Categories
Contract

What Is an Indemnity? The Essentials of Indemnities

Indemnity agreement

An indemnity is a contractual term which promises to reimburse another party in respect of a loss or damage. The only party indemnified is the one that is identified as the beneficiary of the indemnity.

If the benefit of that indemnity is to be transferred to another party it must be done formally-for example with a written note or record assigning the benefit of the indemnity to the recipient of the assignment.

Potential liabilities are covered in two ways:

  1. Between parties to the contract where party 1 gives party 2 an indemnity, and
  2. Third party claims against the beneficiary of the indemnity

What losses will be covered by the indemnity will depend on the drafting of the indemnity clause which can be narrowly or broadly drafted. What losses are intended to be covered by the indemnity? Direct losses? Indirect losses?

A narrow drafting would see only direct losses being covered. A broad drafting would cover all losses including direct, indirect, consequential, and so forth. An example of a broadly drafted indemnity would be as follows:

“all damages, liabilities, demands, costs, expenses, claims, actions and proceedings (including all consequential, direct, indirect, special or incidental loss or punitive damages or loss, legal and other professional fees, cost and expenses, fines, penalties, interest and loss of profit or any other form of economic loss (including loss of reputation))”

How enforceable is an indemnity? This will depend on the resources of the party giving the indemnity. That party can, of course, take out indemnity insurance which would ensure resoursces would be available to meet the losses arising from the indemnity.

Some indemnity claims will arise by operation of law-for example, an agent is indemnified by his principal as a consequence of the law of agency.

Many indemnities will arise in a contract and in a contract of guarantee as an indemnity is less vulnerable to an attack than a guarantee.

It is important to understand that the period during which an indemnity can be enforced is 6 years from the date on which the indemnifier refuses or fails to honour the indemnity.

It is also worth considering whether there is a need for an indemnity; you would see if you can rely on simply suing for breach of contract or breach of a warranty, for example.

The drafting on an indemnity requires close attention with consideration given to how broad or narrow it needs to be.

The effect of the indemnity should be to give rise to damages for breach of contract or damages generally. Check if the effect of the indemnity in a breach of contract will give rise to other remedies-for example termination of the contract-or compensation/reimbursement.

Should you need an indemnity you would be well advised to have it drafted specifically for your particular purposes and circumstances. Avoid a boilerplate indemnity which may not be appropriate or suitable for your situation.

Categories
Business and Company Law Small Business Loans

Commercial Borrowing and Lending-Some Important Issues

Commercial borrowing and lending can be a trap for the unwary lender….and borrower.

commercial borrowing

The issues that arise can lead to borrowers and lenders losing out on what they perceive to be a technicality.

An individual borrower’s powers

An individual can borrow what he pleases and the only issues surrounding this revolve around 3 questions

1. Is the borrower 18 or over?
2. Is the borrower of sound mind?
3. Is the borrower a bankrupt?

For example many small businesses involved families living over pubs or shops.

However the Family Home Protection Act 1976 provides safeguards for the Family Home and if the lender in lending money to a borrower fails to divide out the family home from the business property then the security that the lender thinks it is obtaining may not be effective.

A number of issues which arise from an individual borrowing money arise in the whole area of consumer legislation.

Essentially the Consumer Credit Act, 1995 and the European regulations in 1995 dealing with Unfair terms in Consumer Contracts place fairly onerous obligations on lenders and there is the possibility that if the lending institution gets any of the procedural or substantive safeguards wrong then the security that the bank thinks they are obtaining may not be effective.

Partnership

Unlike a company a partnership does not have a separate legal personality so any issue surrounding the capacity of a partnership to engage in commercial borrowing really falls back on the capacity of the individual partner and this can be ascertained by looking at the partnership deed if there is one (if there is no partnership agreement drawn up then the Partnership Act, 1890 will apply).

Companies

A company is a separate legal entity but is an artificial one to some extent so the ability of the company engage in commercial borrowing depends on

1.The company still being in existence ie not having been struck off
2.Not being in receivership, liquidation or under the protection of the court.

It is interesting to note that if a company adopts the standard Table A articles of association and section 79 has not been excluded from it, then the powers of the directors to borrow on behalf of the company is ineffective.

Section 79 says that a company can only borrow an amount equal to the nominal value of the issued share capital unless the company in a general meeting authorises a higher amount. This can be of enormous significance if the legal team advising the bank overlook this point when granting loans to companies.

Security

A bank will usually take either a fixed charge (on a property) or a floating charge (on stock or debtors or assets that change)

A fixed charge has preference over a floating charge and preferential creditors such as employees and the Revenue Commissioners. But the latter have preference over a floating charge in a wind up situation.

Types of commercial borrowing

Overdraft-normally repayable on demand

Term loan-repayable by negotiated amounts over a period of time
Revolving credit-these are loans which are (were!) popular with property developers allowing for the rolling over of the amount borrowed after 6 months depending on how sales of the development were going.

Factoring-this is essentially the sale of the book debtors of the company to the bank who then gather in the debtors and charge their client a percentage for having provided the finance up front for the book debtors

Leasing-legally the leased property remains the property of the lender although in practical terms the borrower has the use and enjoyment of the asset

Specific Assets in commercial borrowing

Property

This is usually secured by a fixed charge of the property and the company must have the powers in the memorandum and articles of association to mortgage land/property.

Stock

Stock is usually secured by way of a floating charge.

Plant/machinery

Can be secured by both floating and fixed charge depending on the value of the plant.

Debtors/cash

These can be secured by a floating or fixed charge and it has been held in the UK that it is possible for a bank to obtain a charge over the credit balance of a borrower with itself.

Guarantees/Indemnities

When a borrower is involved in commercial borrowing he must be aware of the difference between an indemnity and a guarantee.

A guarantee must be in writing whilst an indemnity need not be. The person giving the indemnity is primarily responsible for the debt whereas with a guarantee the guarantor is secondarily responsible after the borrower who is the first port of call if the loan goes wrong.

A guarantee will normally contain a clause preventing the guarantor from protecting himself by taking security from the borrower. The guarantee will also make provision for the money be repayable on demand which protects the bank from losing out by the running of the Statute of Limitations, 1957 which otherwise might prevent the bank from pursuing the debtor.

As outlined above a company must have the powers to execute a guarantee in it’s memorandum of association.

In a partnership a partner has no implied authority to bind the partnership in commercial borrowing unless it is expressly stated in the partnership deed so the lender will be anxious to get all partners to sign any guarantee.

Post Borrowing

Assuming that a company has the power to borrow and regulation 79 of Table A of the Articles of Association has been excluded then details of the borrowing and charge must be registered with CRO and the Registrar of Companies within 21 days of the creation of the charge.

This time may be extended with an application to court but if the charge becomes void as a result of the charge not being registered within time then the borrowing becomes payable and the lender may sue immediately for recovery of the sum.

Financial assistance re purchase of a company’s own shares

Section 60 of the Companies Act 1963 prohibits the provision of financial assistance for the purchase of shares in the company providing the assistance by anybody. This is to prevent asset stripping and the reduction of the share capital of the company.

However there is a procedure called the ‘whitewash procedure’ which allows certain exemptions which are set out in section 60(2-11).

The effect of this assistance being provided without this procedure is that the transaction is voidable at the choice of the company against any person who knew of the facts which cause the breach.

Conclusion

For many small business owners, the whole area of commercial borrowing is one that now, in 2009, should have been, with hindsight, treated with far more caution. As for the banks attitude to commercial borrowing….unfolding events will show how badly they got it wrong in the whole area of commercial borrowing and lending.