Background
Nicholas Bolton served as a director of Keybridge Capital Limited across three separate periods. At the start of his second directorship in January 2013, Keybridge and Bolton entered into a Director’s Deed containing two distinct indemnity mechanisms: clause 3.1, which provided a broad indemnity “on a full indemnity basis and to the full extent permitted by law” against losses and liabilities incurred as an officer; and clause 3.3(a), which provided for advances of costs in defending “Relevant Proceedings” — defined as proceedings arising from Bolton’s role during the Relevant Period, which ended when his second directorship concluded in late 2015. No equivalent deed was executed when Bolton returned to the board for a third time in October 2019.
During his third directorship, Bolton allegedly caused Keybridge to transfer $4.75 million to Crotto del Nino S.r.l., an Italian company he solely owned. In 2024, shareholder WAM Active Limited obtained leave to bring a derivative action on behalf of Keybridge alleging Bolton had breached his duties as a director, with related precautionary seizure proceedings commenced in Italy. By the time of the first-instance hearing, Bolton had incurred approximately $210,000 in NSW legal costs and €80,000 in Italian costs. He sought indemnity for these amounts under clause 3.1 of the 2013 Director’s Deed, and alternatively under clause 10.2 of Keybridge’s Constitution, which contained a broadly worded indemnity obligation in favour of officers.
The primary judge (Nixon J) upheld Bolton’s claim under clause 3.1, reasoning that the clause obliged Keybridge to pay Bolton’s costs immediately, subject to a right of recovery under clause 3.3(d) if Bolton were ultimately found to have a liability to the company for which indemnity was prohibited. Keybridge appealed, contending that this construction was inconsistent with the statutory prohibition in section 199A(3) of the Corporations Act 2001 (Cth), which bars indemnifying a person against legal costs in proceedings where the person is found to have a liability owed to the company.
The Court’s Holding
The Court of Appeal (Stern, Ball and Free JJA) allowed the appeal and dismissed Bolton’s claim. The Court held that section 199A(3) draws a fundamental distinction between an indemnity — which is prohibited where the director may be found liable to the company — and a loan or advance under section 212(2), which is expressly permitted pending the outcome of proceedings. The prohibition crystallises at the moment the person is found to have the relevant liability (including on appeal), meaning that as a practical matter an indemnity falling within section 199A(3) is precluded for the entire period during which such a finding remains possible. The Court rejected the primary judge’s reasoning that clause 3.1, read with the repayment obligation in clause 3.3(d), could function as a permissible interim payment mechanism: the obligation under clause 3.3(d) to repay does not convert what is otherwise an indemnity into something outside the statutory prohibition.
On the proper construction of the Deed, the Court held that clauses 3.1 and 3.3(a) were designed to operate in different circumstances. Clause 3.3(a) — the advance-of-costs mechanism for Relevant Proceedings — addresses the concern that a director might lack resources to defend themselves. However, because the primary proceedings arose from conduct during Bolton’s third directorship (which post-dated the Deed), they fell outside the definition of Relevant Proceedings, a finding Bolton did not challenge. Clause 3.1’s words “to the full extent permitted by law” did not broaden its operation to cover costs prohibited by section 199A(3), nor could those words imply a repayment obligation that would alter the character of the indemnity. The Court also rejected, on identical reasoning, Bolton’s notice of contention that clause 10.2 of the Constitution independently required indemnity: that clause too provides an indemnity, and it equally cannot apply to costs that section 199A(3) prohibits while the outcome of proceedings remains unknown.
On the secondary ground advanced by Keybridge — that clause 3.1 was limited to costs arising from the defined Relevant Period or Access Period — the Court agreed with the primary judge that there was no textual basis for such a temporal limitation. However, as Bolton failed on the primary ground, this finding was of no practical consequence.
Key Takeaways
- Section 199A(3) of the Corporations Act 2001 (Cth) prohibits any indemnity — whether under a deed or a company’s constitution — against a director’s legal costs in proceedings where the director may be found to have a liability to the company; this prohibition operates from the outset of those proceedings, not merely upon an adverse finding.
- The only permissible mechanism for funding a director’s legal costs in such proceedings before the outcome is known is a loan or advance under section 212(2), which must be repaid if the director is ultimately found liable — a standalone indemnity with a contractual repayment clause does not achieve the same legal effect.
- A director’s deed entered into at the start of one directorship does not automatically extend to protect conduct occurring during a later, separate directorship for which no equivalent deed was executed; companies should ensure new deeds are executed at the commencement of each fresh appointment.
- Broadly worded constitutional indemnity clauses (of the type common in Australian company constitutions) offer no greater protection than a deed in this context: both are subject to the section 199A(3) prohibition and neither can require interim payment of costs while derivative or similar claims remain on foot.
Why It Matters
This decision has significant practical implications for the drafting of director and officer deeds across Australia. It confirms that the commonly used formulation — indemnity “to the full extent permitted by law” — does not permit companies to fund a director’s defence costs during litigation in which the director faces claims of liability to the company, regardless of any contractual repayment obligation. Advisers drafting or reviewing D&O deeds must ensure that cost-advancement provisions are structured expressly as loans or advances within the section 212(2) framework, with clear repayment obligations, rather than as indemnities. Companies relying solely on constitutional indemnity clauses face the same constraint.
The decision also clarifies the relationship between section 199A(3) and section 212(2) in Australian corporate law, resolving uncertainty left by earlier intermediate appellate authority from the Federal Court and the Victorian Court of Appeal. For listed companies and their boards, the ruling underscores the importance of maintaining separate advance-of-costs provisions covering all directorships, including those arising from successive appointments where the original deed may have lapsed, and of obtaining member approval or structuring funding as section 212 advances when a director faces derivative or compensation claims by or on behalf of the company.