New provisions in relation to directors’ liabilities came into force on 1 October 2007 under the Companies Act 2006. Some commentators have raised concerns about the impact of new sections 232 – 235 on existing exoneration clauses and indemnities in trust deeds and rules as they apply to the directors of corporate trustees.
It has been suggested that the new provisions ‘wipe out’ the protection exoneration clauses provide for directors of corporate trustees. Our view is that this is probably not the case but that it may be useful for schemes to review any indemnity clauses in trust deeds and rules.
Exoneration clauses clearly offer valued protection from personal liability for those carrying out trusteeship roles. The Law Commission in 2006 reported that “exoneration clauses control risk and keep cost down... Trustee indemnity insurance is not capable of replacing the role played by exoneration clauses”.
Exoneration clauses prevent liability from arising, while indemnity clauses protect trustees against the financial consequences of any liability that does arise. Valid exoneration clauses provide an effective form of protection for the corporate trustee and indirectly for its directors.
The Companies Act 2006 limits indemnities but will allow the directors of a corporate trustee of an occupational pension scheme to be indemnified by the trustee company or by an associated company, for most issues. (A company may continue to purchase indemnity insurance where an indemnity would otherwise be void).
This is wider than under the Companies Act 1985 which only allowed companies to provide a “qualifying third party indemnity” for directors ie applying in respect of proceedings brought by third parties. The 2006 Act now extends this to allow companies to include “qualifying pension scheme indemnity” provisions which indemnify directors of corporate trustees against liability incurred in connection with the company’s activities as a trustee. However, the provisions must not provide indemnification against:
- any liability of the director to pay a fine imposed in criminal proceedings or a penalty imposed by a regulatory authority (eg the Pensions Regulator); or
- any liability incurred by the director in defending criminal proceedings in which he is convicted.
Schemes with corporate trustees should review any indemnity provisions in the scheme rules or the company’s articles of association and if necessary make suitable amendments in order to ensure that the indemnity provisions comply with the new Act.
An exoneration clause can provide complete protection for pension scheme trustees in the absence of (normally) fraud or dishonesty. It has been suggested that the Companies Act 2006 which prohibits provisions by which a company relieves directors from liability could mean that the directors of a corporate trustee cannot rely on exoneration clauses. However, it remains the case that a valid exoneration clause protects the trustee company. Anyone bringing a claim against the directors of a corporate trustee would have to lift the “corporate veil” to hold the directors personally liable. This is usually very difficult unless the directors are dishonest. So the exoneration clause should still be effective in most circumstances.
It is very important for schemes which have a corporate trustee to review their trustee protection provisions to ensure that they are adequate and consistent with new legislation. Well drafted exoneration and indemnity clauses will continue to provide protection. However, the new legislation provides a good opportunity for trustees to review the overall protections in their scheme.