In-house lawyers at risk of paying for costs under Corporations Act

In-house lawyers could be at risk of losing personal assets such as property to pay for legal fees under current Australian laws, according to Middletons’ partner Murray Deakin.

Recent high profile ASIC prosecutions against in-house lawyers at Centro, Fortescue and, most recently, James Hardie have highlighted the lack of protection available to corporate lawyers who are found guilty in court of breaching their duties or responsibilities. “By virtue of the prohibition in section 199A of the Corporations Act any failure on their part to exercise due care and skill as a corporate legal adviser may render them liable to prosecution… with potential exposure to penalties, disqualification orders and costs,” said Deakin. “This is because the current law will require the company indemnitor to seek repayment of the legal costs paid under their indemnity in the event that the corporate lawyer loses ASIC's case against them. The repayment of those legal costs may well be very substantial and may require the corporate lawyer to sell their home (if they have one) or file for bankruptcy, which may jeopardise their ongoing ability to practise as a lawyer.”

According to Deakin, who has seen an increased awareness amongst the corporate lawyer community regarding their duties and responsibilities since the ASIC prosecutions, a number of corporate lawyers do not have D&O insurance and are reliant upon a corporate indemnity from the company which employs them. “It is quite unjust that a corporate lawyer (or any other officer of an Australian corporation) should be exposed to the risk of having to pay his or her own legal costs in such circumstances, as the complexities of modern corporate law are such that you could never be 100 percent confident of victory at the time you decide to defend an ASIC prosecution,” said Deakin.

He cites the James Hardie case as evidence of this issue, which saw the directors first found to have acted in breach of their duties by one court, acquitted on appeal, and then found in breach again by the High Court. “The current prohibition against the indemnification of legal costs in the event of failure is fundamentally unjust and unfair,” said Deakin, “as it effectively deprives the defendant in the above circumstance from having a properly funded defence, unless the defendant is willing to run the risk of financial catastrophe if he or she loses.”

The Australian Corporate Lawyers Association (ACLA) said it advised members to ensure that they have appropriate professional indemnity insurance in place and to consider if they need to enter into a Deed of Indemnity with their company to indemnify them for personal liabilities and associated legal costs. However, even this is not a guarantee for corporate lawyers facing a court case. “There some uncertainty following recent New Zealand case law, concerning application of D&O policies in respect of when legal costs can be paid,” said an ACLA spokesperson. “The purchase of a D&O legal expenses policy maybe something to consider in the current environment.”

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