Clause 217

Company Law Reform Bill [Lords] – in a Public Bill Committee at 9:00 am on 13th July 2006.

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Provision of insurance

Photo of Jonathan Djanogly Jonathan Djanogly Shadow Minister (Business, Innovation and Skills), Shadow Solicitor General, Shadow Minister (Justice), Shadow Solicitor General

I beg to move amendment No. 460, in clause 217, page 99, line 2, at end add—

‘( ) The cost of any excess under an insurance policy permitted to be purchased under this section may be paid for by a company or associated company, provided that it does not exceed £5,000’.

We are discussing the clauses in chapter 7 of part 10 that deal with provisions protecting directors from liability. Clause 217 permits a company to take out and maintain insurance for a director against any liability referred to in clause 216(2), the scope of which we argued in our previous sitting should be broadened. However, if excess is provided for under an insurance policy, it is logical for a company to be permitted to meet the cost, provided that it does not exceed a reasonable amount, given that the existence of an excess normally reduces the premium payable by a company.

The amendment would enable a company to meet that cost under an insurance policy that it is permitted to take out under clause 217. On a probing basis, we suggest that the provision should encompass an excess sum of less than £5,000.

Photo of Mike O'Brien Mike O'Brien Solicitor General, Law Officers' Department

This is not an unreasonable amendment and we accept that it states a modest face value. It also picks up a recommendation made in the company law review. However, in the light of the major reforms introduced in the Companies (Audit, Investigations and Community  Enterprise) Act 2004, we do not feel able to accept it. It is preferable to keep to the basic principles that underline the chapter.

If a director’s liability is to a third party, the company will in most cases be able to indemnify him. However, if the liability is to the company itself, it would be wrong in principle for the company to indemnify the director, even if the amount involved was relatively modest, as I accept the proposed amount is.

The Companies Act 1985 permits companies to indemnify directors against most liabilities to third parties, including shareholders who bring a class action, or to pay a director’s legal costs up front, providing that the director repays any loans, discharges or other liability to the company if he is convicted in criminal proceedings or judgments are made against him in civil proceedings brought by the company or an associated company. It should be clear that companies are already permitted to indemnify directors in a wide range of circumstances.

It is, however, necessary to draw some lines in the sand. Those lines are drawn in the right places in the 2004 Act and in the Bill. The hon. Gentleman’s point is not unreasonable, but we have taken the view that this is a matter of principle. I hope he accepts that that is probably the best way to proceed.

Photo of Jonathan Djanogly Jonathan Djanogly Shadow Minister (Business, Innovation and Skills), Shadow Solicitor General, Shadow Minister (Justice), Shadow Solicitor General

I thank the Solicitor-General for his consideration of my points, although I am not entirely sure that I agree with his point of policy. When excesses are involved, insurance costs can generally be reduced, so we thought that the amendment would be attractive. However, I have heard what he has to say, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 217 ordered to stand part of the Bill.

Clause 218 ordered to stand part of the Bill.