Indemnifying directors: what the law allows

A company cannot exempt its directors from liability to the company, and any indemnity against negligence, default, breach of duty or breach of trust is void unless it fits one of three exceptions in the Companies Act 2006: insurance, a qualifying third party indemnity, or a qualifying pension scheme indemnity. Where a qualifying indemnity exists, the directors’ report must say so and a copy must be kept open to members.

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What does the Companies Act prohibit?

Section 232 contains two rules. Under section 232(1), any provision that tries to exempt a director, to any extent, from liability for negligence, default, breach of duty or breach of trust in relation to the company is void. Under section 232(2), any provision by which the company directly or indirectly indemnifies a director of the company, or of an associated company, against that kind of liability is void, except as permitted by section 233 (insurance), section 234 (qualifying third party indemnity) or section 235 (qualifying pension scheme indemnity).

Section 232(3) applies the rule wherever the provision appears: in the articles, in a service contract, in a side letter or “otherwise”. Companies are associated for this purpose if one is a subsidiary of the other or both are subsidiaries of the same body corporate (section 256). The policy is simple: a director cannot be shielded by the company from claims the company itself brings for breach of the duties covered in our guide to directors’ duties.

What is a qualifying third party indemnity?

Section 234 permits an indemnity against liability the director incurs to someone other than the company or an associated company, such as a customer, a supplier or a lender, provided it does not cover any of the following:

a fine imposed in criminal proceedings;
a sum payable to a regulatory authority as a penalty for breaching a regulatory requirement;
the cost of defending criminal proceedings in which the director is convicted;
the cost of defending civil proceedings brought by the company or an associated company in which judgment is given against the director;
costs of an application for relief under section 1157 (or section 661(3) or (4)) where the court refuses relief.

The conviction, judgment or refusal must be final before the exclusion bites. Section 234(5) says it becomes final at the end of the appeal period if there is no appeal, or when any appeal is disposed of. Until then the company can, in principle, meet defence costs under the indemnity.

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What about pension trustee companies?

Section 235 allows a qualifying pension scheme indemnity for directors of a company that is trustee of an occupational pension scheme, covering liability incurred in connection with the company’s activities as trustee. It has a shorter list of exclusions: criminal fines, regulatory penalties and the costs of defending criminal proceedings that end in conviction. The scheme must be an occupational pension scheme established under a trust, using the Finance Act 2004 definition.

Can the company pay defence costs as they arise?

Yes, by lending rather than indemnifying. Section 205 allows a company to fund a director’s expenditure defending criminal or civil proceedings about alleged negligence, default, breach of duty or breach of trust in relation to the company, or on an application for relief, without the member approval normally needed for loans to directors under sections 197 to 201. The terms must require repayment if the director is convicted, judgment is given against them or relief is refused, no later than the date that outcome becomes final.

Section 206 gives a similar exemption for funding a defence in an investigation by a regulatory authority or against action it proposes to take. Our guide to loans to directors explains the approval rules these sections switch off.

Can the company buy insurance instead?

Section 233 says section 232(2) does not stop a company purchasing and maintaining, for a director of the company or an associated company, insurance against any liability of the kind in section 232(2). This is the route for cover against claims the company itself might bring, which an indemnity cannot touch. Article 53 of the model articles for private companies lets the directors decide to buy insurance at the company’s expense for any current or former director against any loss or liability incurred in connection with their duties or powers. The commercial product is usually directors and officers liability insurance; the statutory point is that the premium is lawful for the company to pay.

What do the model articles provide?

Article 52 of the model articles for private companies limited by shares allows a “relevant director”, meaning any director or former director of the company or an associated company, to be indemnified out of the company’s assets against liability for negligence, default, breach of duty or breach of trust, liability as director of a pension trustee company, and any other liability incurred as an officer. Article 52(2) then cuts that back: it does not authorise any indemnity that the Companies Acts or any other law would prohibit or make void. In practice the article grants the widest indemnity the Act permits and no more.

Companies incorporated under earlier legislation, or with bespoke articles, may have different wording. A standalone deed of indemnity is common where a director wants certainty that does not depend on articles the members can change.

What must be disclosed and kept?

Directors’ report

Section 236 requires the directors’ report to state if a qualifying indemnity provision is in force for one or more directors when the report is approved, or was in force at any time during the financial year for people who were then directors. Similar statements are needed where the company has given an indemnity to directors of an associated company. A micro entity does not have to prepare a directors’ report at all (section 415(1A)).

Copy available for inspection

Under section 237 the company must keep a copy of the qualifying indemnity, or a written memorandum of its terms if it is not in writing, at the registered office or an alternative inspection place under section 1136. It must be kept for at least one year after the indemnity ends, and variations are treated in the same way. If it is kept anywhere other than the registered office, Companies House must be notified of the place. Default is an offence by every officer in default, with a fine up to level 3 on the standard scale.

Section 238 gives any member the right to inspect it free and to receive a copy within seven days of a request, on paying any prescribed fee. The statutory registers guide covers the other records members can inspect.

How does this work in practice?

Illustration only. A company has adopted the model articles and given its finance director a deed of indemnity in the terms of section 234.

Event	Can the indemnity pay?
A customer sues the director personally for negligent misstatement and wins £40,000	Yes. Liability to a third party.
The company sues the director for breach of duty and wins	No. Section 232 applies and section 234(3)(b)(ii) excludes the defence costs; a section 205 loan could have funded the defence but must now be repaid.
The company sues and loses	The defence costs can be met, since judgment was not given against the director.
A regulator fines the director	No. Regulatory penalties are excluded.
The director is prosecuted and acquitted	Defence costs can be met.

What mistakes do companies make?

Drafting an indemnity “to the fullest extent” with no carve outs. The excluded parts are void, and the company must still decide what is and is not covered when a claim comes in.
Omitting the section 236 statement in the directors’ report, or forgetting that an indemnity from a parent company also triggers disclosure.
Not keeping the copy for a year after the indemnity ends, for example after a director resigns.
Treating an indemnity as a substitute for insurance. An indemnity is only as good as the company’s ability to pay, which is weakest exactly when claims arise, on insolvency.
Overlooking section 1157, under which the court may relieve an officer who acted honestly and reasonably and ought fairly to be excused, and section 1157(2), which allows an application before a claim is made.

Personal exposure for directors in a failing company is covered in wrongful trading, and the limits on member approval in ratifying directors’ breaches.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.