Counter Indemnities Tear Up the Corporate Veil

Monday, September 14th, 2015
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Kim Lovegrove’s recent article on counter indemnities offers some keen and wholly accurate observations.

Counter indemnities are indeed very stringent and severe securitisation instruments. They also cut a swathe through traditional means by which business concerns firewall themselves from personal liabilities for debts or the liabilities of the business.

There is no corporate veil when a contractor signs a counter indemnity. It is common practice for risk averse organisations to incorporate companies for the purposes of protecting those behind the corporate veil (i.e. directors or those associated with the management of a going concern.)

Then if the organisation fails, the company is wound up and unless the directors or those associated with the management of the company have been trading whilst insolvent, the organisation’s liabilities will be solely and exclusively quarantined to the company. If the company is then deemed to be worth $2 then that will be the extent of the company`s liability to the creditors.

Nifty operators had been known to exploit the phenomenon of the corporate veil to avoid liabilities whereby they make a habit of migrating assets out of the company. Sharp practice indeed – and whilst not immune from clawback laws, it is still alas an age old practice. This gave rise to the term phoenix companies – the company is wound up then, in another guise, those behind it return in a new incarnation  (i.e. another company to rise like a phoenix from the ashes.) Insurers are very aware of this phenomena, hence the belts and braces approach of counter indemnities.

But if a contractor were to establish a company for the purposes of firewalling individuals and assets, then he or she should take pause and think again in circumstances where he or she is required to sign a counter indemnity. The corporate veil in the form of the company will provide as much protection as damp tissue paper. The insurer will be able to seize upon the security afforded by the counter indemnity, seize the assets that make up the security behind the director and, in circumstances where they are inadequate, bankrupt the provider of the counter indemnity.

It is also common practice for spouses to sign counter indemnities too, so that the insurer can have access to the matrimonial property. A spouse or a partner would be most ill-advised to co-sign a counter indemnity, for fear of placing their own assets on the line.

It is, however, considered that there is an emerging body of law that may suggest that the provision of counter indemnities in circumstances where the insurer has not, for instance, recommended the deployment of a lawyer to explain the intricacies of a counter indemnity, then such failure may not sit well with the Insurance Contracts Act(the ICA). Will the ICA provide some potential defences to those who have signed counter indemnities in circumstances where they were oblivious to the gravitas attaching to the execution of same?

Paul CottBy Paul Cott  LLB Honours; LLM
Senior Associate in Construction, Commercial and Employment Law at Lovegrove Smith and Cotton.
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