deeds of indemnity

Do your deeds of indemnity for officers and directors require review?

29 January 2016

  • A recent court decision highlights the need for companies to review deeds of indemnity given to the company’s directors
  • The decision illustrates the importance for officers and employees of having effective and extensive directors and officers insurance from the outset

The recent Supreme Court of Victoria Court of Appeal decision of Note Printing Australia Ltd v Leckenby highlights the need for companies to review existing deeds of indemnity granted to officers and directors.

Leckenby was the CEO of Note Printing Australia Ltd (NPAL) from September 1998 to June 2004. Leckenby was charged with conspiring to bribe foreign officials to secure bank note printing contracts for the benefit of NPAL.

In July 2001, Leckenby and NPAL entered into a deed of indemnity. Relevantly, the deed provided that: 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 liability incurred as such an officer of NPAL unless such costs and expenses are incurred… in defending or resisting criminal proceedings in which [he] is found guilty.

The critical question for the Court was whether Leckenby was entitled to be indemnified for legal costs he had incurred in defending criminal proceedings under the deed of indemnity prior to the verdict being handed down.

The Court of Appeal upheld Leckenby’s entitlement to be indemnified under the deed, even though the deed qualified Leckenby’s entitlement if he was ultimately found to be guilty of criminal proceedings.

Although s 199A(3)(b) of the Corporations Act 2001 (Act) prohibits the indemnification of an officer’s legal costs where those costs are incurred in defending criminal proceedings in which the person is found guilty, it was held that the section does not deal with the question of indemnity in respect of costs incurred prior to verdict.

In interpreting s 199A(3)(b), the Court noted that an officer of a corporation cannot be ‘found’ guilty until a verdict of guilt has been arrived at. Accordingly, an obligation to indemnify a person for legal costs before a verdict of guilt is handed down does not contravene s 199A(3)(b) of the Act.

The Court also highlighted that the language of the deed indicated that Leckenby was to be indemnified for any liability he incurred in defending criminal proceedings. The parties to the deed were taken to have intended to make an arrangement which conferred upon Leckenby the maximum protection available, while respecting the prohibition in s 199A(3)(b) of the Act.

What does mean?

If companies do not wish to indemnify directors and officers for legal costs incurred before a verdict, express wording to that effect must be incorporated into the deed of indemnity. Companies should review deeds of indemnity for directors and officers to ensure they are drafted correctly.

It is vital for directors and officers that they have an understanding of the cover provided to them under the company’s directors and officers insurance policy. Officers who desire the most comprehensive protection should insist upon a deed of indemnity, in addition to the protection offered by officer’s insurance.

Disclaimer: This publication contains comments of a general nature only and is provided as an information service. It is not intended to be relied upon as, nor is it a substitute for specific professional advice. No responsibility can be accepted by Rigby Cooke Lawyers or the authors for loss occasioned to any person doing anything as a result of any material in this publication.

Liability limited by a scheme approved under Professional Standards Legislation.

©2016 Rigby Cooke Lawyers