A “note” to corporations: Be aware of the indemnities granted to officers
In Note Printing Australia Ltd v Leckenby  VSCA 105, the Victorian Court of Appeal upheld the decision made in Leckenby v Note Printing Australia Ltd  VSC 538 requiring a company to indemnify its former Chief Executive Officer, John Leckenby, from the legal costs and expenses incurred in defending criminal proceedings made against him. The Victorian Court of Appeal decision provides some comfort to directors who are seeking some form of indemnification or financial assistance when awaiting the outcome of litigation.
The disagreement over the obligation to indemnify
Mr Leckenby was the CEO of Note Printing Australia Ltd (NPAL) and with other officers, was charged with conspiring to bribe foreign officials to secure bank note printing contracts with the aim of benefitting NPAL.
In 2001, Mr Leckenby and NPAL entered into a Deed of Indemnity (the Deed) in which NPAL agreed to indemnify Mr Leckenby for legal costs that may be incurred, or for which he may become liable, by way of being an officer of NPAL. Clause 2.2 of the Deed provided:
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.
Mr Leckenby requested a reimbursement in March 2013 in relation to the relevant proceedings, however, NPAL refused to provide indemnification, arguing that it was prohibited under s 199A(3)(b) of the Corporations Act 2001 (Cth) (the Act) for NAPL to use shareholder funds in the defence of criminal proceedings bought against an officer before the outcome was known. Mr Leckenby sued NPAL in the Supreme Court of Victoria and Sifris J ruled in his favour at first instance.
There were two main questions that the Victorian Court of Appeal had to deal with which were, whether leave to appeal the original decision should be granted, which resulted in a judgment granting leave, but the appeal was lost. The second question considered the validity of the arrangements made by Mr Leckenby with the relevant company.
The Victorian Court of Appeal decision
Tate JA with agreement from Whelan and Ferguson JJA, noted that Sifris J was careful to distinguish between the terms “indemnity”, “loan” and “advance”, and did not use the terms interchangeably, but rather (at 63) “no more than and no different to an agreement that provides for an advance which requires repayment on a guilty verdict.”
Her Honour added further (at 64):
“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…”
The Court also added that s 199A(3)(b) of the Act, prohibits an indemnity that holds (at 65), “the promisee harmless against loss despite the promisee having been found guilty of a criminal offence.” It’s noteworthy that the Court held that the construction of the Deed by Sifris J was (at 66) “the need for a businesslike approach to be adopted in the interpretation of a commercial contract.”
Tate JA set out the reasons for the Court’s decision by adding further that it “would be apparent to a reasonable person in the position of NPAL and Leckenby, at the time of entering into the Deed, that, in the eventuality of a criminal prosecution, unless there was an agreement for ongoing legal costs to be paid prior to verdict…”
The Court went on to say (at 67) “it would not have been a difficult matter for the Deed to have unequivocally stated that NPAL had a right to postpone payment of defence costs until the outcome of any criminal proceedings was known.”
The decision of Tate JA provides some assurance for directors who may find themselves in a similar situation to Mr Leckenby. On the other hand, the case is also a useful reminder for parties when negotiating indemnities, to clarify what is to be covered in the indemnity, and any limitations in the event that criminal proceedings are initiated against an officer.
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