It is common for organisations to want to give indemnity with its officers and executives for costs incurred by virtue of their positions in the company. A recent court decision has considered the question of an executive’s entitlement to indemnity for legal costs in a pending criminal proceeding. The court’s decision highlights the need for companies to review the terms of their deeds of indemnity, in particular the restrictions and timing of payments.
The recent decision of the Supreme Court of Victoria in Leckenby v Note Printing Australia Limited concerned the question of whether an indemnified officer is entitled to be indemnified for ongoing legal costs of defending criminal proceedings prior to any verdict as to guilt or innocence.
From September 1998 to June 2004 the plaintiff, John Leckenby, (Leckenby) was the CEO of the defendant, Note Printing Australia Limited (NPAL). In July 2001, Leckenby and NPAL entered into a deed of indemnity (Deed). Along with former officers of NPAL, Leckenby was charged with conspiring to bribe foreign officials to secure contracts for the benefit of NPAL under the Criminal Code Act 1995 (Cth) and the Crimes Act 1958 (Vic).
Leckenby claimed that he had a right to be indemnified for his ongoing legal costs of the criminal proceedings under the Deed. NPAL argued that if Leckenby was entitled to be indemnified, the entitlement and the right to payment would not arise unless and until the criminal proceedings had come to an end and a ‘not guilty’ verdict had been returned. NPAL did not want to pay ongoing costs or lend money to Leckenby pending verdict.
The Deed of Indemnity
Clause 2.2 of the Deed provided that, ‘to the fullest extent permitted by law, NPAL hereby indemnifies the Officer against each and every liability for legal costs and expense the Officer may incur or for which the Officer may become liable in defending an action for a liability incurred as such an officer of NPAL unless such costs and expenses are incurred: … in defending or resisting criminal proceedings in which the Officer is found guilty…’. This is a common provision in deeds of Indemnity.
Furthermore, clause 6.2 of the Deed also imposed an obligation upon Leckenby to ‘refund to NPAL all amounts incurred by NPAL under this Deed’ in respect of ‘a Claim that the Officer is not entitled to be indemnified [for].’ Notably, the Deed did not expressly allow or preclude advances or payments to Leckenby for costs incurred before the determination of the criminal proceedings.
The issue for determination
The critical issue for determination was whether Leckenby was entitled to be indemnified by NPAL for ongoing legal costs pursuant to clause 2.2 of the Deed and, if so, when that payment was due and payable by NPAL. .
Section 199A of the Corporations Act 2001 (Cth) is directed at ‘prohibiting a company from effectively impoverishing itself by agreeing not to pursue or seek recourse against an officer that has engaged in conduct detrimental to the company (s 199A(1)) or indemnifying an officer against a liability to the company or to others in the circumstances referred to therein (s 199A(2)),’ or not to indemnify an officer against legal costs incurred in defending certain actions (s 199(A)(3));
Section 212(2) ‘permits the making of… an ‘advance, loan or otherwise’ in circumstances where s 199A applies provided there is an obligation to repay and the benefit is ‘reasonable in the circumstances of the public company or entity giving the benefit.’
NPAL was liable to pay the legal costs incurred by Leckenby in defending the proceedings before verdict.
The court decided:
- yhe wording of the particular Deed and its resemblance to s 199A(3) allows the word ‘indemnity’ to be read as ‘no more than and no different to an agreement that provides for an advance which requires repayment on a guilty verdict
- reading the provisions of the Corporations Act in conjunction with the Explanatory Memorandum, ‘it is clear that the legislature was concerned to ensure that an officer could, under certain circumstances, receive payments in advance of… proceedings being finalised and a verdict being returned”
- the Deed did not contravene s 199A(3)(b) as the prohibition [contained in section 199A(3)] to bite, there must be a finding [of liability or guilt] and that finding must be made in the very proceedings in respect of which legal costs are currently being claimed by the officer under his or her indemnity.’ As such, given Leckenby is not entitled to indemnification and must repay any monies if a guilty verdict is returned, the Deed is compliant with the Corporations Act
- it is within the rights, means and ability of the parties to place a limitation on the indemnity, or when the indemnity can be called upon, in the drafting and formation of any deed of indemnity.
What this means for you
Companies should carefully review deeds of indemnity for their directors and officers, particularly the wording of exclusions and when those exclusions apply. If companies do not want to pay costs on an ongoing basis before verdict, this case makes it clear that wording to that effect must be incorporated in that deed of indemnity.