Member Article

The codification of directors' duties under the Companies Act 2006 has brought directors' exposure to liability into sharp focus.

This, along with extended rules on corporate governance, recent legislation, and increased shareholder awareness, means directors must evaluate the liability protection that is available to them.

A company cannot, of course, indemnify directors against their own wrongdoing. This restriction is enshrined in the Companies Act 2006, which contains a general prohibition on the ability of a company to exempt its directors from liability for negligence, default, breach of duty or breach of trust, or otherwise limit any such liability.

This general prohibition is subject to certain exceptions, however, which enable a company to purchase and maintain insurance cover against such liabilities for its directors, and to provide limited forms of indemnity to its directors.

Essentially, a director's indemnity can include QTPIPs (qualifying third party indemnity provisions) and QPSIPs (qualifying pension scheme indemnity provisions). These are limited forms of indemnity specifically provided for in the Companies Act 2006.

Under a QTPIP, a company may indemnify its directors, and directors of associated companies, against liability incurred by its directors to third parties (that is, liabilities to persons other than the company or any associated company).

Subject to a number of restrictions on what it may cover, the main application of QTPIPs will be in relation to liabilities of directors to shareholders or third parties (where the directors act in a way which creates a personal obligation) or in third party civil actions commenced in other jurisdictions.

A QTPIP may also be provided to indemnify a director in respect of his costs in defending an action brought by the company of which he is a director in circumstances where the company is unsuccessful.

QPSIP indemnities, first introduced in October 2007, permit the provision of certain indemnities to directors of a company which is a trustee of an occupational pension scheme. Again, QPSIPs must be limited in scope but, importantly, a QPSIP can cover liabilities of the director of the pension trustee company in connection with the company's activities as trustee of the scheme.

Often, a company's articles of association contain provisions which enable a company to indemnify its directors, but directors should not rely on these provisions alone as they do not oblige the company to exercise the power to indemnify.

 

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