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Partnership Indemnity Clauses – High Court Guidance

Being appointed a partner in a professional firm is generally a cause for celebration – but the position is not without risks. In one case, however, the High Court found that partners in an insolvency practice were not liable to indemnify a salaried colleague against the potential consequences of a substantial misfeasance claim.

The man, who was described as a salaried partner in the firm, had held office first as joint administrator, then as joint liquidator, of a company in financial difficulties. More than £1.2 million in professional fees had been run up prior to his replacement by new liquidators. The latter subsequently launched proceedings against him, claiming that he had been guilty of misfeasance and/or breach of fiduciary duty.

After leaving his employment with the firm, the man argued that its partners were bound to indemnify him against any compensation or legal costs that he might be ordered to pay in respect of the claim, which he firmly denied. The partnership agreement that governed his employment made it plain that any insolvency appointments that he received would be held for the benefit of the partners and on trust for them.

In rejecting his claim, however, the Court found that, on a true interpretation of the partnership agreement, the relevant indemnity clause related to liabilities, actions or proceedings against the partnership collectively, rather than individuals. The Court was not satisfied that the commercial purpose of the clause was to protect the man against claims made against him personally.