Getting it right: deeds, indemnity and D&O insurance
Our clients regularly ask us about the duties and protections that are imposed on directors and other officers responsible for running companies. As the law in this area is continually developing, we strive to update our readers. This week, we discuss a very relevant topic for directors and officers of the company - namely, deeds of indemnity.
Leckenby v Note Printing Australia Limited
This recent case considered the terms of an indemnity between Mr Leckneby and the company, Note Printing Australia ('NPAL') when Mr Leckneby was the CEO. The issue at the heart of the case was whether Leckneby was entitled to be indemnified by NPAL for ongoing legal costs related to defending himself in criminal proceedings. Leckneby was alleged to have bribed foreign officials to secure bank note printing contracts for the benefit of the company.
The deed of indemnity between the parties did not expressly provide that the company would cover Leckenby’s legal costs prior to the closing of the investigation.
The key portion of the indemnity stated:
"To the fullest extent permitted by law, NPAL hereby indemnifies the Officer against each and every liability for legal costs and expense the Officer may incur or for which the Officer may become liable in defending an action for a liability incurred as such an officer of NPAL unless such costs and expenses are incurred ... in defending or resisting criminal proceedings in which the Officer is found guilty".
The result was that Mr Leckenby was entitled to indemnity in accordance with the terms of the deed of indemnity. Justice Sifris observed that it was clear that the legislature’s concern when drafting the law in this area was to ensure that an officer could have funding for defence costs prior to criminal proceedings being finalised and a verdict announced. In these circumstances, the payment able to be made prior to verdict could be a loan. In the event that Leckenby was found guilty, Section 199A (3)(b) of the Corporations Act prevented NPAL from indemnifying Leckenby against legal costs incurred. However, section 199A(3) did not discuss payments made prior to return of the verdict.
Implications for Directors & Officers
Directors are recommended to use a deed of indemnity where possible, as it ensures protection in addition to the protections offered by the company constitution and other kinds of D&O insurance.
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When drafting such deeds, it would be helpful to consider the following:
Who will be responsible for the legal costs?
Whether the officer will be able to select a lawyer or if the company will agree to provide one;
Whether the payable amount should be limited;
Whether preliminary costs connected to the investigation will cover the officer;
The types of liabilities that ought to be covered by the indemnity;
Are there to be any restrictions to the indemnification?
What Should I Do Next?
Contact us if you would like further legal advice on deeds, indemnity and D&O insurance or any other issues we are having in your thought. Our lawyers at You Legal will be happy to assist you in whatever way we can.
* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.