Directors' Indemnities

01.01.06

Directors' Indemnities

6 April 2005 represented a milestone in the ability of companies to protect their directors from claims made personally against them by third parties with the implementation of reforms to the Companies Act changing the basis on which indemnities can be given.

Previously, directors could only be indemnified where they successfully defended any such action brought against them and they would have to pay all their costs in making that defence up front, to be claimed back from the company at the conclusion of the case.

The reforms to this area of company law, introduced by the Companies (Audit, Investigations and Community Enterprise Act) 2004, considerably widen the scope of the indemnity which companies can give to their directors.

The new provisions permit the company to indemnify its directors against legal costs incurred by the director(s) in defending third party claims (i.e. claims made by a person other than the company for example, negligence claims by shareholders or creditors of the company, or claims made by regulatory bodies) where the indemnity is a "qualifying third party indemnity". Broadly, the indemnity will "qualify" provided that it does not seek to cover (i) legal costs for criminal actions which result in the director being convicted of a crime; (ii) fines imposed as a result of criminal actions or by regulatory bodies; or (iii) directors' liability to the company where the company has successfully brought a civil claim.

Companies will now also be able to advance funds to the director for him to conduct his defence even where the action is brought by the company itself; however, the director will be liable to repay those funds if he is convicted of a crime or if the company is successful in a civil action.

These provisions are likely to require a change to the company's articles of association to reflect the new rules in order for both the company and the directors to be able to rely on them with confidence. Alternatively, a separate contractual indemnity can be used. Care must be taken in drafting the indemnity, as wording which goes beyond what is permitted by the new provisions will result in the indemnity being void.

Brodies Corporate Department will be very happy to discuss the new provisions with you and to assist in amending your articles of association if required. Please contact Iain Young (Partner Elect) on 0131 656 0154; iain.young@brodies.com or Euan C Murray (Solicitor) on 0131 656 0058; euan.c.murray@brodies.com if you would like further information.

This brief bulletin is produced for general information purposes only and should not be regarded as a substitute for specific legal advice. Readers should be aware that, while Brodies LLP take great care in publishing this material, no liability can be accepted for any loss or damage, except where the firm has been directly instructed to provide specific legal advice to a client.