General prohibition
A director acts as an agent for the company but from time to time may incur personal liability to the shareholders or to a third party. Under the general prohibition, a company cannot indemnify a director of the company or an associated company for any liability he may have incurred as a result of his negligence, default, breach of duty or trust in relation to the company of which he is a director. Any provision purporting to do so is void (s.232 CA 2006).
Companies are associated if one is a subsidiary of the other or both are subsidiaries of the same body corporate (s.256 CA 2006).
The aim of s.232 CA 2006 is to protect companies from loss caused by their directors. However, this protection must be balanced with the practical need to encourage people to become directors. The legislation attempts to achieve this balance by:
- not preventing companies from purchasing and maintaining insurance for a director against such liability (ss.232(2)(a) and 233 CA 2006) (usually referred to as ‘Directors’ and Officers’ Liability Insurance’ or abbreviated to ‘D & O insurance’); and
- not preventing companies from providing ‘qualifying third party indemnity provisions’ (‘QTPIP’) (ss.232(2)(b) and 234 CA 2006) and, in respect of companies which act as trustees of an occupational pension scheme, ‘qualifying pension scheme indemnity provisions’ (‘QPSIP’) (ss. 232(2)(c) and 235 CA 2006), to their directors.
QTPIP
QTPIP is defined in s.234 CA 2006. Under this definition, a company is permitted to indemnify its directors against liability incurred by the director to a person other than the company or an associated company provided that the indemnity does not include:
- an indemnity for a director in relation to a fine he has to pay as a result of criminal proceedings or a sum payable as a penalty imposed by a regulatory authority for non-compliance with “any requirement of a regulatory nature”;
- an indemnity for a liability a director incurs in defending criminal proceedings if he is convicted;
- an indemnity for a liability a director incurs in defending any civil proceedings brought by the company or an associated company where the judgment is given against the director; or
- an indemnity in relation to a director’s unsuccessful application to court for relief in connection with s.661(3) or (4) CA 2006 (acquisition of shares by innocent nominee) or s.1157 (general power to grant relief in case of honest and reasonable conduct).
The practical effect of this is that a company can indemnify a director against liabilities incurred by the director to anyone other than the company or an associated company. This may include the costs of defending those proceedings and the financial costs of an adverse judgment. However, a director can still be liable to the company itself and cannot be indemnified against this.
QPSIP
Section 235 sets out the meaning of qualifying pension scheme indemnity provision. A ‘pension scheme indemnity provision’ is a provision which indemnifies a director of a company that is a trustee of an occupational pension scheme against liability incurred in connection with the company’s activities as a trustee of the scheme. Again, it will only be ‘qualifying’ if certain conditions set out in s.235 CA 2006 are met.
QPSIPs were introduced by the CA 2006 in recognition of the fact that companies which act as occupational pension scheme trustees can find it hard to attract high calibre individuals as directors without such protection in respect of the personal liabilities they may incur in the position.
Expenditure on defence proceedings and in connection with regulatory actions or investigations
Section 205 permits a company to provide a director with funds to pay for his expenses in defending any criminal or civil proceedings in connection with any alleged negligence, default, breach of duty and breach of trust in relation to the company or an associated company or in making any relief applications in connection with s.661(3), s.661(4) and s.1157 CA 2006. These funds will need to be repaid if the director is convicted in the criminal proceedings or receives an adverse judgment in the civil proceedings or his relief application is unsuccessful.
There is a similar provision at s.206 CA 2006 in relation to a director’s costs in defending himself in investigations or actions by regulatory authorities. Note that shareholder approval is not required under the CA 2006 provisions requiring member approval for loans etc. for a company to provide a director with funds for defence proceedings or regulatory actions and investigations. Sections 205 and 206 CA 2006 expressly state this.
Indemnity provisions in the articles of association
The sections of the act discussed above set out the fullest extent to which a company may lawfully indemnify its directors in respect of negligence, default, breach of duty and breach of trust in relation to the company.
MA 52 provides companies with the authority but not the obligation to indemnify their directors, former directors (and those of their associate companies) to the fullest extent permitted by the CA 2006. However, they cannot indemnify beyond the scope of the CA 2006 provisions. Consequently under MA 52(2) no provision can indemnify a director against liability incurred to the company of which he is director or to an associated company.
A company is under no obligation to provide an indemnity to the fullest extent permitted by law and should consider the extent of the indemnity it is willing to provide. The Department for Business, Energy and Industrial Strategy’s guidance also suggests that the company needs to consider whether it is in the company’s best interests to agree to pay a director’s defence costs.
Disclosure
QTPIPs and QPSIPs need to be disclosed in the directors’ report (s.236 CA 2006). Copies of the indemnities must be kept by the company at its registered office (or a place specified in regulations under s.1136 CA 2006) during their term and also for one year after they have expired or terminated (s.237 CA 2006). Non-compliance with s.237 CA 2006 is a criminal offence. Shareholders have the right to inspect copies of the QTPIPs and QPSIPs and, on payment of a fee, to be provided with a copy (s.238 CA 2006).