Indemnification of directors and officers (CBCA s. 124)

Departing sellers who were directors or officers meet this term when they ask the corporation to cover claims about past acts. Section 124(1) lets a federal corporation indemnify them against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred in a proceeding in which they are involved because of that association. See director liability in a share purchase.

The conditions

• Subsection (3): no indemnity unless the individual acted honestly and in good faith with a view to the best interests of the corporation, and, in a criminal or administrative proceeding enforced by a monetary penalty, had reasonable grounds to believe the conduct was lawful.
• Subsection (4): indemnity in an action by or on behalf of the corporation to procure a judgment in its favour needs a court’s approval, and the (3) conditions still apply.
• Subsection (5): despite (1), the individual is entitled to indemnity for the costs of defence if not judged by the court or other competent authority to have committed any fault or omitted to do anything they ought to have done, and the (3) conditions are met.

What to ask

Ask whether the corporation is federal; this entry covers the CBCA only. Ontario’s Business Corporations Act has its own s.136, so read the Act that governs. Ask whether the purchase agreement addresses any indemnity the corporation owes a departing director. A contractual promise is an indemnity.