Directors' indemnities

United Kingdom

The new law in relation to directors' indemnities comes into force on 6 April 2005.

The law will permit companies to provide indemnities to their directors in relation to non-criminal liabilities to third parties. It will also allow companies to enter into arrangements to fund defence costs as they are incurred in civil and criminal proceedings (subject to clawback if judgment is given against the director or the director is convicted), even where the company itself takes the action. Indemnities against directors' defence costs will also be possible where the action is taken by the company itself but is settled out of court or otherwise ends without judgment in favour of the directors.

Less welcome, perhaps, is a new restriction on the types of indemnities that may be granted by other companies in the same group (although indemnities that were in place on 29 October 2004 are not affected).

Further details of the new law are set out in the article published in the February 2005 edition of our bulletin, Clearly Corporate, and in the Law-Now archive.

What action should you be taking?

  • Are the directors aware of the changes? They will want to consider whether, or how far, to take advantage of the new flexibility – but also what impact the restriction on indemnities by other group companies will have on future plans and structures.
  • Companies may have existing indemnities in place. These should be reviewed, and may need to be amended to take advantage of the changes to the law. These indemnities are normally either contained in directors' service contracts, or in stand-alone indemnities. New indemnities will need to be disclosed in the relevant company's annual report and accounts.
  • If you want to upgrade any existing indemnities, or commit the company to fund defence costs, is there authority to do this under the company's articles?
  • Should you be reviewing your existing insurance arrangements? Do existing directors' and officers' liability insurance policies interact with the new regime?