| These new powers can only be used if the governing document allows it. The old rules meant that a trustee had to use his own personal funds to pay legal costs if sued and was only reimbursed at the conclusion of perhaps lengthy proceedings. Trustees may now be lent funds by the charity to pay legal costs as they arise. Under the Companies (Audit, Investigations, and Community Enterprise Act) 2004 Act companies are now able to amend their Articles to allow the provision of funds to cover directors’ legal costs up-front; but any loan must be made on terms that the director repays the loan if the case is lost. Directors can also be indemnified against some liabilities to third parties. The new act also allows for company officers, excluding directors or auditors, to be exempt from liability or indemnified against liability. A loophole which allowed the circumvention of the restrictions by using associated companies to indemnify directors has been blocked. A parent company is now restricted in its ability to indemnify not only its own directors but also directors of its subsidiaries. A subsidiary is now restricted in its ability to indemnify not only its own directors but also directors of its parent company, or of a fellow subsidiary of that parent company. This new law represents a less strict approach to director indemnity prohibition. Directors may not be indemnified against any liability for negligence, default, breach of duty or breach of trust, unless the liability is a “qualifying third party indemnity provision”. Three conditions have to be met for a liability to qualify: - One cannot indemnify the director against a liability to the company itself, or to any associated company
- One cannot indemnify the director against payment of a criminal fine or a regulatory penalty
- One cannot indemnify the director against any liability incurred in defending any criminal proceedings in which he/she is convicted, in defending any civil proceedings brought by the company or an associated company, and in an unsuccessful application for relief form the liability under the provisions of relief in the Companies Act.
Any charitable company wishing to make use of these new rules will generally need to amend their Memorandum and Articles of Association, since standard indemnity provisions will not cover the new indemnification. As a trustee benefit, the wider indemnity requires explicit prior Charity Commission consent. Organisations will need to decide whether the directors should have entitlement to the wider indemnity or whether the unconflicted directors should be in a position to decide whether or not to provide the indemnity in individual cases. The new law removes the restriction against the making of loans to directors in connection with the up-front payment of legal costs, it does not confer on the charity organisation a power to make such loans. However, no explicit constitutional provision is needed for this purpose as long as the indemnity itself is authorised or required by the constitution, the making by the organisation of the loan to the director can be regarded as incidental. The board of directors should consider carefully whether it would be in the best interests of the charity to make a loan to provide up-front funding for the director’s legal costs. Our own experience is that organisations often neglect reviewing governance documents. We find that these and other useful provisions are often lacking and have not been updated to reflect organisation and company law change. For further information contact: James Sinclair Taylor The Charity Team at Russell-Cooke Direct Dial: 020 8394 6480 Email: taylorj@russell-cooke.co.uk | 