Prior to 6 April 2005 a company could only indemnify its officers or auditor against any liability for negligence, default, breach of duty or breach of trust if the officer or auditor was successful in defending legal proceedings brought against him or if relief was granted by the court on the basis that the director acted honestly and reasonably. The main problem with this is that the indemnity is only enforceable by the officer once the outcome of the court proceedings is known. Whilst it is possible to take out insurance against liability, if the insurance cover is insufficient to meet the costs the director is not entitled to any further financial assistance from the company and may find that they have to fund their defence costs from their own resources.
Qualifying third party indemnity
With effect from 6 April 2005 the situations in which companies may grant indemnities to their directors have been extended. A company may now indemnify a director against liability to a third party other than the company or an associated company, as long as the indemnity does not extend to criminal fines or penalties incurred. However, if a civil action is brought by the company, the indemnity will only be valid in relation to the director's third party costs if the director is either successful in defending the claim or the action is otherwise settled out of court.
Interim funding of defence costs
In addition, a company may now advance funds to a director to meet legal and other costs in defending any proceedings brought against him. If the director is found guilty the funds must be repaid by him, but otherwise, for example if the case is settled out of court, the company and director can agree their own terms of repayment.
Taking advantage of these new provisions
Whilst this sounds like good news for directors, in practice action must be taken to benefit from these provisions. Any company incorporated prior to 6 April 2005 will contain the standard indemnity provision in its articles of association which will only reflect the prior law. To take advantage of this new legislation directors will either have to amend the articles of association, or put in place of a separate contractual indemnity. The drafting of the indemnity is crucial, as an indemnity that goes beyond the scope of the new legislation is void in its entirety.
Jordans' services
Our directors' indemnity updating service allows directors to benefit from this new legislation by incorporating the indemnity in the company's articles of association.
There are 3 options open to the company:
- to provide a qualifying third party indemnity to directors;
- to include power for the company to provide interim defence cost funding; and
- to either include an unlimited indemnity for the company secretary or to give the company the power to provide an unlimited indemnity for the company secretary as and when required.
Our updating service includes:
- (a) minutes and resolutions to amend the articles to incorporate any or all of these options; and
- (b) text of the new indemnity article drafted by Senior Counsel.
Reprints of the memorandum and articles can also be provided for an additional fee.
Next steps
Our fee for this service is £190 + VAT. Our fee for reprints of the memorandum and articles start at £50 + VAT.
More information on our directors indemnity provisions service
