It's a fundamental principle of company law that a company is a
legal entity in its own right; independent from its shareholders
and governed by its directors. However, directors and employees can
still be personally liable for their acts or omissions.
Under the Companies Act 1993 (the "Act"), a company may
indemnify (agree to use its assets to satisfy a liability) its
directors and employees in respect of claims made against them, as
well as the costs associated in challenging claims, except
generally in the case of criminal liability, or breach of the duty
to act in good faith and in the interests of the company.
To further protect directors and employees from financial
liability, the Act permits a company to obtain directors and
officers insurance, which again can meet the costs of defending and
(if required) satisfying a claim; however as with indemnification
by the company, insurance cover with respect to criminal liability
The company constitution
Both of the above require the constitution of the company to
expressly permit indemnification to be granted and for insurance to
be taken out. Without that (and the procedural requirements of the
Act being followed) the company cannot validly indemnify or
Upon incorporation, a company is not required to have a
constitution, however over time and as a business grows, this
should be revisited, to consider if the above permissions (as well
as other permissive provisions available under the Act) should be
Who should be covered?
Indemnification and insurance cover are especially important for
service businesses or those who deal with third party property or
There is now a range of specialised insurance products on the
market. Expert advice should be obtained when taking out these
types of policies and any exclusions contained in the policies
should be carefully reviewed and fully understood.
If you are a director or senior officer it is worth
- If the company has
director and officer (known as D&O) insurance in place;
- If you are indemnified by
- If the company's
constitution permits insurance and indemnification.