A matter of insurance

Professor Bob Baxt explains why directors can legally seek financial indemnity when fighting claims brought against them.

Company directors generally will be aware that sections 199A and 199B of the Corporations Act 2001 (the Act) prohibit companies from indemnifying directors for penalties imposed upon them for breaches of the Act, and for breaches of other legislation, where penalties may be imposed. There are, however, still good reasons why directors (and other officers), should negotiate appropriate deeds of indemnity.

Through these, directors can often obtain some financial support from their companies in the event that they need to defend prosecutions/other legal cases during the course of their “employment”. The drafting of the deeds will be important: the language could well exclude the possibility of directors or officers from receiving financial support pending the final outcome. The recent decision of Note Printing Australia Limited v Leckenby [2015] VSCA 105 decided by a strong Court of Appeal, also showed that, providing the document is drafted in a “commercially” sensible way, it can provide the relevant director with a satisfactory financial indemnity, at least on a temporary basis, for his or her legal costs.

John Leckenby was the chief executive officer of Note Printing Australia Limited (NPAL). He and other officers of the company were prosecuted for allegedly conspiring to bribe foreign officials to secure bank-note printing contracts for the benefit of the company. The trial had not yet taken place. He incurred considerable legal costs and expenses in defending the proceedings, and sought reimbursement under a deed of indemnity entered into between him and NPAL on 27 July 2001, for his legal costs. The indemnity was described in the deed in the following terms: “to the fullest extent permitted by law, NPAL hereby indemnifies [Leckenby] against each and every liability for legal costs and expenses [he] may incur and for which [he] may become liable in defending an action for a liability incurred as such an officer.”

The clause also provided cover for him in resisting criminal proceedings. Leckenby brought legal proceedings against NPAL in March 2013 alleging that the company had refused to indemnify him on the basis that it was prohibited under the law, to reimburse him. Justice Sifris in Leckenby v Note Printing Australia Limited [2014] VSC 538 ruled that Leckenby was entitled to be reimbursed under the deed.

Two considerations

In the Court of Appeal, Justice Tate, on behalf of Justices Whelan and Ferguson, considered two major questions in dismissing the appeal and upholding Leckenby’s right to the indemnity. The first legal issue, but one I will discuss later (it was in fact only dealt with in the last few pages of the written judgment), was whether leave to appeal should be granted (it is now necessary to obtain leave to appeal in the Victorian courts). The bulk of her very interesting and important judgment, however, considered whether Justice Sifris was correct in allowing Leckenby to claim under the insurance policy.

As noted above, the relevant provisions in the Act prohibit the payment by companies to directors and officers for their legal costs if they are held guilty in relevant proceedings. If companies advance funds to persons who are eventually found guilty, those funds have to be paid back. As explained by Justice Tate, the relevant indemnity obligation contained in the agreement signed by Leckenby “was one which asked the company to provide indemnity ‘to the fullest extent permitted by law’”. The construction of the deed adopted by Justice Sifris, and which the Court of Appeal agreed with, “permitted payments to be made to officers of the relevant company” (paragraph 22). Justice Tate added that clause 6.1 of the deed  “confirms that Leckenby can ‘enforce immediately’ a present entitlement to the payment by NPAL of the ongoing legal costs and expenses prior to verdict” (paragraph 28).

The Rickus case

In reaching her (and the court’s) conclusion Justice Tate was assisted by her interpretation of the decision in Rickus v Motor Trades Association of Australian Superannuation Fund Pty Ltd (2010) 265 ALR 112. In that case, the full Federal Court was concerned not so much with an interpretation of the relevant provisions of the Act, but more the drafting of the relevant deed under which Rickus was seeking payment and adopted a “permissive” interpretation of the arrangements.

The fact that eventually, a person who is held liable under relevant proceedings pursuant to which a penalty may have to be paid, is thereby required to repay any advance or loan that was made to that person by the company, or any payment that would otherwise contravene the provisions, was a factor which in the Victorian court’s view, should not prevent an advance being made to enable that person to defend the case. The Court of Appeal’s view, as expressed by Justice Tate, was that the relevant drafting of the deed in the Leckenby case permitted the relevant payments to be made in the circumstances of the document drawn up to assist persons to defend or resist criminal proceedings until a verdict was given.

It is my view that the court is correct in stating that it would be “cruel” for a court to interpret the provisions in a different way. As Justice Tate noted at paragraph 64 of her judgment: “the deed was analogous to an advance that required repayment in the event that Leckenby was found guilty. [Justice Sifris] 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 [Justice Sifris] found the deed was an agreement to make a payment “otherwise than by a strict indemnity loan advance.” In my view he was correct in that conclusion.

Insurance interpretation

In one of the two recent cases in which the High Court has had to consider the impact of section 199A of the Act, Justice Callinan in Wilkie v Gordian Ronoff (2005) 221 CLR 552 (the other case is Silbermann and anor vs CGU Insurance Ltd (2005) 214 ALR 370) had to interpret the terms of an insurance policy challenged as not permitting payment to directors in the event of a guilty verdict.

He noted, at paragraphs 537 – 538 of the High Court judgment: “the adoption of the construction for which [the company in this case] contend would mean that in the real and practical sense they could become the final arbiters of the extent of their obligations because their insureds [i.e. the directors] will frequently lack the means to defend themselves adequately against the charges levelled against them unless they put in funds to do so. It would not have been a difficult matter for the [company] 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”. Justice Tate agreed that this represented a better interpretation of the law.

The Leckenby case also raises a matter of importance that was critical to the decision of the Victorian Court of Appeal to grant leave for the appeal to be brought. While the company had lost its appeal, this did not mean that the court was wrong in allowing the appeal to be brought, especially as it dealt with a matter of such importance. The discussion of the reasons of why leave to appeal was to be granted reflects, in my view, an encouraging interpretation of how the law should operate.

In conclusion, it is useful for me to set out one further quote from the decision of the Victorian Court of Appeal, which emphasises the “clear common sense”.  In discussing the interpretation of the relevant law and the deed that was signed by the parties, Justice Tate felt (applying the reasoning of Justice Callinan referred to above) that the interpretation adopted by Justice Sifris, was supported “by the need for a business-like approach to be adopted in the interpretation of a commercial contract. It would be apparent to a reasonable person in the position of NPAL and Leckenby, at the time of entering into the deed, that, in the eventuality of a criminal prosecution, unless there was an agreement for ongoing legal costs to be paid prior to verdict, Leckenby could incur significant liability with his cost in the matter that could be potentially compromising of his defence”.

It is uncertain whether leave to appeal this decision to the High Court will be pursued. It is an important question but in my view, the decision is one that should be welcomed by directors and hopefully even if leave to appeal is granted to the High Court, a similar conclusion will be reached on the facts of this case.