Directors Counsel Getting legal costs back

  • Date:01 May 2010
  • Type:CompanyDirectorMagazine
Professor Bob Baxt reviews a recent appeals ruling that provides directors with a victory when it comes to seeking reimbursement for legal costs.

Getting legal costs back

Last year, in this column (Company Director, April 2009), we discussed the decision by Justice Flick in Motor Trades Association of Australia Superannuation Fund Pty Ltd v Rickus (No. 3) [2008] FCA 19A6 in which he dismissed a claim by John Rickus, who had been the chairman of the board of directors of the Motor Trades Association of Australia Superannuation Fund (the trust). This followed the incurring of legal costs by him in defending an action brought by the trust against him. That action arose because Rickus had refused to supply copies of answers he had provided to the Australian Prudential Regulatory Authority (APRA) concerning the administration of the trust. He had refused to provide this information to the board of the trust because he believed there was one director on the board who had a conflict of interest which he felt made it imperative that he not provide this information.

Justice Flick rejected his claim to recover the legal costs incurred by him which he argued were due to be paid pursuant to the operation of a Deed of Indemnity (the deed).

The judge ruled that Rickus could not be indemnified for legal costs pursuant to the deed because he might have been in breach of his duty in not providing the trust with a copy of the answers he had given to APRA. In effect, Justice Flick ruled that Rickus’ behaviour amounted to a breach of his duty to act in good faith and in the best interests of the trust. As a result, no claim for indemnity was available to him. Rickus appealed that decision. His appeal has now been upheld by the Full Federal Court in Rickus v Motor Trades Association of Australia Superannuation Fund Pty Ltd [2010] FSAFC 16.

To appreciate the appeal decision, it is useful to briefly review certain facts arising in the case at first instance.

The trust had also tried to obtain the information he had supplied to APRA through administrative law proceedings. To protect his position in relation to the other litigation, Rickus joined in those administrative law proceedings. Rickus believed he was entitled to an indemnity for the legal costs he incurred in the relevant actions because of the operation of the deed as well as under the provisions of section 199A of the Corporations Act 2001.

In his judgement at first instance, Justice Flick had ruled that Rickus was not entitled to reimbursement by virtue of earlier legal authority as well as by virtue of the operation of section 199A(3) of the Corporations Act. In his view, whether there was an obligation on the part of a director to provide information to the board of a company being investigated by a regulator or not, the failure on the part of the director to provide that information meant the director was not acting in the best interests of the company and was therefore in breach of his duty to the trust.

The Full Court overturned his decision on very interesting grounds. There had in fact been no finding in the hearing at first instance that Rickus was in breach of his duty to the trust. This was because the proceedings brought by the trust against him had been discontinued by the trust. But, of course, Rickus had in the meantime incurred legal costs. The Full Court ruled that Rickus was entitled to rely on the deed to secure an indemnity for his legal costs. It noted: “Although it may have been the case that, had the trustee pressed its proceedings to finality, [Rickus] may have been found liable to it as alleged, that is not how events unfolded and no finding of liability was ever made in the [proceedings brought by the trustee” (see para 66)].

There were two clauses in the deed (clause 2.1 and 2.2) that were relevant. Clause 2.1 did not extend to matters covered by section 199A(2) of the Corporations Act which prohibits the giving of an indemnity in respect of certain specific matters. That clause was, therefore, ineffective. The Full Court, however, ruled that Clause 2.2 required a different result. It explained that the relevant provision in the Corporations Act, mirrored in Clause 2.2, had this effect.

“[The] 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 [the officer] if there is a finding in those proceedings that the officer is liable to that corporation. But, for prohibition [to be effective], 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 [the indemnity]” (at para [41]).

As noted earlier, the trust had discontinued the relevant proceedings and therefore there was no actual finding of liability against Rickus. In these circumstances, the legal costs incurred by Rickus in defending and resisting the trust’s proceedings and resisting claims in relation to those proceedings were recoverable.

The Full Federal Court also ruled that the Corporations Act did not diminish the effectiveness of the clause.

Justice Flick at first instance had discussed the obligation of directors to alert a company if a request has been made of the director under the terms of relevant legislation (whether it be tax legislation, or the Trade Practices Act 1974 or whatever).

His language is interesting:

“…it would seem surprising if a director was not obliged to bring to the attention of his board a request (for example) made of him by the present authority to produce documents of immediate relevance to the affairs of his company; a request made of him by the Commissioner of Taxation for access to books pursuant to section 263 of the Income Tax Assessment Act 1936 (Cth); or a request made of him by the Australian Competition and Consumer Commission pursuant to s 155 of the Trade Practices Act 1974 (Cth) for the production of documents.”

However, there are occasions when directors (or individuals) are being pursued by a regulator and it is made clear to the individual that there should be no communication with his or her employer about this. Indeed, there are times when a regulator will insist, by way of an undertaking from the relevant person, that there will be no communication with the company. In those circumstances, it would be difficult to assert that there had been a breach of duty if the individual did not provide information to the company. The question remains at large and is likely to be the subject of an interesting piece of litigation at some stage in the not too distant future.

In passing, the court also had to deal with the question of whether special leave to appeal should have been granted to Rickus in having the judgement of Justice Flick reviewed. In its view, it would have been unjust if Rickus did not have the right to challenge the finding of Justice Flick in the circumstances of the litigation that the judge had to consider.

Professor Bob Baxt AO FAICDLife is a partner at Freehills and chairman of AICD’s Law Committee