are some legal limitations that restrict the extent of indemnity that can be provided as companies also wish to limit the breadth of indemnity provided to officers.
From an officer's point of view, a deed that provides indemnity to the full extent permitted by law provides the greatest protection and security.
However, the law imposes numerous legal restrictions on the extent of any indemnity for legal liability. For instance, the company cannot indemnify an officer for any activity that is dishonest or that breaches a criminal provision of any legislation.
Aside from insurances and indemnities, there are several other techniques CFOs might use to help protect themselves and their assets.
However, Bartholomeusz says there is a suite of provisions within the Corporations Act that are designed to 'pierce the corporate veil' and that it would be naive to think that simply transferring property into a spouse's name will offer protection.
“They look beyond whose name is on the paperwork to determine the true owner of the property to claw back assets that may in fact belong to the company or its directors or officers," she explains
In addition to insurance and indemnity, CFOs may wish to explore other ways to protect assets such as the family home by holding them in trust for the benefit of a spouse and children.
Nevertheless, Bartholomeusz cautions CFOs against thinking that losing their home is the worst thing that could happen.
“A trust will not save you from jail. The only way to truly protect yourself from personal liability is to be aware of what your obligations as directors and officers are, fulfil those obligations diligently and when in doubt seek professional advice," she stresses.
- Read and fully understand the insurance policies that relate to directors and officers.
- Explore whether it's necessary for the company to provide a deed of indemnity.
- Don't assume transferring property into a spouse's name provides appropriate protection.