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Reducing the risk of personal bankruptcy
Published August 2007
Directors are turning to the company
Directors are now able to ask their companies to foot the bill for legal claims made against them. Less risk of personal bankruptcy for directors, but does that leave the company exposed?
Company directors can be personally liable, sometimes for unlimited damages, if they are accused of negligence or other wrongdoing. Legal liabilities lurk in every nook and cranny. Company law, health and safety rules, trading law can all land you in trouble. At worst, a heavyweight legal claim might mean bankruptcy before you even get to court.
Your company can give you peace of mind by indemnifying you in more of these situations - sometimes even when the claim against you is by the company itself.
For creditor, employee or shareholder claims against you the indemnity agreement can state that the company will pay your legal costs as they arise. If you lose, the company can also agree to pay the damages awarded against you, and any of the other side's costs awarded against you.
Alternatively, it can provide that you will get nothing further - and must pay back any money it's already paid towards your legal costs.
If the claim is by the company itself - for breach of your duty to act in its best interests, for example - it can agree to pay your legal costs as they arise, but you must repay them if you lose.
Of course, your company can't indemnify you for its own damages awarded against you, or for any of its legal costs that the court says you have to pay.
The company can pay your legal costs if a criminal case is brought against you, as they arise, but you have to repay them if you are found guilty. You can't be indemnified against fines from regulatory authorities, or fines imposed if you are found guilty of a criminal offence.
The company has a choice whether and how it will indemnify its directors. If it wants to protect its directors at all, it should:
Consider indemnities for directors.
Make sure the company's articles of association authorise the directors to make the necessary arrangements.
Ensure the directors disclose indemnity arrangements in their annual report.
Consider Directors' and Officers' Indemnity insurance.
If you would like to find out more about the services that we provide, please e-mail or contact us to arrange a meeting.
