Clarification on the use of indemnities
24/10/2016
ARITA recognises the importance of indemnities in making the insolvency process viable for insolvency practitioners and directors.
The purpose of our recent article
highlighting the risk of indemnities from related parties was to provide caution for their use. It was never intended to prohibit the long-accepted ability to accept indemnities from directors. It is also important to note that the article was not the articulation of a new policy – it was a reminder based on the existing requirements of the Code.
Depending on the circumstances, the acceptance of an indemnity may result in the appointee no longer being seen to be independent. This could arise from the perception that the practitioner is relying on the future satisfaction of the indemnity, and that they may not take action which might put that future payment at risk.
This would particularly be the case where the indemnity is provided by a party involved in a specific transaction with the company which would have to be investigated during the appointment.
The pre-appointment sale of a company’s business or a known possible uncommercial transaction involving the provider of an indemnity would create a perception of a lack of independence – even if the indemnity is unconditional.
Any pre-appointment investigations required to satisfy a proposed appointee of the validity of such a transaction would be outside the accepted scope of pre-appointment communications and meetings (refer section 6.8.1B. of the Code).
Being 'a party involved in a specific transaction with the company’ is not considered to usually extend to the investigations of, and possible causes of, action for insolvent trading or breaches of directors’ duties.
The requirement to be, and be seen to be, independent remains a fundamental principle of the Code and the Court may provide clarity in some circumstances.
If an indemnity is accepted, the disclosure requirements under the Code remain.