10 October 2018

Indemnifying officers and employees for breaches of competition laws

This article was written by Sharon Henrick, Christopher Kok and Rebecca Mahony.

Context

The Australian Competition and Consumer Commission (ACCC) and the Commonwealth Director of Public Prosecutions each have power to apply to the Federal Court of Australia (the Court) for penalties against employees and officers of a company for being involved in a contravention by the company of the Competition and Consumer Act 2010 (Cth) (CCA).

The potential consequences for an employee or officer of being found to be involved[1] in a contravention by a company of the CCA include, for each contravention:

  • where the contravention is civil in nature, a pecuniary penalty of up to AUD 500,000, an order banning the individual from being involved in the management of any Australian corporation and an order for legal costs; or
  • where the contravention is criminal in nature, a criminal fine of up to AUD 420,000 or up to 10 years imprisonment and a criminal record.

In March 2018, the Organisation for Economic Co-operation and Development (OECD) released its report entitled Pecuniary Penalties for Competition Law Infringements in Australia.  The report stated that both the average and maximum penalties imposed on corporations for anti-competitive behaviour are significantly lower in Australia than in other OECD countries.

In response to the report, the ACCC’s Chairman, Mr Rod Sims, observed: “we do not want breaches of our competition law to be seen as an acceptable cost of doing business. We need penalties that will be large enough to be noticed by senior management and company boards, and also shareholders”.

Why this is important?

The ACCC’s increased focus on pursuing individuals for being involved in contraventions by a company of the CCA is an important governance issue for all companies that carry on business in Australia, including through a subsidiary or branch.

What this alert examines

This alert examines whether a company may indemnify its current and former employees and officers[2] for financial liabilities and legal costs of:

  • being investigated by the ACCC for a possible contravention of the CCA;
  • being found by the Court to have been involved in a contravention of civil prohibitions in the CCA by a company who employed or retained them at the time of the breach; and
  • being found by the Court to have been involved in a criminal offence under the CCA committed by the company who employed or retained them at the time of the offence.

Being knowingly involved in a civil wrong - statutory prohibition on indemnifying officers

The CCA[3] prohibits companies from indemnifying their current or former officers, whether by agreement or making a payment, or through an interposed entity, for:

  • civil liabilities to pay pecuniary penalties for breaches of the competition provisions in the CCA;[4] and
  • legal costs incurred in defending or resisting proceedings in which the current or former officer is found to have that liability.

A contravention of the prohibition may result in a criminal fine of up to $5,250 payable by the company, and a criminal fine of up to $1,050 payable by each individual knowingly involved in the contravention.

Although these fines are small, they are criminal in nature.  This means they are accompanied by a criminal record.  A criminal record can have significant consequences - it may prevent the company holding certain licences or tendering for work from governments.

Indemnities deemed to be void

Anything that purports to indemnify an officer for the civil liabilities and/or legal costs is deemed to be void.[5]

Being knowingly involved in a criminal offence - statutory prohibition on indemnifying officers

Where an officer of a company is found guilty of being knowingly involved in the company’s criminal offence, the applicable statutory prohibition on indemnification is in the Corporations Act 2001 (Cth) (Corporations Act).[6] 

It provides that a company or a related company must not indemnify an officer or an auditor, whether by agreement or by making a payment and whether directly or through an interposed entity, against legal costs incurred in defending or resisting criminal proceedings in which the person is found guilty.[7]

In addition, the Corporations Act[8] prohibits indemnification of officers for liabilities that are owed to someone other than the company or a related company and did not arise out of conduct in good faith.

A contravention of the statutory prohibition on indemnifying officers for being knowingly involved in a company’s criminal offence attracts the same criminal consequences as contravening the statutory prohibition on indemnifying officers for civil wrongs described above.

In addition, if the company is a public company, providing an indemnity will also result in the company contravening the Related Party Benefits regime contained in Part 2E1 of the Corporations Act.

When do the statutory prohibitions on indemnities operate?

The statutory prohibitions in the CCA and Corporations Act state that a company must not indemnify an officer against legal costs in proceedings in which the officer has a civil liability, is found guilty

A person cannot be “found guilty” or have a “civil liability” until the outcome of the proceedings is known.  Consequently, the statutory provisions do not operate to prohibit the payment of an officer’s legal costs in defending or resisting the criminal prosecution until and unless the officer is finally found guilty or to have a civil liability after the outcome of the proceedings, including all appeals.  

This is consistent with the position in Note Printing v Leckenby [2015] VSCA 105, in which the Court found that a former CEO was entitled to an ‘indemnity’ for his ongoing legal costs of defending criminal proceedings and that the Corporations Act prohibition on indemnification of legal costs had no impact until and unless a guilty verdict was reached.

An advance or loan is not an unlawful indemnity

In the Note Printing case, the court observed that an agreement which requires an officer to pay back the costs upon a finding of guilt (or liability) is not an indemnity.

The case makes it clear that a company will not contravene the statutory prohibitions on indemnification by entering into, and giving effect to, an agreement to pay the legal costs of an officer by way of an advance or loan, for example, on the condition that the company will be paid back if the officer is found guilty.

Who is an officer?

The statutory prohibitions are limited to indemnities for liabilities and legal costs incurred as an officer of a company.

The statutory prohibitions do not apply to companies indemnifying their employees – they are confined to officers.

Under the CCA, “officer” has the same meaning as it does under the Corporations Act.

Consequently, when considering whether the statutory prohibitions might be applicable to a proposed indemnity, companies must ask whether the person is an “officer”.  This involves asking whether the person is:

  • a director or secretary of the company or any of its related companies;
  • a shadow director of the company or any of its related companies;
  • someone who makes, or participates in making, decisions that affect the whole or a substantial part of the business of the company or any of its related companies; or
  • someone who has the capacity to significantly affect the company’s, or any of its related companies’, financial standing.
The statutory definition of “officer” can include senior executives who are not members of the company’s board of directors.

Consideration also needs to be given to whether the liability and legal costs were incurred as an officer of the company which has been prosecuted.

Common law will not enforce indemnities in favour of employees or officers for civil pecuniary penalties or criminal fines

Under the common law, courts will not enforce indemnities against civil wrongs or criminal offences.[9] 

The common law does not distinguish between officers and employees.  It applies to both of them.

The result is that Australian courts will not enforce an indemnity for an employee (or an officer) of a company for civil pecuniary penalties[10] or criminal fines payable as a result of the employee (or an officer) being found to be involved in the company’s contravention of the competition provisions of the CCA.

Common law applies to Director’s and Officer’s insurance

Some Director’s and Officer’s insurance policies (D&O policies) purport to insure individuals against civil and criminal liability.

The common law position of not enforcing indemnities affects the validity of D&O policies in the same way as it applies to indemnities by companies of their officers and employees.

The application of the common law to D&O policies is reflected in a clause which is commonly seen in D&O policies claiming that the indemnity is limited to the extent that it is allowable by the law.

Corporations Act prohibits paying insurance premiums in three circumstances

Under the Corporations Act, companies are prohibited from paying insurance premiums for their officers in three circumstances.[11]  These are:

  • where the officer was involved in a wilful breach of duty in relation to the company;
  • where the officer has misused their position;[12] or
  • where the officer has misused information.[13]

None of the circumstances will necessarily arise from the officer being involved in the company’s contravention of the CCA.  They might - it will depend on the particular circumstances.

Insurer is not an interposed entity

The Corporations Act states that the prohibition on companies paying insurance premiums for their officers in the three circumstances set out above “applies to a premium whether it is paid directly or through an interposed entity”.[14]

Similarly, the CCA provides that a company must not indemnify any of its officers “whether by agreement or by making a payment and whether directly through an interposed entity.[15] 

The express reference to “a premium … paid through an interposed entity” in the Corporations Act suggests that an “interposed entity” is not an insurer but is some other entity interposed between the company making the payment and the officer.

Consequently, a company will not contravene the statutory prohibitions on indemnification of their officers by paying the officer’s insurance premium to an arms-length insurer for insurance to cover criminal or civil liabilities and associated legal costs other than where the liability of the officer arises from the officer:

  • wilfully breaching a duty in relation to the company;
  • misusing their position; or
  • misusing information. 

The distinction between legal costs incurred in defending or resisting proceedings and during preceding investigations

The statutory prohibitions create criminal offences for companies indemnifying their officers for legal costs incurred in defending or resisting proceedings in which the officer is found to be involved in the company’s civil wrong or criminal offence.

It is the “proceedings” in court which must be defended or resisted. 

Any prior investigation by the ACCC which led to the “proceedings” are not the “proceedings.”  

Consequently, a company can indemnify, without any conditionality or risk under the statutory prohibitions, the legal costs of its officers and employees (current and former) incurred as a result of the ACCC’s investigation.

What amounts to defending or resisting proceedings has not been considered by a court under these statutory prohibitions.  On a plain reading of them, it appears that they would not apply to legal costs incurred in circumstances where the officer pleaded guilty or admitted liability at the earliest point in the proceedings and took no steps to defend or resist them. 

However, if any civil penalty or criminal fine is imposed against the officer in those proceedings, the statutory prohibitions would apply to indemnification for those civil penalties or criminal fines.

Partial wins

It has not yet been determined, when an officer is found liable or guilty of only a subset of the alleged civil wrongs or criminal offences alleged in the proceedings, whether the officer can be indemnified for those costs incurred in successfully defending themselves in respect of the other claims.  It may be possible to indemnify for a proportion of the legal costs incurred in that part of the defence which was successful.  This has not been considered by a Court.

Conclusion

In conclusion, the following table summarises when a company may indemnify its officers and employees for breaches of Australian competition laws.

  Indemnification possible
   Officer  Employee
 Investigations Y Y
Proceedings - legal costs if the individual takes no steps to defend or resist the proceedings (eg pleads guilty or admits (does not contest) liability at the first available opportunity) Y Y
Proceedings - legal costs of defending or resisting the proceedings where the individual is found liable for a civil wrong or guilty of a criminal offence N Y
 Civil pecuniary penalties N
N
Indemnification not prohibited by statute but unenforceable at common law
 Criminal fines N
N
Indemnification not prohibited by statute but unenforceable at common law



[1] See section 75B of the CCA which provides that a reference to a person involved in a contravention shall be read as a reference to a person who has (a) aided, abetted, counselled or procured the contravention; (b) induced, whether by threats or promises or otherwise, the contravention; (c) been in any way, directly or indirectly, knowingly concerned in, or a party to, the contravention; or (d) conspired with others to effect the contravention.  When considering section 75B, Mason ACJ, Wilson, Deane and Dawson JJ observed in Yorke v Lucas (1985) 158 CLR 661 at 667 that “the words ‘aided, abetted, counselled or procured” are taken from the criminal law where they are used to designate participation in a crime …as an accessory before the fact … [A] person will be guilty of the offences only if he intentionally participates in it.  To form the requisite intent, he must have knowledge of the essential matters which go to make up the offence whether or not he knows that those matters amount to a crime.”   Their Honours continued (at 669):  “Notwithstanding that s 75B operates as an adjunct to the imposition of civil liability, its derivation is to be found in the criminal law and there is nothing to support the view that the concepts which it introduces should be given a new or special meaning.  That is, for a person to “be involved” in a contravention of the CCA by a company, the person must have actual knowledge of each element of the civil wrong or criminal offence, even if they do not appreciate that what they are doing is unlawful.  See too Rural Press Limited v Australian Competition and Consumer Commission (2003) 203 ALR 217 at 48 (for civil wrongs) and Wilson, Deane and Dawson JJ in Giorgianni v The Queen (1985) 156 CLR 473 at 504-5 (for criminal offences).

[2] In this alert, “officers” includes directors.

[3] Sub-section 77A(1).

[4]  Sub-section 77B(2).

[6] Sub-section 199A(3).  See also sub-section 199A(2).

[7] Section 199C operates to void the indemnity.

[8] Sub-section 199A(2)(c).

[9] Kennedy J in Burrow v Rhodes [1899] 1 QB 816, 828.

[10] For example, Heery J in Australian Competition and Consumer Commission v Simsmetal Ltd (2000) ATPR 41-764 40,997 where His Honour observed that it “would of course be unlawful for a company to assist individuals in the payment of those penalties.”

[11] Section 199B.

[12] Section 182.

[13] Section 183.

[14] Section 199B.

[15] Sub-section 77A(1).


a)     where the officer was involved in a wilful breach of duty in relation to the company;

b)    where the officer has misused their position;[12] or

c)     where the officer has misused information.[13]

a)     where the officer was involved in a wilful breach of duty in relation to the company;

b)    where the officer has misused their position;[12] or

c)     where the officer has misused information.[13]

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