In this case, the Court found that on a proper construction of section 199A(3)(b) of the Corporations Act 2001 (Cth) (and an analogous provision in a deed of indemnity with a director), a company was not prohibited from indemnifying its director for legal costs in defending criminal proceedings prior to a verdict being handed down, provided that the director is obliged to repay any amounts paid in the event that a guilty verdict is ultimately returned.

A deed of indemnity between Note Printing Australia Limited (NPAL) and Mr Leckenby (its then Chief Executive Officer) (Deed) provided that:

  • to the fullest extent permitted by law, NPAL indemnifies Mr Leckenby against liability for legal costs and expenses incurred by Mr Leckenby or for which Mr Leckenby may become liable if defending actions for liability as an officer of NPAL, unless such costs were incurred in defending or resisting criminal proceedings in which [Mr Leckenby] is found guilty (clause 2.2); and
  • Mr Leckenby was required to refund to NPAL all amounts incurred by NPAL in respect of a claim for which Mr Leckenby was not entitled to be indemnified.

Tate J (with whom Whelan JA and Ferguson JA agreed) in the Supreme Court of Victoria – Court of Appeal upheld the decision at first instance that NPAL was liable to pay Mr Leckenby’s legal costs in defending the criminal proceedings before a verdict was handed down for the following reasons:

the carve out for criminal proceedings in clause 2.2 largely mirrors the prohibition against an indemnity for legal costs in section 199A(3)(b) of the Corporations Act 2001 (Cth) (Act).  A proper construction of the use of the future perfect tense (ie is found guilty) in both clause 2.2 and section 199A(3)(b) meant that unless and until a finding of guilt occurs, NPAL’s obligation to indemnify subsists.  At all relevant times before a verdict is reached, a person charged with an offence is not a person who has been found guilty of the offence;

  • the carve out for criminal proceedings in clause 2.2 largely mirrors the prohibition against an indemnity for legal costs in section 199A(3)(b) of the Corporations Act 2001 (Cth) (Act).  A proper construction of the use of the future perfect tense (ie is found guilty) in both clause 2.2 and section 199A(3)(b) meant that unless and until a finding of guilt occurs, NPAL’s obligation to indemnify subsists.  At all relevant times before a verdict is reached, a person charged with an offence is not a person who has been found guilty of the offence;
  • such finding was supported by the change in wording from the predecessor of section 199A(3)(b) which reflected a temporal shift in the prohibition on indemnifying officers for legal costs so as to permit such costs to be paid during criminal proceedings and up until, and unless, a guilty verdict is returned;
  • Tate J accepted that the trial judge found that the requirement for Mr Leckenby to repay NPAL in the event that he was found guilty rendered the transaction something different to a traditional indemnity but was in effect an advance (as opposed to a loan) that was to be repaid if a guilty verdict was returned; and
  • adopting a business-like approach, the parties were to be taken to have intended to make an arrangement which conferred upon Mr Leckenby the maximum protection available while respecting the prohibition in section 199A(3)(b).  It would not have been difficult for the Deed to have stated that NPAL had a right to postpone payment of defence costs until the verdict was known if that had been the intention.