Can a Kenyan Company Indemnify Its Directors?

Directors often ask the company for a promise: if I am sued over a board decision, will you pay? In Kenya the answer is limited by statute. The Companies Act, 2015 makes most promises to cover a director’s liability to the company void, and then carves out specific exceptions. Knowing where the line sits is essential before anyone drafts an indemnity clause.

The general rule: section 194

Section 194 voids any provision, in the Articles, a contract or elsewhere, that exempts a director from liability to the company for negligence, default, breach of duty or breach of trust, or that indemnifies the director against such liability, except as the Act itself permits. A clause saying “the company will never hold the director liable” is therefore ineffective, and so is a clause promising to repay the company’s own claim against the director. The rule protects members from a board that would otherwise excuse itself.

Exception one: insurance (section 195)

The Act does not prevent a company from buying and maintaining insurance for a director against liability for negligence, default, breach of duty or breach of trust. This is why liability insurance is the standard answer. Cover bought from an insurer is outside the voiding rule, subject to the policy terms. Our article on D&O insurance in Kenya explains what a policy covers and who sells it.

Exception two: qualifying third party indemnity (section 196)

Section 196 allows a “qualifying third party indemnity provision”, that is, an indemnity for liability incurred by the director to a person other than the company or an associated company. Typical examples are claims by customers, creditors or other outsiders. Section 194(3) does not affect such a provision.

It has limits. The indemnity is void to the extent it covers criminal fines, regulatory penalties, the costs of defending criminal proceedings in which the director is convicted, or the costs of defending civil proceedings brought by the company or an associated company in which judgment is given against the director. In short, the company cannot fund a director’s own wrongdoing, and it cannot be made to pay for the director’s losing defence of its own claim.

Disclosure and inspection (sections 197 and 198)

If the directors’ report is required, it must disclose the existence of any qualifying indemnity provision in force during the year (section 197). A copy of the provision must also be kept available for inspection by members (section 198). An indemnity that is not disclosed or open to inspection invites challenge, so draft the compliance steps with the clause itself.

What this means in practice

• Do not write a blanket indemnity. Anything that reaches liability to the company is at risk under section 194.
• Use a qualifying indemnity for third party claims, with the section 196 exclusions stated expressly.
• Buy insurance for the rest, and read the exclusions, since insurers commonly exclude fraud and deliberate acts.
• Record who decides. Say whether the board or the members approve indemnity and advances of costs.
• Disclose and make available the provision as sections 197 and 198 require.

A director’s duties come first, and the indemnity regime exists because those duties are real. See our guide to a director’s legal duties. Where a company is a licensed firm, regulators may add expectations on governance, so check the regime that binds your licence.

An illustration

Imagine a director is sued by a supplier over a contract the board signed, and separately the company sues the same director for approving a transaction without disclosing a conflict. A qualifying third party indemnity could in principle respond to the supplier’s claim. It cannot respond to the company’s claim, because section 194 voids indemnity against liability to the company, and section 196 voids cover for the costs of defending civil proceedings by the company in which judgment goes against the director. Only insurance, if the policy terms allow, may help with the company claim, and insurers commonly exclude deliberate misconduct.

The lesson for drafting is to separate the layers. Put the third party indemnity in one clause with its statutory limits. Put the insurance commitment in another, with an obligation to maintain cover during service and for a reasonable period after exit. State who decides on an advance of defence costs and what happens if the director must repay it. Then check the Articles, because an indemnity in the contract cannot be wider than the Act allows, and the Articles may contain a provision that needs to be reviewed at the same time. Finally, diarise the directors’ report disclosure each year so the provision does not become a compliance gap.

The short version

A Kenyan company cannot excuse or indemnify a director against liability to the company, but it can insure the director and can give a qualifying indemnity for claims by outsiders, within the section 196 limits. Draft the layers separately, disclose the indemnity as required, and review the Articles and any insurance policy together so that they do not promise more than the law allows, or leave a gap the director assumed was covered.

Frequently asked questions

This article is general information on Kenyan law as at its publication date, not legal advice. Reading it does not create an advocate and client relationship.