Note Printing Australia Ltd v Leckenby

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2014 0151

NOTE PRINTING AUSTRALIA LTD (ACN 082 630 671)	Applicant
v
JOHN LECKENBY	Respondent

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JUDGES:	TATE, WHELAN and FERGUSON JJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	6 March 2015
DATE OF JUDGMENT:	20 May 2015
MEDIUM NEUTRAL CITATION:	[2015] VSCA 105
JUDGMENT APPEALED FROM:	[2014] VSC 538 (Sifris J)

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CORPORATIONS – Deed of indemnity between company and its officer for legal costs and expenses in defending criminal proceedings – Whether present entitlement to be indemnified during proceedings and before verdict, or whether indemnity arises only at the conclusion of proceedings if no finding of guilt – Effect of obligation to refund where officer found guilty – Whether obligation under deed in breach of prohibition in s 199A(3)(b) of the Corporations Act 2001 (Cth) – Rickus v Motor Trades Association of Australia Superannuation Fund Pty Ltd (2010) 265 ALR 112 applied – Leave to appeal granted – Appeal dismissed.

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APPEARANCES:	Counsel	Solicitors
For the Applicant	Mr R M Garratt QC with Ms H A Tiplady	Hall & Wilcox
For the Respondent	Mr N J O’Bryan AM SC with Mr K A Loxley	Holding Redlich

TATE JA:

TABLE OF CONTENTS

Introduction …………………………………………………………….. 1

The dispute over the obligation to indemnify ………………………. 2

The Deed ………………………………………………………………… 4

The prohibition under the Corporations Act ……………………….. 7

The judge’s reasons …………………………………………………….. 9

Is cl 2.2(b) consistent with the prohibition under s 199A(3)(b)? 15

           (1)       Interpreting the statutory language of s 199A(3)(b) …….. 18

           (2)       The significance of the obligation to refund …………….. 27

           (3)       Is a criminal charge a ‘Claim’? …………………………... 31

Conclusion on the application for leave to appeal ……………….. 33

Conclusion on the appeal …………………………………………….. 36

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Introduction

The applicant, Note Printing Australia Limited (‘NPAL’), seeks leave to appeal from the orders of a Judge of the Trial Division of the Supreme Court upholding the present entitlement of the respondent, John Leckenby (‘Leckenby’), to be indemnified by NPAL for legal costs and expenses incurred in defending criminal proceedings in the Supreme Court (‘the criminal proceedings’).[1] The criminal proceedings remain on foot. The application for leave to appeal, which was heard at the same time as the appeal, turns on the construction of a Deed of Indemnity.
[1]Leckenby v Note Printing Australia Limited [2014] VSC 538 (‘Reasons’).

The central question raised is whether Leckenby is presently entitled to be indemnified for his ongoing legal costs during the course of the criminal proceedings and before verdict, or whether his entitlement 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 in favour of Leckenby.

For the reasons that follow, I consider that Leckenby has a present entitlement to be indemnified prior to verdict. I would grant leave to appeal and dismiss the appeal.

The dispute over the obligation to indemnify

Leckenby was the Chief Executive Officer of NPAL from September 1998 to June 2004. Along with other former officers of NPAL, and NPAL itself, 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. It is expected that the trials will take place in 2015.

Leckenby’s legal costs and expenses incurred by him to date in defending the criminal proceedings have been paid pursuant to a Directors and Officers insurance policy with Chubb Insurance Company of Australia Ltd entered into by NPAL in August 2010. The limit of cover available under this policy will be insufficient to meet Leckenby’s total legal costs in defending the criminal proceedings.

On 27 July 2001 Leckenby and NPAL entered into a Deed of Indemnity (‘the Deed’). By the Deed, NPAL agreed to indemnify Leckenby against certain liabilities, including liability for legal costs, which Leckenby may incur, or for which he may become liable, by reason of Leckenby being an officer of NPAL.

The operative clause of the Deed is cl 2.2 which relevantly provides:

To the fullest extent permitted by law, NPAL hereby indemnifies [Leckenby] against each and every liability for legal costs and expenses [he] may incur or for which [he] may become liable in defending an action for a liability incurred as such an officer of NPAL unless such costs and expenses are incurred:
…
(b) in defending or resisting criminal proceedings in which [he] is found guilty.

Leckenby called upon the indemnity in cl 2.2(b) of the Deed on 15 March 2013. NPAL refused to indemnify Leckenby on the basis that NPAL is not permitted, at law, to indemnify Leckenby until it is known whether or not he is found guilty in the criminal proceedings. NPAL instead offered to lend Leckenby money subject to him providing NPAL with sufficient security.

Leckenby brought proceedings in the Court[2] seeking declaratory relief to the effect that: (1) he is entitled to be indemnified by NPAL for his ‘continuing legal costs’[3] pursuant to cl 2.2 of the Deed; (2) NPAL is liable to pay the costs incurred by Leckenby within 30 days of the date he provides evidence of a liability to pay legal costs, pursuant to cl 2.3 of the Deed; and (3) Leckenby is not obliged to provide security to NPAL pursuant to the Deed in respect of the indemnity provided for by the Deed.
[2]This was by an originating motion filed on 19 August 2014.
[3]The ‘continuing legal costs’ are those costs Leckenby will incur in defending the criminal proceedings after the funds available under the Directors and Officers insurance policy with Chubb Insurance Company of Australia Ltd are exhausted.

NPAL does not dispute that Leckenby will incur, or become liable for, legal costs in defending the criminal proceedings. Nor does it dispute that Leckenby’s liability for legal costs will be incurred in defending proceedings for a liability incurred while he was an officer of NPAL (although whether this liability was incurred as an officer may require the facts of the alleged offending to be considered after the outcome of the criminal proceedings).

Leckenby contends that he has a present entitlement to an indemnity for his legal costs and expenses under cl 2.2(b) of the Deed unless and until he is found guilty, whereupon he accepts he would have an obligation to refund NPAL and NPAL would have no further obligation to pay. NPAL contends that Leckenby’s entitlement to an indemnity for legal costs arises only once the criminal proceedings have terminated without a finding of guilt.

The Deed

Relevant clauses of the Deed are cls 1.1, 2.2, 2.3, 2.4, 2.5, 3.1, 3.2, 3.3, 4.1, 6.1 and 6.2:

DEFINITIONS AND INTERPRETATION
Clause 1.1
…
‘Claim’ means any writ, summons, crossclaim, counterclaim, application or other originating legal or arbitral process issued against the Officer and arising out of or in any way connected to any Act of the Officer, or any written or oral threat that might reasonably result in the Officer apprehending that any such proceedings would be initiated;
…
INDEMNITY
Clause 2.2
To the fullest extent permitted by law, 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 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 [that is, where the liability is owed to NPAL or a related body corporate, or arises out of a pecuniary penalty order or the like, or arises out of conduct involving a lack of good faith on the part of the Officer]; 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 [Corporations] Law in which the court denies the relief.

Clause 2.3
If the Officer becomes liable to pay an 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.
Clause 2.4
It is not necessary for the Officer to incur expense or make payment before enforcing the Officer’s rights of indemnity under this Deed.
Clause 2.5
Subject 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.

NPAL MAY CONDUCT DEFENCE
Clause 3.1
NPAL 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;
(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.
Clause 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 responsible 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 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.

Clause 3.3
The Officer is entitled to be reimbursed by NPAL the actual costs of the Officer reasonably incurred in taking action pursuant to paragraph (c) or providing assistance pursuant to paragraphs (d) or (e) of clause 3.2.
THE OFFICER MAY ENGAGE LEGAL ADVISERS
Clause 4.1
The Officer may engage separate legal or other representation and participate in a Claim or proceeding against the Officer by reason of or arising out of being an officer of NPAL but any expenses incurred by the Officer in relation to such representation or participation shall be borne by NPAL only to the extent that those expenses are:
(a)       incurred prior to NPAL assuming conduct of the Claim or proceeding;
(b)       incurred with the prior written authority of NPAL; or
(c)reasonable and are incurred in circumstances where NPAL has refused to authorise representation or participation by lawyers other than lawyers acting also for NPAL and there is a reasonable likelihood that the interests of the Officer and NPAL would conflict were the same lawyers to act on behalf of both the Officer and NPAL.

RELIEF ETC. FOR NPAL
Clause 6.1
It 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.
Clause 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.

The prohibition under the Corporations Act

NPAL also relies upon s 199A(3)(b) of the Corporations Act 2001 (Cth) (‘the Act’) which it claims prohibits it from indemnifying Leckenby during the course of the criminal proceedings. Section 199A(3) provides:

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) [that is, where the liability is owed to the company or a related body corporate, or arises out of a pecuniary penalty order or the like, or did not arise out of conduct in good faith]; 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 a 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 208 requires member approval for a financial benefit to be given to a ‘related party’ of the company. It provides:

(1)For a public company, or an entity that the public company controls, to give a financial benefit to a related party of the public company:
(a) the public company or entity must:
(i)obtain the approval of the public company’s members in the way set out in sections 217 to 227; and
(ii)give the benefit within 15 months after the approval; or

(b) the giving of the benefit must fall within an exception set out in sections 210 to 216.
…

(2) If:
(a) the giving of the benefit is required by a contract; and
(b) the making of the contract was approved in accordance with subparagraph (1)(a)(i) as a financial benefit given to the related party; and

(c) the contract was made:
(i) within 15 months after that approval; or
(ii) before that approval, if the contract was conditional on the approval being obtained;

member approval for the giving of the benefit is taken to have been given and the benefit need not be given within the 15 months.

Section 212 of the Act provides an exception to the requirement for membership approval for a financial benefit that applies in respect of legal costs. This is reflected in Note 2 to s 199A. Section 212 of the Act provides:

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

(b) disregard any other financial benefit given or payable to the officer by the public company or entity.

Neither s 208 nor s 212 is directly relevant, confined as they are to a ‘related party’. A ‘related party’ includes a director but Leckenby was NPAL’s Chief Executive Officer and was not a director. However, Leckenby contends, and the judge agreed, s 212 is of assistance in construing s 199A(3)(b).

The judge’s reasons

In upholding Leckenby’s present entitlement to be indemnified by NPAL for his ongoing legal costs, pursuant to cl 2.2 of the Deed, the judge observed that s 199A(3)(b) prohibited 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, but that it does not specifically or directly deal with the question of indemnity in respect of costs prior to verdict.[4]
[4]Reasons, [12], [54]. This interpretation of s 199A(3)(b) is challenged by NPAL by grounds 3 and 4 of the grounds of appeal.

The judge emphasised that it was necessary to consider the meaning of cl 2.2 of the Deed in the context of the document as a whole and the relevant provisions of the Act.[5] He considered that the exclusion or ‘carve out’ from the indemnity, under paragraph (b) of cl 2.2, mirrors the prohibition found in s 199A(3)(b).
[5]Ibid [44].

He then proceeded, as a first step, to consider the words of cl 2.2 in isolation and concluded that, looked at in that way, they support a construction that there is a present entitlement. He said:

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.[6]

[6]Ibid [47]. This approach is challenged by ground 1 of the grounds of appeal as one of ignoring statutory and contractual context.

The judge then identified, as a second step, the intention of cl 2.2(b) when considered in the context of the Deed as a whole. He said:

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).[[7]] The court must give effect to the agreement between the parties to ‘the fullest extent permitted by law’.
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.[8]

[7]See [12] above.

[8]Reasons, [48]–[49].

He rejected the interpretation proffered by NPAL that the word ‘Claim’ in cl 6.2(a)[9] does not include criminal proceedings:

I do not accept that the word ‘Claim’ in clause 6.2(a) does not include criminal proceedings. It applies to any legal proceedings against Leckenby including the criminal proceedings. The position is not affected by clauses 3.1 and 3.2.[10]

[9]See [12] above.

[10]Reasons, [50]. See [12] above. This conclusion is challenged by ground 8 on the appeal.

He was reinforced in his view that the entitlement to be indemnified is a present entitlement that arose prior to verdict by his consideration of Note 2 to s 199A(3) of the Act and s 212 which, as he recognised, expressly permitted payments to be made to officers of a corporation prior to verdict either through a loan, an advance, ‘or otherwise’.[11] He also considered the Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 (Cth) (‘the CLERP Bill’) that introduced s 199A(3). The Explanatory Memorandum provided:

6.16 One 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, ongoing 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.[12]

[11]See [13]–[15] above. This is challenged by ground 5 of the grounds of appeal on the basis that the reference in Note 2 to the giving of a loan or advance in respect of legal costs was a reference to a separate transaction from the transaction of indemnity.

[12]Reasons, [15].

The judge noted that s 199A(3)(b) clearly precludes Leckenby having an entitlement to be indemnified by NPAL against legal costs he has incurred if he is found guilty. He also considered that, although s 199A(3) and s 212 were ‘badly drafted’,[13] it was clear the legislature had recognised that substantial legal costs could be incurred in the course of defending criminal charges and intended that it would be permissible for payments to be made by a corporation to an officer during the course of that defence to meet what could be a substantial liability. He said:

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’.[14]

[13]Ibid [53].

[14]Ibid [51]. NPAL challenged the interpretation the judge adopted of s 199A(3)(b) as permitting payments prior to verdict in grounds 6, 7 and 9 of the grounds of appeal.

He went on to conclude that although the Deed was called a ‘Deed of Indemnity’ Leckenby was not being indemnified in a manner that offends s 199A(3)(b) because he would be obliged to refund any payments made if he was eventually found guilty. He held that an obligation to refund, or to repay, is inconsistent with the notion of an indemnity. He said:

The usual concept of an indemnity is to hold someone harmless or make good a loss which a person has suffered. Requiring payment 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.
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.[15]

[15]Reasons, [59]–[61] (citations omitted).

He emphasised also that s 212(2) specifically recognised that, providing there is an obligation to repay in certain circumstances, payments can be made in circumstances analogous to Leckenby’s:

[I]n 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)).[[16]] 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.[17]

[16]See s 212(2)(d) set out at [15] above.

[17]Ibid [62].

Ultimately, he characterised cl 2.2(b) as tantamount to an agreement that provides for an advance.[18] He considered that an advance is a form of permissible payment. The obligation to repay meant that cl 2.2(b) did not provide for a ‘traditional indemnity’. It was consistent with the Act regardless of how it was described. He said:

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.[19]

[18]This was challenged by ground 2 of the grounds of appeal. Ground 2 became the primary focus of the appeal and encompassed all the other grounds save for ground 1.

[19]Reasons, [63].

He found support for his view in a decision of the Full Federal Court in Rickus v Motor Trades Association of Australia Superannuation Fund Pty Ltd[20] which he described as follows:
[20](2010) 265 ALR 112 (Jacobson, Siopsis and Foster JJ) (‘Rickus’).

In a recent case concerning s 199A(3)(a) [of the Act], 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. 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.

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.[21]

[21]Reasons, [64]–[65].

His Honour’s conclusion that ‘Leckenby is entitled to [an] “indemnity” in accordance with the terms of the Deed’[22] thus rested on three propositions:
[22]Ibid [66].

(1) The prohibition in s 199A(3)(b) of the Act has no impact until and unless a guilty verdict is reached; it allows for an agreement that provides for an advance from a corporation to one of its officers which requires a refund or repayment if the officer is found guilty and s 212 confirms this.

(2) Such an agreement is not a traditional indemnity because it does not hold someone harmless; requiring repayment is inconsistent with indemnifying someone.

(3) Clause 2.2 is ‘no more than and no different to’[23] an agreement that provides for an advance which requires repayment upon the reaching of a guilty verdict; it does not offend the prohibition in s 199A(3)(b) and should be read according to its clear intent as giving rise to a present entitlement in Leckenby to payment by NPAL of any liability he incurs for legal costs and expenses prior to verdict.

[23]Ibid [63].

All three propositions were challenged on appeal.

Is cl 2.2(b) consistent with the prohibition under s 199A(3)(b)?

The focus of the appeal is on whether cl 2.2(b) of the Deed is consistent with the prohibition under s 199A(3)(b) of the Act. NPAL submits that, when cl 2.2(b) is construed in accordance with the judge’s interpretation as permitting interim payments before verdict, it is not so consistent. It submits that the clear meaning of s 199A(3)(b) is that a corporation may not apply shareholder funds towards the defence of criminal proceedings brought against an officer before the verdict is known and that this may entail abiding the outcome of an appeal. Note 2 to s 199A, and the Explanatory Memorandum which introduced s 199A(3), were argued to reinforce this because they show that a company may address hardship (in the form of the burden of ongoing legal costs) that might be caused to an officer in Leckenby’s position before the outcome of the proceedings is known and an entitlement to payment of an indemnity arises. The options for addressing hardship consist of an interim loan or an advance. NPAL argues that the premise of such interim measures is that the time for the payment of any indemnity arises only once the successful outcome of the criminal proceedings is known; were an indemnity permitted prior to verdict, there would be no need for any interim measures.

NPAL submits that the judge was wrong to construe the Deed as providing for an indemnity prior to verdict, as this was to construe it as achieving what s 199A(3)(b) prohibits, in which case the Deed must be void for illegality, either pro tanto or wholly.

NPAL further submits that the ordinary and natural meaning of the text of cl 2.2(b), in its statutory context and to ensure consistency with s 199A(3)(b) of the Act, is that its obligation to indemnify Leckenby against his legal costs of defending the criminal proceedings cannot, and will not, arise until the conclusion of those proceedings and a favourable outcome. The judge was therefore in error in finding that, under cl 2.2(b), the right to indemnity arises immediately. Moreover, NPAL argues, cl 2.3 (payment within 30 days) has no relevant work to do until the entitlement to indemnification has arisen, which is only at the successful conclusion of the criminal proceedings. Clause 2.4 (no need for Leckenby to have incurred expense) operates similarly.

With respect to the interpretation the judge gave to the word ‘Claim’ in cl 6.2(a), NPAL submits that, although ‘Claim’ has a wide definition under the Deed, it is not defined in language that adverts to criminal proceedings and the judge erred in failing to recognise that the definition excludes such proceedings because, NPAL argues:

(1) While ‘Claim’ is broadly defined and includes an ‘application or other originating legal … process’ it is not common legal usage to denote the commencement of criminal process such as a charge or indictment as ‘originating legal process’;

(2) By cl 3.1 of the Deed, NPAL is entitled (subject to Leckenby’s consent) to assume the conduct, negotiation or defence of a Claim. It is most improbable to encounter such an agreement in the context of a criminal proceeding and not readily conceivable how NPAL could properly be interposed between an accused and his or her legal representatives; and

(3) Pursuant to cl 3.2 of the Deed, NPAL may request Leckenby to compromise any Claim, or withhold its consent to Leckenby making an admission of liability in respect of, or settling, a Claim. It is not conceivable how such powers would be exercisable by NPAL in respect of criminal proceedings. The question is raised, hypothetically: Could it extend to a bona fide request for a plea of guilty?

NPAL submits that the proper construction of ‘Claim’ is that it does not extend to the criminal proceedings and cl 6.2(a) of the Deed has no operation in relation to the criminal proceedings. It is submitted that cl 6.2(a), and the obligation to refund that it provides for, does have work to do, for example, in relation to civil proceedings where an officer has been indemnified for his or her legal costs but facts subsequently emerge that the officer did not act in good faith whereupon amounts already paid would be repayable.

NPAL further submits that the judge wrongly used the terms ‘indemnity’, ‘loan’ and ‘advance’ interchangeably. NPAL argues that an indemnity is a different transaction to an advance or a loan. A contract of indemnity is an undertaking to provide a benefit, usually money, in the event of a promisee suffering loss. By contrast, a loan entails the provision of funds that will be repaid, with or without interest, and it was conceded by senior counsel for Leckenby, at trial, that the Deed is not a loan agreement. NPAL argues that whether it should now loan Leckenby funds for his legal costs and expenses, as a separate transaction, with or without security, was a matter for its Board, not the Court. The Deed uses the word ‘indemnity’ (and cognate forms thereof) throughout, not ‘loan’ or ‘advance’, and it contains none of the provisions as to repayment, interest, security or other matters ordinarily found in an instrument of loan or an instrument permitting the anticipatory enjoyment of an entitlement otherwise accruing. Funds may be advanced under a loan agreement, but the terms ‘loans’ and ‘advances’ have different significations, not all advances being loans; advances are frequently payments on account of a present entitlement not yet due for payment, for example, to an author under a royalty agreement, or to an employee on account of an end of year bonus. Relevantly, an advance is a transaction by which hardship may be alleviated until it is known whether any indemnity will be payable. The distinction between the transaction of indemnity and transactions of advances and loans is argued to be the basis of Note 2. NPAL submits that the question for the judge was whether Leckenby is entitled to an indemnity under the Deed prior to verdict and it was wrong for him to attempt to ‘rework’ the Deed into an agreement for some other benefit. He ought to have held that the Deed made no provision for any loan or advance to Leckenby.

Finally, NPAL submits that the conclusion reached by the judge strips s 199A(3)(b) of any real meaning. It argues that if a corporation is permitted to indemnify an officer for his or her legal costs incurred in defending criminal proceedings before the outcome is known, the prohibition in s 199A(3)(b) is left with no real work to do. A corporation’s funds may be paid away prior to a guilty verdict with only a personal, and potentially valueless, right of recovery available to it after verdict. This would be to defeat the policy of the prohibition and permit funds to be applied in the defence of criminal charges to which it should not have applied.

Leckenby responds by submitting that the judge was correct to construe the prohibition in s 199A(3)(b) of the Act as having no impact until a verdict of guilt has been arrived at. He submits, first, that the judge was correct to pay close attention to the statutory language in s 199A(3)(b) and that he construed cl 2.2(b) appropriately in the context of the Act and the Deed as a whole, and second, that he was correct to construe the obligation under cl 2.2(b) as not a traditional indemnity or, at least, not the type of indemnity that offends the prohibition in s 199A(3)(b) of the Act.

(1) Interpreting the statutory language of s 199A(3)(b)

With respect to the importance of the statutory language, Leckenby submits that NPAL ignores the plain meaning of the word ‘found’ which requires that there has been, in the future, a finding of guilt. The prohibition in s 199A(3)(b) is expressed in the future perfect tense. So too is the exception in cl 2.2(b) of the Deed. This is a conditional tense that is used to indicate that an action will have been completed (or ‘perfected’) at some point in the future. Thus, unless and until a finding of guilt occurs (that is, will have occurred in the future), the obligation on NPAL to ‘indemnify’ Leckenby for his legal costs and expenses subsists.

I agree.

A person, including an officer of a corporation, cannot be ‘found’ guilty until a verdict of guilty has been arrived at. At all relevant times before a verdict has been reached, a person charged with an offence is not a person who has been ‘found guilty’ of that offence. An obligation to indemnify a person charged with an offence for all his or her legal costs and expenses during the course of defending criminal proceedings until and unless he or she is, in the future, ‘found’ guilty is, in my view, consistent with the prohibition in s 199A(3)(b).

The obligation undertaken by cl 2.2(b) is to be construed ‘[t]o the fullest extent permitted by law’. The construction adopted by the judge of s 199A(3)(b), with which I agree, permits the obligation under cl 2.2(b) to be interpreted as a duty to indemnify Leckenby for all his legal costs and expenses prior to verdict. Clause 6.1 confirms that Leckenby can ‘enforce immediately’ that duty; in other words, he has a present entitlement to the payment of his ongoing legal costs and expenses. This entitlement is governed by the terms of the Deed, including, under cl 2.3, allowing for 30 days for payment after providing satisfactory evidence of the liability for those costs and expenses.

That this is the correct construction of s 199A(3)(b) is apparent from the decision of the Full Federal Court in Rickus to which the judge referred. It is useful to consider some of the details of that matter. In dispute was the construction of cl 2.2 of a deed of indemnity (‘the Rickus deed of indemnity’) entered into between John Rickus (‘Rickus’) and the Motor Trades Association of Australia Superannuation Fund Pty Ltd (‘the Company’), which was the trustee of the Motor Trades Association of Australia Industry Superannuation Fund (‘the trustee’). Rickus was the Chairman of the Board of Directors of the trustee. Clause 2.2 of the Rickus deed of indemnity read:

The Company shall indemnify the Officer to the maximum extent permitted by law against any liability for legal costs incurred in respect of a Liability incurred by the Officer as or by virtue of holding office as and acting in the capacity of an officer of the Company or a Subsidiary other than for legal costs incurred:
(a)in the circumstances set out by s 199A(3)(a) of the Corporations Act, namely in defending or resisting proceedings in which the Officer is found to have a liability for which they could not be indemnified under s 199A(2) of the Corporations Act as defined in Clause 2.1 of this deed;
(b)in the circumstances set out in Section 199A(3)(b) of the Corporations Act, namely in defending or resisting criminal proceedings in which the Officer is found guilty;
(c) in the circumstances set out in Section 199A(3)(c) of the Corporations Act …
(d)in the circumstances set out in Section 199A(3)(d) of the Corporations Act …[24]

[24]Rickus (2010) 265 ALR 112, 118-9.

The exception created under cl 2.2(a) of the Rickus deed of indemnity relates to liabilities which could not be indemnified under s 199A(2) of the Act and these include, under paragraph (a), a liability owed to the company or a related body corporate; (b) a liability for a pecuniary penalty order or the like; or (c) a liability that is owed to someone other than the company or related body corporate and did not arise out of conduct in good faith.[25] The exceptions under (a) to (d) of cl 2.2 closely follow the prohibitions set out in s 199A(3) of the Act and are reflected also in the Deed, as set out above.[26]
[25]More precisely, s 199A(2) of the Act, as it was at the time that the proceedings in Rickus commenced, provided: ‘A company or a 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 any of the following liabilities incurred as an officer or auditor of the company: (a) a liability owed to the company or a related body corporate; (b) a liability for a pecuniary penalty order under section 1317G or a compensation order under section 1317H; (c) a liability that is owed to someone other than the company or a related body corporate and did not arise out of conduct in good faith. This subsection does not apply to a liability for legal costs.’
[26]See [12] above.

The matter arose out of a notice served by the Australian Prudential Regulation Authority (‘APRA’) on Rickus to produce certain books and records with which Rickus complied. Rickus was then removed as Chairman of the Board and as a director of the trustee. The trustee demanded a copy of the documents produced to APRA. When Rickus did not provide a copy of the documents the trustee commenced proceedings against him seeking that copies of the documents be provided and, amongst other things, claiming an account of profits for breach of an equitable duty of confidence (‘the trustee’s proceedings’). The trustee’s proceedings were abandoned. Rickus filed a crossclaim seeking a declaration that he was entitled to be indemnified by the trustee in respect of legal costs incurred by him in defending the trustee’s proceedings and in resisting the claims before the trustee’s proceedings were commenced.

At first instance the primary judge dismissed the crossclaim with costs and, with respect to the trustee’s proceedings, directed that each party was to bear its own costs.[27] He concluded that the indemnity claimed by Rickus was not permitted by law because it was prohibited by the operation of s 199A(2)(a) and (3)(a) of the Act. He rejected the view that because the trustee’s proceedings were abandoned Rickus had never been ‘found’ to have a liability. The trustee had argued, in support of the dismissal of the crossclaim, that Rickus was under a duty to provide to the trustee copies of the documents he had provided to APRA.[28] The primary judge held that, in the individual circumstances of the case, Rickus ‘was under a duty to fully inform the trustee as to his response to the [APRA] notice — and that included a duty to provide to the trustee a copy of that which had been given to the authority’.[29] He considered that this duty was properly characterised as a ‘liability’ owed to the company and that it was irrelevant that it was established in the crossclaim proceeding Rickus commenced rather than the trustee’s proceedings:

The duty or obligation to produce a copy of the documents can properly be characterised as a ‘liability’ owed to the company … The cross-claim was but the vehicle whereby it was found that Mr Rickus was under a ‘liability owed to the company’.[30]

[27]Motor Trades Association of Australia Superannuation Fund Pty Ltd v Rickus [No 3] (2008) 69 ACSR 264.

[28]Ibid 272 [48].

[29]Ibid 278 [68]. See also 279 [71].

[30]Ibid 281 [77], [78].

He held that, as Rickus had been found to have a liability, the indemnity claimed was not permitted by law because it was prohibited by operation of s 199A(2)(a) and (3)(a) of the Act. He said:

It is thus considered that s 199A(3)(a) precludes an indemnity being given in respect to the legal costs presently in issue. Whether or not either the deed or the constitution are otherwise to be construed as conferring an indemnity, both the deed and the constitution are expressed to be subject to that which is ‘permitted by law’. Section 199A(3)(a) and (2)(a) preclude the indemnity now claimed. Mr Rickus was under a ‘liability owed to the company’ to produce a copy of the documents when requested.[31]

[31]Ibid 281 [79] (emphasis added).

In allowing the appeal, and setting aside the orders made below, the Full Court of the Federal Court held that cl 2.2 of the deed of indemnity obliged the trustee to indemnify Rickus in respect of the legal costs incurred by him in defending the trustee’s proceedings and in resisting the claims before the trustee’s proceedings were commenced. The Court held that the primary judge was wrong in his construction of cl 2.2 by concluding that it was irrelevant that the finding of liability that had been made was in the crossclaim and not in the trustee’s proceedings. It was indeed relevant that the finding of liability had been made in the crossclaim and that there had been no finding of liability made in the trustee’s proceedings.[32] The Court held that the prohibition imposed by s 199A(3)(a) on indemnifying a person for his or her legal costs in defending or resisting proceedings in which the person ‘is found to have a liability’ was directed specifically to the costs of those proceedings in respect of which the claim for indemnity was being made, relevantly, the trustee’s proceedings. With respect to cl 2.2 of the deed of indemnity the Court said:

The subject matter of the claim to indemnity made by [Rickus] pursuant to cl 2.2 in the present case is legal costs incurred by him in defending the trustee’s proceedings and in resisting the trustee’s claims before those proceedings were commenced. Those costs are covered by the cl 2.2 indemnity unless the appellant has been found to have been liable to the trustee in the trustee’s proceedings.[33]

[32]Rickus (2010) 265 ALR 112, 126 [66].

[33]Ibid 125 [56] (emphasis added).

Thus, not only was it necessary that there be a finding of liability before the prohibition in s 199A(3)(a) had any impact but, a fortiori, it was necessary that the finding be made in the very same proceedings as that in respect of which the claim for indemnity was being made. This emphasised the Court’s construction of s 199A(3)(a), relied upon here by the judge,[34] that ‘for the prohibition to bite, there must be a finding to that effect’.[35]
[34]See [27] above.
[35]Rickus (2010) 265 ALR 112, 122 [41].

The Court reiterated that, under s 199A(3)(a), there is a present entitlement to an indemnity up until the time the relevant finding is made and that entitlement will not be defeated by a finding in a separate proceeding from that in respect of which the costs are being claimed, or by supposition as to what findings could have been arrived at hypothetically:

By the time the primary judge came to hear and determine [Rickus’] cross-claim, the trustee’s proceedings had been discontinued. The claimed indemnity pursuant to cl 2.2 was, in terms, confined to legal costs incurred in defending the trustee’s proceedings and in resisting the trustee’s claims before those proceedings were commenced. Although it may have been the case that, had the trustee pressed its proceedings to finality, [Rickus] would have been found liable to it as alleged, that is not how events unfolded and no finding of liability was ever made in the trustee’s proceedings.
For these reasons, the indemnity provided to [Rickus] pursuant to cl 2.2 of the deed was enlivened when [Rickus] made his claim pursuant to that clause and was not precluded either by the clause itself or by s 199A(3)(a) of the Corporations Act. The cross-claim is not a proceeding which [Rickus] defended or resisted and is thus not within the preclusions laid down in cl 2.2(a) of the deed and in s 199A(3)(a) of the Corporations Act.[36]

[36]Ibid 126–7 [66]–[67] (emphasis added). The Court also held that the primary judge should not have embarked upon a consideration of liability in the context of the cross-claim and, while it expressed no view on the merits of the finding that Rickus had a liability, it held that he erred in making the finding which he did because it was irrelevant to the issues at hand: at 132 [93].

As the judge here recognised, it is clear that analogous reasoning can apply to the prohibition in s 199A(3)(b) so that it does not preclude an entitlement to an indemnity arising when a claim is made by a person in respect of legal costs incurred in defending an action for a liability incurred as an officer of the company if the costs are incurred in defending or resisting criminal proceedings, until and unless the officer is found guilty. As the High Court recognised in Farah Constructions Pty Ltd v Say-Dee Pty Ltd,[37] comity between intermediate appellate courts is a matter of great importance. Indeed, with respect to the interpretation of Commonwealth legislation, as here, there are more stringent obligations:

Intermediate appellate courts and trial judges in Australia should not depart from decisions in intermediate appellate courts in another jurisdiction on the interpretation of Commonwealth legislation or uniform national legislation unless they are convinced that the interpretation is plainly wrong.[38]

[37](2007) 230 CLR 89, 151–2 [135].

[38]Ibid 151–2 [135], citing Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485, 492.

The Full Court in Rickus was not interpreting the section of the Act with which this appeal is concerned, s 199A(3)(b). However, it was interpreting a closely related section of the same piece of Commonwealth legislation, s 199A(3)(a) of the Act, and the judgment of the Full Court dealt expressly with the question of when the prohibition ‘bites’. Moreover, its answer, namely, not until and unless the finding of liability has been made, has obvious and direct application to the question of when the prohibition under s 199A(3)(b) ‘bites’, namely, not until and unless the finding of guilt has been made. Far from considering the interpretation of the Full Federal Court to be plainly wrong, with respect I agree with their Honours and find their reasoning convincing. Irrespective of whether I am strictly bound to adopt an interpretation of s 199A(3)(b) that is analogous to their Honours’ interpretation of s 199A(3)(a), I consider that I should adopt such an interpretation as correct.

This interpretation of s 199A(3)(b) is further supported by a comparison of the words of s 199A with its predecessor, s 241 of the Corporations Law which relevantly provided:

(1) A company or a related body corporate must not:
(a)indemnify a person who is or has been an officer or auditor of the company against a liability incurred by the person as such an officer or auditor; or

(b) exempt such a person from such a liability.
…
(3)Subsection (1) does not prevent a person from being indemnified against a liability for costs and expenses incurred by the person:
(a)in defending proceedings, whether civil or criminal, in which judgment is given in favour of the person or in which the person is acquitted; or
(b) in connection with an application, in relation to such proceedings, in which the Court grants relief to the person under this Law.[39]

[39]Emphasis added.

A literal reading of s 241(3)(a) suggested that no indemnity could be provided until after a verdict was reached. It had been observed that:

Read literally, s 241(3) provides that a company cannot indemnify an officer until the result of a proceeding is known. It also means that a company cannot indemnify an officer in respect of costs incurred where there is no proceeding or where a proceeding is settled prior to judgment.[40]

[40]Emilios Kyrou, ‘Indemnity, Access and Insurance for Directors and Officers’ (1997) 71(10) The Law Institute Journal 36, 36.

The Explanatory Memorandum to the CLERP Bill to which the judge referred[41] was thus pointing to the difficulty that arose from the wording of s 241(3)(a) in that a substantial liability for costs could be incurred during a proceeding which the company was prohibited from meeting. For convenience, I set out the passage again:

One 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 the 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.[42]

[41]See [22] above.

[42]Explanatory Memorandum, Corporate Law Economic Reform Program Bill 1998 (Cth) 6.16 (emphasis added).

In explaining the change of wording from s 241(3)(a) to s 199A(3)(b), the Explanatory Memorandum noted that arrangements other than those expressly prohibited were to be permitted:

The draft provisions clarify the legal costs exception to the statutory prohibition on a company or related body corporate indemnifying or exempting an officer or auditor of the company from liability incurred in that capacity.
It is proposed that the provisions concerning indemnification be rewritten to state all circumstances in which indemnification and exemption of officers or auditors is not permitted. As is currently the case, it is proposed that exemptions in respect of officers or auditors by the company, for a liability owed to a company, will not be permitted at all. Indemnification will be permitted in circumstances other than those expressly prohibited.[43]

[43]Ibid 6.8, 6.9.

In my view, the change in wording from s 241(3)(a) of the Corporations Law to s 199A(3)(b) of the Act reflects a temporal shift in the prohibition on indemnifying an officer for legal costs so as to permit those costs to be paid by a company during a criminal prosecution and up until, and unless, a verdict of guilty is reached.[44]
[44]It follows that I reject grounds 3 and 4 of the grounds of appeal.

In any event, it is the statutory language upon which the meaning of s 199A(3)(b) depends. Extrinsic materials can never supplant, or be a substitute for, the language of a statute. As the High Court said in Thiess v Collector of Customs:[45]

Statutory construction involves attribution of meaning to statutory text. As recently reiterated:
‘This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the [statutory] text’. So must the task of statutory construction end. The statutory text must be considered in its context. That context includes legislative history and extrinsic materials. Understanding context has utility if, and in so far as, it assists in fixing the meaning of the statutory text.’[46]

[45](2014) 250 CLR 664 (‘Thiess’).

[46]Ibid 671 [22], citing Federal Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503, 519 [39].

The observations of the High Court in Thiess also show why the judge was correct to do what he did in focusing upon both the statutory and contractual language while acknowledging that it was also necessary to read cl 2.2 in the context of the Deed as a whole and in the context of various directly and indirectly relevant provisions of the Act, including s 212.[47]
[47]It follows that I reject ground 1 of the grounds of appeal.

An interpretation of s 199A(3)(b) that permits a company to indemnify a person for his or her legal costs in defending criminal proceedings until and unless he or she is found guilty has immediate implications for the construction of cl 2.2(b) of the Deed because it allows for cl 2.2(b) to be construed as conferring a present entitlement upon Leckenby to an indemnity for his legal costs and expenses incurred up until, and unless, in the future, he is found guilty. The interpretation favoured by Leckenby of cl 2.2(b) of the Deed is thus consistent with the prohibition under s 199A(3)(b). Under this interpretation, the type of transaction provided for under cl 2.2(b) is ‘permitted by law’.

Thus, what s 199A(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.

(2) The significance of the obligation to refund

The second thread of the judge’s reasoning was to treat the obligation under cl 2.2(b) as not a traditional indemnity. Leckenby submits that the judge was correct in doing so.

The judge considered that the requirement upon Leckenby for repayment in the event that he was found guilty, arising from cl 6.2(a), rendered the transaction something different from a traditional indemnity.[48] On the appeal Leckenby also emphasised, relying on Sunbird Plaza Pty Ltd v Maloney,[49] that an indemnity, properly construed, imposes an ultimate liability on an indemnifier to hold the promisee harmless against loss. In Sunbird Plaza Mason CJ distinguished between guarantees and indemnities:

[A] contract of guarantee is, subject to any qualifications made by the particular instrument, a collateral contract to answer for the debt, default or miscarriage of another who is or is contemplated to be or to become liable to the person to whom the guarantee is given … Such a promise was required by s. 4 of the Statute of Frauds to be evidenced in writing, unlike a contract of indemnity, which stands outside the statutory requirement … An indemnity is a promise by the promisor that he will keep the promisee harmless against loss as a result of entering into a transaction with a third party … In their endeavours to distinguish between a guarantee and an indemnity the courts have emphasized the difference between the guarantor's secondary liability and the indemnifier's primary liability … There is an element of ambiguity in this distinction unless the reference to primary liability is understood to mean ultimate liability. Once default has occurred, the party having the benefit of the guarantee can call on the guarantor to honour his promise before calling on the principal contracting party to perform his obligation, but the guarantor, having honoured his promise, can hold the principal contracting party to account by virtue of the doctrine of subrogation.[50]

[48]See [24]-[26] above.

[49](1988) 166 CLR 245 (‘Sunbird Plaza’).

[50]Ibid 254 (with whom Deane, Dawson and Toohey JJ agreed: at 265) (citations omitted).

Leckenby maintains that the judge was correct to say that requiring repayments of amounts previously paid is inconsistent with the notion of an indemnity. He also contends that, contrary to NPAL’s submissions, the judge did not use the terms ‘indemnity’, ‘loan’ and ‘advance’ interchangeably. Instead, the judge was careful to distinguish between them and to conclude that the Deed was neither a traditional indemnity, nor a loan, but rather ‘no more than and no different to an agreement that provides for an advance which requires repayment on a guilty verdict’.[51]
[51]Reasons, [63] (emphasis added). See [26] above.

I accept that the judge found that the Deed was analogous to an advance that required repayment in the event that Leckenby was found guilty. He did not conclude that the agreement was for a loan and he was careful to distinguish it from a loan, acknowledging that the obligation to repay would not become operative except in the eventuality of a guilty verdict. Not being a loan, it is not surprising that the Deed does not make provision for security, interest and so on. In effect the judge found that the Deed was an agreement to make a payment ‘otherwise’ than by a strict indemnity, loan or advance, within the meaning of s 212.[52] In my view, he was correct in that conclusion.
[52]See [15] above. See also [22], [23] and [25] above.

This did not involve, as NPAL submits, a ‘reworking’ of the Deed into an agreement that provides for some benefit other than an indemnity for the purpose of rendering the Deed compatible with the prohibition under s 199A(3)(b). To the contrary, the judge had already concluded that s 199A(3)(b) did not prohibit agreements that allowed for payments to be made during the course of criminal proceedings which the promisee was obliged to repay in the event of a guilty verdict. His analysis of the Deed as no different from an agreement for an advance repayable on a guilty verdict reflected his conclusion that the Deed involved the type of transaction that s 199A(3)(b) permitted. No ‘re-working’ was required to achieve compatibility. The judge was correct to recognise that an arrangement that requires the refund of any payment made, upon the satisfaction of a condition, is not a traditional indemnity because it does not hold the promisee harmless against loss despite any relevant contingency. Whatever particular label is given to this type of agreement is of little consequence; what is important is that a proper construction of s 199A(3)(b) demonstrates that payments can be made up until, and unless, a guilty verdict is reached providing that there is an obligation to repay any such payments in the event of a guilty verdict and that the Deed provides for just such an arrangement.[53]
[53]It follows that I reject grounds 2, 6, 7 and 9 of the grounds of appeal.

Furthermore, the judge’s construction of the Deed is also supported by the need for a businesslike approach to be adopted in the interpretation of a commercial contract.[54] It would be apparent to a reasonable person in the position of NPAL and Leckenby, at the time of entering into the Deed,[55] 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. As Callinan J said, in the context of construing an exclusion in an insurance policy, which indemnified a director of a company against loss arising from a claim by reason of a wrongful act, as limited only to those circumstances where there was an admission of misconduct, or a curial finding of misconduct:

[T]he adoption of the construction for which the respondents contend would mean that in a real and practical sense they would become the final arbiters of the extent of their obligations because their insureds will frequently lack the means to defend themselves adequately against the charges levelled against them unless they are put in funds to do so. It would not have been a difficult matter for the respondents to have insisted upon a policy that put beyond doubt their right to postpone payment of defence costs until the outcome is known had they so wished.[56]

[54]See McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579, 589 [22].

[55]See Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, 462.

[56]Wilkie v Gordian Runoff Limited (2005) 221 CLR 522, 537–8 [52].

Similarly, 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. Far from including any such qualification, the language of cl 2.2(b), and the objects it intended to secure, indicate that Leckenby was to be indemnified for any liability for legal costs he incurred in defending or resisting criminal proceedings for which he could be lawfully indemnified. In other words, adopting a businesslike approach, the parties to the Deed are to be taken to have intended to make an arrangement which conferred upon Leckenby the maximum protection available while respecting, in particular, the prohibition in s 199A(3)(b). In my view, the construction of cl 2.2(b) of the Deed, adopted by the judge, faithfully reflects that intention.

Moreover, there is no need to deal with the obligation to make payments in respect of Leckenby’s legal costs prior to verdict in a separate transaction from the other forms of indemnity provided for in the Deed because all those indemnities permit payments to be made in advance. The Deed is premised on an arrangement of payments made in advance of findings of liability coupled with an obligation to repay in the event of an adverse finding on liability. There is no need for a separate transaction.[57]
[57]It follows that I reject ground 5 of the grounds of appeal.

Finally, I do not accept that if NPAL is permitted to ‘indemnify’ an officer under cl 2.2(b), in the sense explained by the judge, for his or her legal costs in defending criminal proceedings before the outcome is known, the prohibition in s 199A(3)(b) is left with no real work to do. Absent the obligation to refund in the event of a guilty verdict, an agreement to make payments for the legal costs incurred in defending criminal proceedings would clearly violate the prohibition in s 199A(3)(b). This would be indeed a traditional form of indemnity, to hold the promisee harmless, or make good his or her loss, despite a successful criminal prosecution. As I have indicated, the ordinary meaning of the words of s 199A(3)(b) would clearly outlaw such an agreement.[58] Hence the significance of the obligation to refund. Furthermore, it cannot be assumed that, where there is an obligation to refund, the right to recovery after a guilty verdict will be potentially valueless. The assessment of the value of such a right of recovery is a matter for the parties to an agreement at the time of the making of the agreement. It was a matter for NPAL and Leckenby when they entered into the Deed on 27 July 2001. It is not a matter for the Court.

(3) Is a criminal charge a ‘Claim’?

[58]See [17], [23], [24], [40] and [60] above.

If a criminal charge is not a ‘Claim’, the obligation to refund, arising from cl 6.2(a), would be inapplicable. NPAL denies that the criminal proceedings are a ‘Claim’ and argues that cl 6.2(a) has no operation in relation to criminal proceedings.

While it may not be common usage to describe a criminal charge as a claim, in my view there are multiple indicia throughout the Deed that indicate that the commencement of criminal proceedings against an officer was intended to be subsumed under the definition of a ‘Claim’. First, as NPAL concedes, the breadth of the definition of ‘Claim’ in cl 1.1 of the Deed[59] does not preclude criminal process being a form of ‘originating legal … process’. Second, cl 2.5 links the indemnities provided by cls 2.1 and 2.2, without excluding the indemnity under cl 2.2(b), to ‘Claims’ by providing that ‘the indemnities provided by cls 2.1 and 2.2 … continue in full force and effect without limit in relation to any claim in respect of the matters the subject of this indemnity’.[60] Third, cl 6.2(a) also expressly links the indemnities under cls 2.1 and 2.2 to a ‘Claim’ without any exclusion of the indemnity provided under cl 2.2(b).[61]
[59]See [12] above with respect to all relevant clauses of the deed.
[60]See, the wording of cl 2.5(c) set out at [12] above.
[61]See [12] above.

In my view, it would be wrong to read the reference to cl 2.2 in cl 6.2(a) as not including cl 2.2(b), as NPAL submits the Court should do, because to do so would beg the question. It is not sufficient that cl 6.2(a) would continue to have work to do if the indemnity under cl 2.2(b) was excluded; the problem is rather that there is no express exclusion of cl 2.2(b) and every suggestion that the reference to cl 2.2 includes all four sub-paras (a)-(d). Moreover, it would be wholly artificial to carve out from the notion of ‘Claim’ those liabilities an officer might have arising from criminal proceedings, and would inexplicably reduce the obligations an officer has, for example, under cl 3.2(a), to notify NPAL promptly of any Claim, with the consequence that the obligation to notify promptly would not extend to notifying NPAL that criminal proceedings had been brought against him or her.

Furthermore, it is significant that the assumption by NPAL of the conduct of a defence to a claim, including the retaining of lawyers to act on Leckenby’s behalf, can only occur with Leckenby’s consent, pursuant to cl 3.1. The requirement for such consent is consistent with a ‘Claim’ extending to a criminal proceeding. Many criminal defences in the Court are conducted by a separate funding body, for example, Victoria Legal Aid (‘VLA’). Issues of representation may be disputed and resolved between the accused and VLA. There have been occasions where the Court has granted a temporary stay on the ground that the trial is likely to be unfair because of the inadequacy of the representation provided by VLA.[62] The problems created by a separate fund assuming the conduct of criminal proceedings are not so intractable as to preclude a criminal proceeding falling within the ambit of a ‘Claim’.
[62]R v Chaouk [2013] VSC 48 [47]–[48] (where VLA refused to fund the attendance of an instructing solicitor on a day to day basis for the duration of the trial).

Furthermore, NPAL’s retaining of lawyers to act on Leckenby’s behalf is subject to the recognition, under cl 4.1, that separate legal representation may be appropriate where there is a reasonable likelihood of a conflict of interest between NPAL and Leckenby. These are matters upon which this Court cannot speculate.

The obligations imposed upon Leckenby under cl 3.2 are largely governed by requirements of reasonableness. While, in my view, cl 3.2(c), which prohibits Leckenby from making any admission of liability without the prior written consent of NPAL, could not apply to a criminal prosecution on public policy grounds, this does not detract from the overall intention that ‘Claim’ includes criminal proceedings subject, in effect, to a manifest contrary intention.

I reject NPAL’s submissions on the meaning of ‘Claim’.[63]
[63]It follows that I reject ground 8 of the grounds of appeal.

If ‘Claim’ extends to a criminal prosecution, as I consider it does, this further supports the view that: (1) payments ought be made to Leckenby prior to verdict (for there would be no obligation to refund under cl 6.2(a) if no payments could lawfully be made before verdict) and (2) that he has an immediate entitlement to payment without being required to disprove any potential exclusion (pursuant to cl 6.1).

Conclusion on the application for leave to appeal

The application for leave to appeal was made on 23 December 2014. This was after the reforms to the process of civil appeals in this Court came into effect in November 2014. Leave is necessary because of the requirement introduced by the civil appeal reforms that almost all appeals need leave. Formerly, an appeal from a decision of a judge of the Trial Division of this Court to the Court of Appeal would proceed by right. The changes were explained by Whelan and Ferguson JJA in Kennedy v Shire of Campaspe[64] with respect to an appeal from the County Court:
[64][2015] VSCA 47 (‘Kennedy’).

Leave is necessary because of the introduction in November 2014 of a new appeal regime. Under the old system, the applicant would not have required leave and would have been entitled to appeal as of right. In this regard, it was principally only appeals from interlocutory orders that required leave …
The new civil appeals regime requires that leave to appeal be obtained in almost all cases regardless of whether the decision is final or interlocutory. Section 14A of the Supreme Court Act 1986 provides:
(1)Subject to subsection (2), any civil appeal to the Court of Appeal requires leave to appeal to be obtained from the Court of Appeal.

(2) Leave to appeal is not required—
(a) for an appeal from a refusal to grant habeas corpus; or
(b) for an appeal under the Serious Sex Offenders (Detention and Supervision) Act 2009; or
(c)if the Rules provide that leave to appeal is not required, whether in any particular class of application or proceeding or generally.

(3) For the purposes of this section, civil appeal means an appeal from a judgment or order made in exercise of civil jurisdiction, including an appeal by way of rehearing or judicial review, for which this Act, any other Act or the Rules provide an appeal to the Court of Appeal.[65]

[65]Ibid [2]–[3] (citations omitted).

Whelan and Ferguson JJA went on to describe how the reforms have introduced a single-limbed test for leave to appeal, that the appeal has ‘a real prospect of success’, in substitution for the two-limbed test in Niemann v Electronic Industries Ltd,[66] which required an applicant for leave to appeal to establish both that the decision below was attended with sufficient doubt to justify the grant of leave and that substantial injustice would flow if the decision was not reversed. They said:
[66][1978] VR 431, 441–2.

Under the new regime, the concept of an appeal having a real prospect of success is introduced. Section 14C of the Supreme Court Act provides:
The Court of Appeal may grant an application for leave to appeal under section 14A only if it is satisfied that the appeal has a real prospect of success.

The use of the permissive ‘may’ suggests that even if satisfied that the appeal has a real prospect of success, the Court may nevertheless refuse to grant leave in the exercise of its discretion. In making the second reading speech for the Bill introducing the new appeal regime, the then Attorney-General stated that the reforms were to ‘modernise and simplify appeal processes and improve the flexibility of courts … to finalise unmeritorious cases.’
The analogous phrase ‘no real prospect of success’ appears in s 63 of the Civil Procedure Act 2010. That section concerns when a court may give summary judgment and was considered by this Court in Lysaght Building Solutions Pty Ltd v Blanalko Pty Ltd. Having reviewed the legislative history and authorities concerning comparable provisions in the United Kingdom, Queensland and at a federal level, Warren CJ and Nettle JA (as his Honour then was) stated:
… the test under s 63 of the Civil Procedure Act should be construed as one of whether the respondent to the application for summary judgment has a ‘real’ as opposed to a ‘fanciful’ chance of success; that the ‘real chance of success’ test is to some degree a more liberal test than the ‘hopeless’ or ‘bound to fail’ test; and that, as the law is at present understood, the real chance of success test permits of the possibility that there may be cases, yet to be identified, in which it appears that, although the respondent’s case is not ‘hopeless’ or ‘bound to fail’, it does not have a real prospect of succeeding.

Their Honours also observed that:

… it must be borne in mind that the power to terminate proceedings summarily should be exercised with caution and thus should not be exercised unless it is clear that there is no real question to be tried.[67]

[67]Kennedy [2015] VSCA 47, [4]–[7] (citations omitted).

Whelan and Ferguson JJA concluded that the meaning of ‘real prospect of success’, in the test for a grant of leave to appeal, should be construed consistently with the meaning of those words in s 63 of the Civil Procedure Act, namely, that the appeal has a ‘real’ and not simply a ‘fanciful’ chance of success:

Attention must be focussed on the words ‘real prospect of success’ used by the statute. Bearing that in mind, those words should be construed consistently with this Court’s interpretation of s 63 of the Civil Procedure Act. That is, the Court may only grant leave where the appeal has a ‘real’ as opposed to a ‘fanciful’ chance of success.[68]

[68]Ibid [12].

They drew a comparison with the test for special leave to appeal to the High Court which permits that Court to consider any matters that are relevant and obliges it to consider whether a question of law of public importance is involved. They also drew a comparison with the test for leave to appeal under Rule 52.3(6) of the Civil Procedure Rules 1998 (UK) which is expressed in two alternative limbs, the first reflecting the need for the court to consider that the appeal would have a real prospect of success and the second limb permitting leave to be granted where ‘there is some other compelling reason why the appeal should be heard’. Their Honours concluded:

In our view, if an appeal does not have a real prospect of success, the Court cannot grant leave even if, for example, there is some other compelling reason why the appeal should be heard or a matter of public importance is at issue.[69]

[69]Ibid [11].

I agree with their Honours that the words ‘real prospect of success’ in s 14C of the Supreme Court Act should be read as providing that the Court may only grant leave where there is a real as opposed to a fanciful chance of success. This is not to deny, however, that the assessment is being made only for the purpose of granting or refusing leave to appeal. It is not incumbent on an applicant for leave to appeal to demonstrate that it is likely that the appeal will be successful; only that its prospects are not fanciful. It may sometimes be difficult to assess, at the leave stage, precisely how an appeal will develop. The fact that an appeal would raise a matter of public importance, presumably unresolved, may require, as a practical matter, greater diligence to assess whether the appeal would have a real and not fanciful prospect of success. This may be so because, for instance, the appeal raises a question of the construction of statutory language that reflects comparable legislation in other jurisdictions, or the appeal would potentially affect a number of people beyond the litigants themselves. In those circumstances the fact that a matter of public importance was raised could be a relevant consideration. It remains the case that, as Whelan and Ferguson JJA have said, the test that must be satisfied for leave to appeal to be granted is that the appeal has a real prospect of success.

Applying the test under s 14C of the Supreme Court Act here, it is my view that there was sufficient merit in this appeal to render its prospects of success more than fanciful. While ultimately I consider that the appeal is unsuccessful, I nevertheless consider that the difficulties in the construction of s 199A(3)(b), and the alternative interpretations that are available, as discussed above, mean that the appeal satisfied the threshold test of having a real prospect of success.

I would grant NPAL leave to appeal.

Conclusion on the appeal

I have concluded that cl 2.2(b) of the Deed confers a present entitlement upon Leckenby to be paid by NPAL for his legal costs and expenses incurred in defending the criminal proceedings, until and unless a guilty verdict is reached in which case he will be under an obligation to refund NPAL. I have also concluded that this entitlement is consistent with, and not prohibited by, s 199A(3)(b) of the Act. I

consider that NPAL is liable to pay the legal costs incurred by Leckenby within 30 days of the date he provides evidence of a liability to pay those costs, pursuant to cl 2.3 of the Deed, and that Leckenby is not obliged to provide security to NPAL pursuant to the Deed in respect of NPAL’s obligations to make payments to, or on behalf of, Leckenby, provided for by the Deed.

I would dismiss the appeal.

WHELAN JA:

For the reasons given by Tate JA, I agree that the applicant should have leave to appeal but that the appeal should be dismissed.

FERGUSON JA:

I agree with Tate JA (for the reasons that her Honour gives) that leave to appeal should be granted and that the appeal should be dismissed.

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Citations

Note Printing Australia Ltd v Leckenby [2015] VSCA 105

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*Introduction* ……………………………………………………………..	1
*The dispute over the obligation to indemnify* ……………………….	2
*The Deed* …………………………………………………………………	4
*The prohibition under the Corporations Act* ………………………..	7
*The judge’s reasons* ……………………………………………………..	9
*Is cl 2.2(b) consistent with the prohibition under s 199A(3)(b)?*	15
(1) Interpreting the statutory language of s 199A(3)(b) ……..	18
(2) The significance of the obligation to refund ……………..	27
(3) Is a criminal charge a ‘Claim’? …………………………...	31
*Conclusion on the application for leave to appeal* ………………..	33
*Conclusion on the appeal* ……………………………………………..	36

[2015] VSCA 105

20 May 2015