Directors can ask their companies to foot the bill for legal claims made against them. This leaves company directors less vulnerable to the risk of personal bankruptcy, but does that leave the company exposed?
Company directors can be made personally liable, sometimes for unlimited damages, if they are accused of negligence or other wrongdoing. Legal liabilities lurk everywhere – company law, health and safety rules, trading law can all land you in trouble. Having to pay your legal costs as they arise in a heavyweight legal claim against you might mean you face bankruptcy before the court even reaches a decision.
Security offered by the company
Companies can give you security by indemnifying you against your legal liabilities or costs in more of these situations – sometimes even when the claim against you is by the company itself.
What costs can be covered?
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 any 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.
Put indemnities in writing
So the company has a choice whether and how it will indemnify its directors. If it wants to protect its directors, it should:
If in doubt, take legal advice.