In Note Printing Australia Ltd v Leckenby [2015] VSCA 105 the Court of Appeal of the Supreme Court of Victoria dismissed an appeal by Note Printing Australia Ltd (NPAL) against a Supreme Court decision that its former chief executive officer, John Leckenby, is presently entitled to be indemnified for his ongoing legal costs during the course of the criminal proceedings and before verdict. But if he is found “guilty” he will have to refund the money.

The court rejected the company’s argument that Leckenby’s entitlement under the Deed of Indemnity between it and Leckenby did 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.

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. 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. The issue was whether the company had to pay the shortfall before a verdict.

The operative clause of the Deed of Indemnity is clause 2.2 which 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. ”

In upholding Leckenby’s present entitlement to be indemnified by NPAL for his ongoing legal costs the trial judge decided that section 199A(3)(b) of the Corporations Act 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. The Court of Appeal agreed.

Justice Tate (with whom the other Appeal Judges agreed) said:

“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). …

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…

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.”