The Victorian Court of Appeal has upheld a decision made by the Supreme Court of Victoria last year which required a company to indemnify its former Chief Executive Officer for legal costs and expenses incurred in defending criminal proceedings prior to verdict.
Note Printing Australia Limited (NPAL) appealed the ruling of Justice Sifris which gave effect to a Deed of Indemnity entered into between NPAL and its former CEO, John Leckenby, on 27 July 2001 (Deed). As a result of that Deed, NPAL agreed to indemnify Mr Leckenby against certain future liabilities (including legal costs) which he may incur by reason of being an officer of NPAL.
On 1 July 2011, the Australian Federal Police charged Mr Leckenby with foreign bribery offences relating to his position at NPAL. Proceedings in relation to those charges remain ongoing.
As a result, Mr Leckenby notified NPAL of his intention to call upon the Deed of Indemnity to meet his continuing legal costs in relation to the criminal proceedings, but NPAL refused to pay.
At first instance, the Supreme Court held that by virtue of the operative clauses of the Deed, NPAL's obligation to indemnify Mr Leckenby arose as soon as costs were incurred by Mr Leckenby, and not after a verdict in the criminal proceedings, as was argued by NPAL.
On appeal to the Victorian Court of Appeal, NPAL argued that:
- s199A(3)(b) of the Corporations Act prohibited a company from applying shareholder funds towards the defence of criminal proceedings brought against an officer before the outcome of those proceedings was known (including possibly the outcome of any appeals);
- any hardship suffered by someone in Mr Leckenby's position before the outcome of the criminal proceedings is known could be dealt with by the company giving an interim loan or advance to the officer to meet his ongoing legal expenses, as the time for payment of any indemnity arose only after the outcome of the criminal proceedings was known;
- whether or not NPAL should loan or advance Mr Leckenby money to pay his ongoing legal expenses, with or without security, was a matter for the NPAL Board and not the Court;
- the meaning of the word 'Claim' in the Deed did not encompass criminal proceedings and therefore any indemnity contained in the Deed could not be effective in relation to the foreign bribery proceedings Mr Leckenby is party to; and
- the finding made by Justice Sifris that the obligation to indemnify Mr Leckenby arose immediately and not following a verdict in the criminal proceedings gave the prohibition in s199A no work to do, as if it was correct, it stood for the principle that shareholder funds may be paid in relation to an officer's liability for legal costs prior to a guilty verdict being returned, with only "a personal, and potentially valueless, right of recovery available to [the company] after verdict".
On behalf of Mr Leckenby, Holding Redlich argued that despite the prohibition contained in s199A, NPAL's contended construction of the Deed ignored the plain meaning of the words "found guilty" – and that unless and until a finding of guilt occurred in the future, NPAL remained obliged to indemnify Mr Leckenby for his ongoing legal costs under the Deed by virtue of it having voluntarily entered into the Deed.
Court of Appeal decision
The Court of Appeal dismissed NPAL's appeal.
Three judges of the Court of Appeal unanimously held that as a result of having entered into the Deed, NPAL was "permitted at law" to indemnify Mr Leckenby for his "legal costs in defending criminal proceedings unless and until he... is found guilty". Such a transaction would not offend the prohibition contained in s199A because of the obligation imposed on Mr Leckenby by the Deed that he refund any costs advanced by NPAL in the event of a finding of guilt being made against him.
The Court also stated that "what s199A(3)(b) prohibits is an indemnity that holds the promisee harmless against loss despite the promisee having been found guilty of a criminal offence - it does not prohibit an entitlement to be indemnified against legal costs incurred in defending or resisting criminal proceedings until verdict which determines whether or not the promisee is entitled to the benefit of the indemnity permanently" (emphasis added).
Of significance, the Court of Appeal also held that the trial judge's construction of the Deed was "supported by the need for a businesslike approach to be adopted in the interpretation of a commercial contract". In its reasons for decision, the Court stated that it "would be apparent to a reasonable person in the position of NPAL and Leckenby, at the time of entering into the Deed, that, in the eventuality of a criminal prosecution, unless there was an agreement for ongoing legal costs to be paid prior to verdict, Leckenby could incur significant liability for those costs in a manner that could be potentially compromising of his defence." The Court then went on to say that "it would not have been a difficult matter for the Deed to have unequivocally stated that NPAL had a right to postpone payment of defence costs until the outcome of any criminal proceedings was known."
The Court also commented that it was not a matter for the Court to determine whether or not NPAL's right to recover funds from Mr Leckenby after any guilty verdict would be "potentially valueless", but rather, this was a matter that NPAL and Mr Leckenby ought to have considered when they entered into the Deed in July 2001.
The decision in the Leckenby case is significant for both companies who may grant indemnities to officers, and officers who may benefit from those indemnities.
Parties who are negotiating indemnities should bear the following in mind:
- It is important to clarify any specific terms or limits on the indemnity above and beyond those already implied by operation of the Corporations Act.
- What is it that the parties intend the indemnity to cover? For example, if it is the intention of the parties to permit legal costs to be paid to an officer only after a verdict in criminal proceedings, then the indemnity should clearly state this. Similarly, if it is not intended that the indemnity will cover the officer in relation to any criminal proceedings brought against him or her, this should be expressly stated.
- A court will not take into account an officer's ability to repay any costs advanced to him at the end of any proceedings in determining whether an indemnity is valid or not. This is a commercial matter for the parties to consider at the time of negotiating the terms of any indemnity.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.