In April last year, companies were given greater flexibility in protecting their directors against certain liabilities as a result of changes to the law. The changes recognised increasing concern over directors' exposure to liability arising from legal proceedings brought by third parties.

The Companies Actprohibits a company from exempting directors in respect of liability if negligent, in default or in breach of duty or trust. The previous law permitted a limited indemnity through subsequent reimbursement of costs arising from proceedings where judgment was given in favour of a director.

While the basic prohibition remains, companies can now take advantage of a broader exemption to indemnify directors against liabilities to third parties and to pay a director's defence costs as they are incurred. This is subject to an undertaking from the director that he will repay these if the defence is unsuccessful.  The indemnity cannot extend to the payment of criminal fines or regulatory penalties.

While most companies will have indemnity provisions in their articles, these may well be out of date.  Directors should consider whether it is appropriate to amend the articles and possibly draw up separate indemnity agreements between the company and individual directors.

Whilst directors may view this recent change to the law as attractive, it is important to note that the new provisions are only permissive and companies are not obliged to indemnify their directors in this way.

At the same time as considering the protection provided for directors, companies may also wish to review their existing directors' and officers' liability insurance.

If you have any questions regarding recent changes to the law on directors' indemnities and how best to address this issue in your own business, please contact your professional advisors.

Stephen Trombala is a partner specialising in corporate finance with commercial law firm Shepherd and Wedderburn. 0131 473 5720.

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