Leckenby v Note Printing Australia Limited
[2014] VSC 538
•11 November 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2014 000055
| JOHN LECKENBY | Plaintiff |
| v | |
| NOTE PRINTING AUSTRALIA LIMITED (ACN 082 630 671) | Defendant |
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JUDGE: | SIFRIS J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 24 September 2014, 14 October 2014 | |
DATE OF JUDGMENT: | 11 November 2014 | |
CASE MAY BE CITED AS: | Leckenby v Note Printing Australia Limited | |
MEDIUM NEUTRAL CITATION: | [2014] VSC 538 | First Revision: 26 November 2014 |
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CORPORATIONS ‑ Deed of Indemnity in favour of officer for costs incurred in defending criminal proceedings ‑ Where costs incurred payable before verdict ‑ Whether Deed of Indemnity is in breach of s 199A(3) of Corporations Act 2001 (Cth).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr N J O'Bryan AM SC Mr K A Loxley | Holding Redlich |
| For the Defendant | Mr R M Garratt QC Ms H A Tiplady | Hall & Wilcox |
HIS HONOUR:
Introduction
From September 1998 to June 2004, the plaintiff (‘Leckenby’) was the Chief Executive Officer of the defendant, Note Printing Australia Limited (‘NPAL’).
Along with other former officers of NPAL, Leckenby has been charged with conspiring to bribe foreign officials to secure bank note printing contracts for the benefit of NPAL. The charges are brought under the Criminal Code Act 1995 (Cth) and the Crimes Act 1958 (Vic).
On or about 5 August 2010, NPAL entered into a Directors’ and Officers’ policy with Chubb Insurance Company of Australia Limited (‘the Policy’) Payments have been made to Leckenby in respect of his legal costs to date pursuant to that Policy.
It is common ground that the limit of cover under the Policy will be insufficient to meet the costs of Leckenby in relation to the criminal proceedings which he faces. As a consequence, Leckenby is looking to NPAL to indemnify him in respect of his legal costs of these proceedings.
Leckenby claims that he has a right to be indemnified in respect of his ongoing legal costs of the criminal proceedings under a Deed of Indemnity entered into between him and NPAL and dated 27 July 2001 (‘the Deed of Indemnity’).
This case concerns the question of whether Leckenby is presently entitled to be indemnified by NPAL in respect of his ongoing legal costs of defending the criminal proceedings both during the interlocutory and trial stages and prior to any verdict of the jury as to his guilt or innocence.
NPAL says that if Leckenby is entitled to be indemnified under the Deed of Indemnity then that entitlement, and the right to payment, does not arise until and unless the criminal proceedings have come to an end (including any appeals) and there has been a not guilty verdict against Leckenby.
Leckenby and NPAL also differ in relation to the question of whether NPAL is entitled to security from Leckenby in relation to any payment made by NPAL to or on behalf of Leckenby.
The proceeding was originally heard by Cameron J. Due to unforeseen circumstances her Honour was unable to determine the matter. With the written consent of the parties I agreed to take over the matter and deliver judgment on the basis of reading the transcript, submissions and other documents filed by the parties. There was no viva voce evidence. I listed the matter for a further directions hearing and invited the parties to make further submissions. In addition to oral submissions, both parties made further written submissions. The course followed was desirable, in accordance with both the Civil Procedure Act 2010 (Vic) and relevant authority.[1]
[1]Bagshaw v Scott [2005] FCA 104; Bakarich v Commonwealth Bank of Australia (No 2) [2012] NSWCA 390.
Deed of Indemnity
Relevantly, the Deed of Indemnity provides as follows:
INDEMNITY
…
2.2To 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:
(a)in defending or resisting proceedings in which the Officer is found to have a liability for which he or she could not be indemnified pursuant to clause 2.1; or
(b)in defending or resisting criminal proceedings in which the Officer is found guilty;
(c)in defending or resisting proceedings brought by the Australian Securities and Investments Commission or a liquidator for a court order if the grounds for making the order are found by the court to have been established; or
(d)in connection with proceedings for relief to the Officer under the Law in which the court denies the relief.
2.3If the Officer becomes liable to pay any amount in respect of which the Officer is indemnified under this Deed, NPAL must, subject to clause 6, indemnify the Officer by paying that amount to the person to which that amount is due within 30 days from the date that the Officer provides satisfactory evidence to NPAL that the Officer is liable to pay that amount.
2.4It is not necessary for the Officer to incur expense or make payment before enforcing the Officer’s right of indemnity under this Deed.
2.5Subject to the other provisions of this Deed, the indemnities provided by clauses 2.1 and 2.2:
(a) are irrevocable;
(b)continue irrespective of one or more previous applications of the clause; and
(c)continue in full force and effect without limit in relation to any claim in respect of the matters the subject of this indemnity whether arising during or after the term of the Officer’s appointment as an officer of NPAL.
3. NPAL MAY CONDUCT DEFENCE
3.1NPAL is entitled, subject to the consent of the Officer, to do one or more of the following:
(a) assume the conduct, negotiation or defence of a Claim;
(b) institute a counterclaim; or
(c)subject to clause 4, retain lawyers in relation to a Claim to act on behalf of the Officer,
and when it does so the conduct of the Claim will be under the management and control of NPAL or its insurers.
3.2 The Officer must:
(a)give notice to NPAL promptly upon becoming aware of any Claim against the Officer that may give rise to a right to be indemnified under this Deed;
(b)take such reasonable action as NPAL requests to avoid, dispute, resist bring an appeal in, compromise or defend any claim or any adjudication of a Claim;
(c)not make any admission of liability in respect of or settle any Claim without the prior written consent of NPAL;
(d)upon request by NPAL, render all reasonable assistance and cooperation to NPAL in the conduct of any Claim, including, without limitation, providing NPAL with any documents, authorities and directions that NPAL may reasonably require for the prosecution or advancement of any crossclaim or counterclaim that are, in the opinion of the Officer acting reasonably and in good faith, lawful, true and not misleading; and
(e)upon request by NPAL, do anything reasonably necessary or desirable to enable NPAL (so far as it is possible) to be subrogated to and enjoy the benefits of the Officer’s rights in relation to any counterclaim or any Claims against any third party and render such assistance as may be reasonably requested by NPAL for the purpose.
3.3The Officer is entitled to be reimbursed by NPAL the actual costs of the Officer reasonably incurred in taking account pursuant to paragraph (c) or providing assistance pursuant to paragraphs (d) or (e) of clause 3.2
…
RELIEF ETC. FOR NPAL
6.1It is not necessary for the Officer to disprove any claimed application of an exception in sub-clauses 2.1 or 2.2 in order to enforce immediately any indemnity given by this Deed.
6.2 If it is established in relation to a Claim that:
(a)the Officer is not entitled to be indemnified under clauses 2.1 or 2.2, NPAL is thereupon relieved from each and every obligation under clauses 2.1 or 2.2 in respect of that Claim and the Officer must refund to NPAL all amounts incurred by NPAL under this Deed in respect of that Claim within 30 days of NPAL providing to the Officer details of such amounts; or
(b)the Officer has failed to perform an obligation referred to in clause 3.2 to the material prejudice of NPAL in relation to that Claim, NPAL is thereupon relieved from each and every obligation under this Deed in respect of that Claim,
but NPAL’s liability in respect of any other Claim shall not be affected by the operation of this clause.
Critical issue for determination
The critical issue for determination in this proceeding is whether Leckenby is presently entitled to be indemnified by NPAL for his ongoing legal costs pursuant to clause 2.2 of the Deed of Indemnity. Is NPAL liable to pay the legal costs incurred by Leckenby in defending the proceedings within 30 days of the date he provides evidence of liability to pay legal costs pursuant to clause 2.3 of the Deed of Indemnity? Or, does he have to wait for the verdict? If he is found not guilty he would be entitled to indemnity for all costs whenever incurred. If he is found guilty he would not be entitled to indemnity. But is this only prospective or would it affect the prior payment or indemnity for costs? Resolution of the issue requires a consideration of the terms of the Deed of Indemnity and the relevant legislation.
Legislation
Section 199A(3)(b) of the Corporations Act 2001 (Cth) (‘the Corporations Act’) prohibits the indemnification of the legal costs of an officer of a company where those costs are incurred in defending criminal proceedings in which the person is found guilty. The section does not specifically or directly deal with indemnity in respect of costs prior to verdict.
Section 199A(3) of the Corporations Act provides that:
When indemnity for legal costs not allowed
(3)A company or related body corporate must not indemnify a person (whether by agreement or by making a payment and whether directly or through an interposed entity) against legal costs incurred in defending an action for a liability incurred as an officer or auditor of the company if the costs are incurred:
(a)in defending or resisting proceedings in which the person is found to have a liability for which they could not be indemnified under subsection (2); or
(b)in defending or resisting criminal proceedings in which the person is found guilty; or
(c)in defending or resisting proceedings brought by ASIC or a liquidator for a court order if the grounds for making the order are found by the court to have been established; or
(d)in connection with proceedings for relief to the person under this Act in which the Court denies the relief.
Paragraph (c) does not apply to costs incurred in responding to actions taken by ASIC or a liquidator as part of an investigation before commencing proceedings for the court order.
Note 1:Paragraph (c)—This includes proceedings by ASIC for an order under section 206C, 206D, 206E or 206EAA (disqualification), section 232 (oppression), section 961M, 1317E, 1317G, 1317H, 1317HA or 1317HB (civil penalties) or section 1324 (injunction).
Note 2:The company may be able to give the person a loan or advance in respect of the legal costs (see section 212).
Section 199A(3)(b) was introduced into the Corporations Act by the Corporate Law Economic Reform Bill 1998 (Cth). Prior to the inclusion of s 199A(3)(b) into the Corporations Act, a company was prohibited from indemnifying an officer except in relation to costs and expenses incurred in defending criminal proceedings in which the person was ‘acquitted’. A view widely taken of the then law was that this meant no payments could be made by the company until after a verdict of not guilty.[2]
[2]See Emilios Kyrou, ‘Indemnity, Access and Insurance for Directors and Officers’ (1997) 71(10) Law Institute of Victoria Journal 36 and Robert P Austin and Ian M Ramsay, LexisNexis, Ford’s Principles of Corporations Law (at November 2014) [8.410.6] (see also [8.410] in the 11th ed, 2003 15th ed, 2013).
The Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 (Cth) which introduced s 199A(3) states that:
6.16One of the concerns about the operation of the indemnity provisions has been that a person is not entitled to an indemnity until the outcome of the relevant proceedings is known. Substantial liability may be incurred (for example, on‑going legal costs) during the course of a proceeding, which are unable to be paid to the indemnified officer, until the outcome of the proceedings is known. To address this, as indicated in Note 2 to proposed section 199A, the company may be able to give a person a loan or advance in respect of legal costs. Once the outcome of the proceedings is known, the person would be either obliged to pay back the loan or advance, if not entitled to an indemnity, or may retain the loan moneys as the indemnity to which the person is now entitled.
Section 212(2) of the Corporations Act provides that:
Payments in respect of legal costs
(2) Member approval is not needed to give a financial benefit if:
(a)the benefit is for a related party who is an officer of the public company or entity; and
(b)the benefit is the making of, or an agreement to make, a payment (whether by way of advance, loan or otherwise) in respect of legal costs incurred by the officer in defending an action for a liability incurred as an officer of the public company or entity; and
(c) either:
(i)section 199A does not apply to the costs; or
(ii)if section 199A applies to the costs—the officer must repay the amount paid if the costs become costs for which the company must not give the officer an indemnity under that section; and
(d)to give the benefit would be reasonable in the circumstances of the public company or entity giving the benefit.
(3)In working out for the purposes of subsection (1) or (2) whether giving the benefit is reasonable in the circumstances:
(a)assess whether it would be reasonable on the basis of the circumstances existing:
(i)if the benefit is given under an agreement ‑ at the time when the agreement is or was made; or
(ii)if the benefit is not given under an agreement ‑ at the time when the benefit is or was given; and
(d)disregard any other financial benefit given or payable to the officer by the public company or entity.
Sections 199A and 212[3] of the Corporations Act, which came into operation on 15 July 2001, must be considered in construing the Deed of Indemnity.
[3]Both parties agree that s 212 is of limited direct application, restricted as it is to related parties, which include directors. Leckenby was Chief Executive Officer and not a director. However, Leckenby contends that the existence of such a provision is of importance in assessing the ambit of s 199A(3).
Some of the doubts and uncertainties have been removed and others created. However, at the very least, a company may make a payment in the form of a loan or advance (or otherwise) to a director in respect of legal costs so long as to give the benefit would be reasonable in the circumstances existing at the time. As provided for by s 212, once the outcome of the proceeding is known, the director may have to pay back any amounts advanced if it subsequently becomes apparent that the costs are costs for which the company must not give an indemnity under s 199A, that is, if the director is found guilty.
Plaintiff’s submissions
Leckenby submits that he has a prima facie right to indemnity under clause 2.2 of the Deed of Indemnity and that NPAL must make payment unless and until he is found guilty upon which NPAL is relieved of any further obligation to pay and indeed Leckenby would have an obligation to repay any amounts received.
As a matter of construction, Leckenby submits that the words of clause 2.2(b) are clear and that his right to indemnity arises immediately; it is only if and when a guilty verdict is found would NPAL be relieved of its obligation to indemnify and Leckenby’s obligation to repay would arise.
Leckenby also relies on clause 2.3 of the Deed of Indemnity, which provides that payment is to be made
to the person to which that amount is due within 30 days from the date that the officer provides satisfactory evidence to NPAL that the officer is liable to pay that amount.
He submits that if NPAL wanted to ensure that no payment would be made to Leckenby until he was found not guilty, that could have been achieved by different drafting which had not been done.
Leckenby also points to clause 6.2(a) of the Deed of Indemnity (which provides for a refund of payments in the event of a guilty verdict) in support of his contention that NPAL is obliged to pay prior to verdict.
On the basis of the introduction of s 199A(3) into the Corporations Act and, in particular, Note 2 to that section, referring, as it does to s 212 of the Corporations Act, Leckenby submits that on a proper construction of the section, NPAL is able to give an indemnity, loan or advance in respect of legal costs prior to a guilty verdict - even without any obligation to repay - because the indemnity is only not permitted if there is a guilty verdict. This does not, it was submitted, prevent any payment or indemnity prior to such verdict. Leckenby submits further that in any event the effect of s 212 is to allow such payments to be made and indemnity given prior to the verdict so long as there is an obligation to repay if the officer is found guilty and the other conditions of s 212 are met.
Leckenby emphasised the introductory words in clause 2.2 of the Deed of Indemnity; ‘To the fullest extent permitted by law’ and submits that given the particular clauses referred to, the indemnity is a proper, lawful and permitted indemnity.
Finally and with leave Leckenby filed two further written submissions.
The first was to the effect that on the authorities the Deed of Indemnity is presumed to be legal and permitted unless NPAL establishes the contrary.[4]
[4]Reference was made to Holidaywise Koala Pty Ltd v Queenslodge Pty Ltd [1977] VR 164; Marra Developments Ltd v B.W. Rofe Pty. Ltd. [1977] 2 NSWLR 616; ICM Investments Pty Ltd v San Miguel and Berri Ltd [2014] VSCA 246.
The second was to the effect that the permitted benefit referred to in s 212(2)(b) of the Corporations Act can include an indemnity (‘or otherwise’) of the kind given and that the Deed of Indemnity was at the time it was entered into reasonable and in the interests of NPAL. Recital D of the Deed of Indemnity was referred to.
Despite the references to s 212, as providing direct support for Leckenby’s case, Leckenby agreed with NPAL’s response to the second submission to the effect that s 212 had no direct application because it only dealt with related party transactions and Leckenby was not a related party, that is a director, but rather the Chief Executive Officer. Leckenby submitted however that the existence of the section, confined as it was, was still relevant in assessing the ambit of s 199A(3) and that Note 2 was not the only way in which s 199A(3) could operate as intended.
Defendant’s submissions
NPAL does not dispute that Leckenby will become liable for legal costs in defending the current criminal charges and that liability will be incurred while he was an officer of NPAL.
However, it is NPAL’s position that both as a matter of construction and by virtue of limitations at law in relation to the indemnification of officers, the entitlement to indemnification for legal costs only arises once the outcome of the criminal proceedings is known (including appeals) and there is a verdict of not guilty.
NPAL submits that the natural and ordinary meaning of clause 2.2 is that it is not obliged to indemnify, and therefore make payment until there has been a successful outcome of the proceedings, and it does not arise until the conclusion of those proceedings.
NPAL also submits that Leckenby cannot rely on clause 6.2(a) in support of his contention that NPAL has an obligation to indemnify prior to verdict. This is because, NPAL contends, the word ‘Claim’, applying a business common sense approach to the construction of the Deed of Indemnity does not embrace criminal proceedings.
It is convenient to set out in detail the submissions of NPAL in relation to this issue:
a.While the definition of “Claim” includes an “application or other originating legal … process issued against the Officer”, it is not common legal usage to denote originating criminal process such as a summons, charge or indictment as an “originating legal process”.
b.By clause 3.1 of the Deed, the defendant is entitled, subject to the officer’s consent, to assume the conduct, negotiation or defence of a Claim. While the defendant’s capacity to take over the conduct of a proceeding is subject to the officer’s consent, it is most improbable to encounter such an agreement in the context of a criminal proceeding, and not readily conceivable how a third party (the defendant) could properly be interposed between an accused and counsel or the solicitor who represent the accused.
c.Most important, in the present context, are the powers conferred by clause 3.2 of the Deed, which are exercisable by the defendant regardless of the officer's consent. Included among those powers, the defendant may request the officer to compromise any Claim (clause 3.2(b)), or withhold its consent to the officer making an admission of liability in respect of or settling a Claim (clause 3.2(c)). It is not readily conceivable how such powers could be contemplated as exercisable by the defendant in respect of criminal proceedings faced by the plaintiff.
Accordingly, NPAL contends, clause 6.2(a) of the Deed of Indemnity can have no operation in relation to criminal proceedings and, as a result, Leckenby is not entitled to an indemnity for legal costs until he is successful in the proceedings.
NPAL submits that Leckenby is seeking to achieve a result which is prohibited by s 199A(3)(b) of the Corporations Act.
In relation to the obligation to pay under clause 2.3 of the Deed of Indemnity, NPAL contends that it follows that any obligation to pay only arises following a liability to indemnify under the Deed of Indemnity arising which, it contends, will not occur until the successful conclusion of criminal proceedings.
NPAL submitted further that the Court ought to adopt a common sense business or commercial approach to the construction of the Deed of Indemnity.
This principle of contractual construction is, it was submitted, expressed in Carter on Contract[5] as follows:
Under the modern law, courts emphasise the need to arrive at an interpretation which is commercially sensible, and in accord with commercial reality. Although the approach is particularly helpful in construing commercial contracts which are expressed in an imperfectly constructed document, the basis for the approach, namely, that it is more likely to give effect to the intention of the parties, is of general application. …
… Under a commercial approach, commonsense must prevail, and even a lack of clarity may be ignored in favour of a broad approach designed to give effect to a sensible construction. Microscopic examination which would defeat the purpose of the contract is not appropriate in a commercial context.[6]
[5]J W Carter, LexisNexis, Carter on Contract.
[6]Ibid [12-040] (as at October 2014). (Citations omitted.)
NPAL also referred to the decision of the House of Lords in Antaios Compania Naviera SA v Salen Rederierna AB,[7] where Lord Diplock held:
…if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.[8]
[7][1985] AC 191.
[8]Ibid 201.
This principle of construction was, it was submitted, also adopted by the High Court in McCann v Switzerland Insurance Australia Ltd,[9] where Gibbs CJ held:
A policy of insurance, even one required by statute, is a commercial contract and should be given a businesslike interpretation. Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure.[10]
[9]McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579.
[10]Ibid 589 [22]. (Citations omitted.) See also: Wilkie v Gordian Runoff Limited (2005) 221 CLR 522, 528–529 [15]; Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181, 198 [43].
Finally, as pointed out earlier, NPAL submitted that s 212(2) of the Corporations Act did not apply because Leckenby was not a director of NPAL and in any event an indemnity was different in substance to a loan or advance.
I permitted Leckenby to respond to the applicability (of s 212(2)) point (see paragraph 28 above) because it had not been raised before. Leckenby agreed that the section was not directly relevant but argued that it was relevant and helpful by analogy and there was no reason to treat related parties ‑ essentially directors ‑ in a different way to senior executive officers like the Chief Executive Officer. It was a clear indicator, it was submitted, of the intent of the legislation. Leckenby did not seek to argue that as a matter of definition (or otherwise) the Chief Executive Officer was relevantly a director and as a consequence s 212 did indeed have direct application as originally submitted.
Consideration
It is necessary to consider the meaning of clause 2.2 of the Deed of Indemnity in the context of the document as a whole and the relevant provisions of the Corporations Act which deal with the indemnification of officers as referred to above.
The words of indemnity in clause 2.2 are of a kind commonly found in deeds of this nature. As extracted above, clause 2.2 provides that:
NPAL hereby indemnifies the Officer against each and every liability for legal costs and expenses 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.
The carve out to that indemnity is to be found in clause 2.2(b) of the Deed of Indemnity. This exclusion mirrors s 199(3)(b) of the Corporations Act.
In my opinion, and apart from the relevant provisions of the Corporations Act, and the other terms of the Deed of Indemnity, the ordinary meaning of the indemnity in clause 2.2 is that the right to indemnity arises immediately. If NPAL wanted to place a limitation on the indemnity, in the manner for which it contends, it could have readily done so. Words to the effect that no indemnity is offered to the Officer whilst criminal proceedings are pending could have been clearly and easily drafted.
It was clearly the intention of the parties that NPAL provide funding prior to verdict. This is tolerably clear from a reading of the Deed of Indemnity as a whole and in particular clauses 2.3, 2.4 and 6.2(a). The court must give effect to the agreement between the parties to ‘the fullest extent permitted by law’.[11]
[11]Introductory words in clause 2.2.
It follows that I do not accept NPAL’s submission to the effect that clauses 2.3 and 2.4 only arise if there is a liability to indemnify, which only arises upon a verdict of not guilty. The obligation clearly arises before any verdict.
Further, I do not accept that the word ‘Claim’ in clause 6.2(a) does not include criminal proceedings. It applies to any legal proceeding against Leckenby including the criminal proceedings. The position is not affected by clauses 3.1 and 3.2.
Although the Corporations Act precludes the giving of an indemnity in the circumstances referred to, from a consideration of s 199A(3) (and particularly Note 2) and s 212 of the Corporations Act together with the words in 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, relevantly in this case, criminal proceedings being finalised and a verdict being returned. This recognises the real, practical and possibly substantial burden potentially faced by officers mounting defences in often complex and lengthy criminal proceedings. The payment that is able to be made prior to verdict can be a loan, an advance ‘or otherwise’.
Section 199A(3)(b) clearly prevents NPAL from indemnifying Leckenby against legal costs incurred by him if he is found guilty.
Despite effecting a significant change from the previous position, the sections are badly drafted.
Two matters immediately become apparent. First, the section is only directed to indemnification. Secondly, it says nothing of payments made prior to verdict. It is simply to be assumed that such payments cannot be made even though the trigger for the prohibition (a guilty verdict) has not arrived or indeed may never arrive.
The Explanatory Memorandum is not entirely helpful and s 212 may be of limited application.
However, the two matters referred to favour the submissions made by Leckenby.
I do not consider that relevantly and as a matter of substance and despite being called a Deed of Indemnity, Leckenby is being indemnified in a manner that offends the section.
Section 199A(3) is in Division 1 of Part 2D.2 of the Corporations Act. Part 2D.2 is headed ‘Restrictions on indemnities, insurance and termination payments’. Division 1 is headed ‘Indemnities and insurance for officers and auditors’. The sections are directed to 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 others in the circumstances referred to therein (s 199A(2)). The prohibition against indemnity extends to legal costs (s 199A(3)). The heading to s 199A(3) is ‘When indemnity for legal costs is not allowed’.
The usual concept of an indemnity is to hold someone harmless or make good a loss which a person has suffered.[12] Requiring repayment of amounts paid is inconsistent with the notion of an indemnity. If Leckenby is found guilty, the obligation to repay means that there is in effect no indemnification past, present or future. If he is acquitted, and is not obliged to repay, this is precisely what is permitted and not subject to the exclusion. The exclusion will not be triggered.
[12]Sunbird Plaza Pty Ltd v Maloney & Anor (1988) 166 CLR 245; Total Oil Products (Aust) Pty Ltd v Robinson [1970] 1 NSWR 701. On the indemnity principle see British Traders’ Insurance Co Ltd v Monson (1964) 111 CLR 86.
There is nothing in Note 2 that affects this analysis. Although Note 2 refers the reader to s 212, and it is common ground that s 212 does not apply in this case, there is no basis to conclude that a loan or advance may only be given if an officer falls within s 212, and not otherwise.
Further, there is nothing in the Explanatory Memorandum that affects this analysis. In fact it supports it. The concept and principle expressed in and the subject of the Explanatory Memorandum goes beyond a narrow application of Note 2. There is simply no reason or indication that it does not or should not include the Chief Executive Officer.[13]
[13]No such distinction is drawn in Robert P Austin and Ian M Ramsay, LexisNexis, Ford’s Principles of Corporations Law (at November 2014) [8.410.6].
Further, in my opinion, s 212(2) of the Corporations Act supports Leckenby’s position. The section specifically permits the making of or an agreement to make a payment whether in the form 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’ (s 212(2)(c)(ii)). This is not surprising in the context of related party transactions. However, as pointed out there is nothing to suggest that the same mechanism cannot be employed in a non-related party context.
The wording of clause 2.2 and in particular its resemblance to s 199A(3) and the unfortunate use of the word ‘indemnity’ to some extent obscures the matter. In context, the indemnity referred to is no more than and no different to an agreement that provides for an advance which requires repayment on a guilty verdict. This is permitted irrespective of the description of the document. To the extent that an indemnity embraces the notion of holding someone harmless, and consequently not requiring repayment, this is not the intent or effect of the document executed between the parties whatever label is given to it. Although not the traditional indemnity, in substance it falls within the relevant provisions. The fact that the Deed of Indemnity does not deal with interest, or any payment and security, does not in my view affect the position. It could have done so. However the parties chose not to do so. The presumed intention of the parties is that no interest is payable and no security need be provided.
In a recent case concerning s 199A(3)(a), the Chairman of a company was entitled to be indemnified from the company in defending claims brought by the company. The indemnity applied to costs incurred before the Chairman ‘was found to have a liability’. In fact he was never found to have a liability because the case was resolved.[14] In upholding an appeal by the Chairman the Full Court of the Federal Court held as follows
[41]… Section 199A(3)(a) prohibits a corporation from indemnifying its officers against legal costs incurred in defending an action for a liability incurred as an officer of the corporation if the costs are incurred in defending or resisting proceedings in which the officer is found to have a liability for which he or she could not be indemnified under s 199A(2). One such liability is a liability owed to the corporation of which the person is an officer. The effect of this provision is that a corporation is prohibited from indemnifying an officer of that corporation in respect of legal costs incurred by him in defending proceedings brought by that corporation against that officer if there is a finding in those proceedings that the officer is liable to that corporation. But, for the prohibition to bite, there must be a finding to that effect and that finding must be made in the very proceedings in respect of which legal costs are being claimed by the officer under his or her indemnity.
[42]The prohibition contained in s 199A(3)(a) does not apply if the officer successfully defends the proceedings brought by the indemnifier. Nor does it apply if those proceedings are settled or abandoned without any finding of liability being made in those proceedings against the relevant officer.
[14]Rickus v Motor Trades Association Superannuation Fund Pty Ltd [2010] FCAFC 16 (Jacobson, Siopsis and Foster JJ).
By analogy, the prohibition in s 199A(3)(b) does not ‘bite’ prior to the verdict of guilty. Of course it may never bite in which case there is no prohibition. If it does bite there is no indemnity, despite the wording of the document.
Accordingly, for the reasons given, Leckenby is entitled to ‘indemnity’ in accordance with the terms of the Deed of Indemnity. The issue of security and interest does not arise.
I will hear from the parties as to the form of the declarations and orders and costs.
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