Federal Court of Australia

Bentley Capital Limited v Keybridge Capital Limited (No 3) [2024] FCA 1139

ORDERS

THE COURT ORDERS THAT:

1.    Within a time to be fixed, the plaintiffs and the first defendant provide to Chambers an agreed minute of proposed orders or declarations (or failing agreement, competing minutes) that reflect these reasons and propose the questions to be answered by the proposed referee.

2.    Costs of this application are reserved.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

BANKS-SMITH J:

1    This proceeding initially concerned a deadlock between two camps of directors of a listed company, Keybridge Capital Limited. The Court having resolved that deadlock by trial (Bentley Capital Limited v Keybridge Capital Limited [2019] FCA 1675 (Bentley (No 1)), it is now necessary to resolve an apparent stand-off as to which competing indemnifier should meet certain legal costs.

2    The initial trial proceeded as an urgent hearing on 8 October 2019, with judgment delivered on 11 October 2019.

3    In summary, the proceeding came about due to conflict between directors nominated by Bentley Capital Limited (the first plaintiff) and directors nominated by Australian Style Group Pty Ltd (the second defendant). At the time Bentley held 20% of the issued shares in Keybridge. Australian Style Group held 22% of the issued shares in Keybridge.

4    Mr William Johnson (the second plaintiff) had been nominated as a director of Keybridge by Bentley. Mr Johnson was also a director of Bentley. Mr John Patton (the third defendant) and Mr Jeremy Kriewaldt (the fourth defendant) had been nominated by Australian Style Group (the second defendant).

5    The relief sought related to the convening of two separate meetings of the directors of Keybridge, one on 10 July 2019 and one on 16 July 2019. Resolutions were purportedly passed at each meeting. The first meeting was convened by the Johnson/Bentley camp and the second by the Patton/Australian Style Group camp.

6    The Patton/Australian Style Group camp pursued relief by way of a cross-claim. Each camp challenged the resolutions passed at the other's respective meeting, and each had some success and some failure in the outcome. Each relevant party succeeded in obtaining declarations as to the invalidity of the conduct of the opposing parties, but each failed to obtain declarations confirming the validity of their own.

7    The parties could not agree where the costs of the trial should fall. I determined the issue of costs in October 2021: Bentley Capital Limited v Keybridge Capital Limited (No 2) [2021] FCA 1318 (Bentley (No 2)). Having regard to the outcome, I determined that there would be no order as to costs, leaving each party to bear their own costs.

8    These reasons address a separate issue that has arisen between the plaintiffs and Keybridge in relation to Keybridge's obligation to indemnify its directors for the costs of the litigation. The second, third and fourth defendants did not participate in the hearing.

The indemnity issue

9    During the course of the costs hearing, an issue arose as between Mr Johnson and Keybridge as to whether Mr Johnson should be indemnified by Keybridge for the legal costs incurred by him in relation to the proceeding. It is not in issue that Mr Johnson commenced the proceedings in his capacity as a director of Keybridge.

10    As explained in Bentley (No 2), when the costs application was heard, the issue of whether any indemnity was or should be forthcoming from Keybridge with respect to Mr Johnson's costs had not properly crystalised (at [43]-[44]). The originating process had not included a claim by Mr Johnson for an indemnity from Keybridge for his costs, although in his cross-claim Mr Patton had sought such relief. It is not in issue that prior to Bentley (No 2) Mr Patton had already been indemnified by Keybridge for his legal costs.

11    I granted leave to Mr Johnson to amend the originating application if the parties were unable to resolve the issue as to an entitlement to an indemnity and he required a determination from the Court. Accordingly, that part of the costs application was deferred: Bentley (No 2) at [41]-[47].

12    It is apparent from communications between Mr Johnson, Mr Patton and Keybridge that from as early as October 2019 and November 2019, Mr Johnson raised the question of being indemnified for his legal costs by Keybridge. Mr Johnson provided a detailed request in writing on 16 May 2020 with supporting documents. After Bentley (No 2) was delivered, Mr Johnson, apparently directly with Keybridge and then through his solicitors, again sought indemnity from Keybridge in relation to his costs of the litigation. Relevantly, a detailed letter dated 8 December 2021 requesting indemnity was sent by Squire Patton Boggs to Keybridge's former solicitors, to which no substantive response was received. It is apparent that no agreement to provide indemnity was forthcoming, and Mr Johnson had no real option but to pursue Keybridge by way of this application. I acknowledge based on communications between the solicitors that it was Keybridge which raised questions as to funding provided by Bentley to pay Mr Johnson's legal fees and Bentley's own obligations to indemnify Mr Johnson. However, I also acknowledge that Keybridge did not respond to Mr Johnson in a timely manner to explain the basis upon which it claimed it was not obliged to indemnify him. Its failure to provide timely responses appears in part to have been caused by a period when it had no legal representation.

13    In any event, the originating process was amended by Mr Johnson and Bentley with leave and by consent on three occasions. It suffices to include the relevant parts of the latest version of the amended originating process:

7.    On behalf of the Second Plaintiff [Johnson], an order that the First Defendant [Keybridge] indemnify the Second Plaintiff for his costs of and incidental to the proceeding.

8.    If this Honourable Court grants relief in the terms (or in the effect of) paragraph [7] above, the First Defendant pay the Second Plaintiff's costs of and incidental to the proceeding in a sum to be determined by a referee appointed by this Honourable Court pursuant to section 54A of the Federal Court of Australia Act 1976 (Cth).

9.    Further and in the alternative to paragraphs [7] - [8] (inclusive) above and on behalf of the First Plaintiff, orders that:

(a)    the First Defendant was liable to pay the Second Plaintiff's costs of and incidental to the proceeding; and

(b)    the First Defendant pay to the Second Plaintiff a sum (by way of contribution) with that sum to be determined by a referee appointed by this Honourable Court pursuant to section 54A of the Federal Court of Australia Act 1976 (Cth).

14    As is apparent, by the amendments Mr Johnson seeks indemnity from Keybridge in relation to the legal costs he has incurred, and further or in the alternative, Bentley seeks contribution from Keybridge towards indemnifying Mr Johnson.

15    The issues distil to the following:

(1)    Is Keybridge obliged to indemnify Mr Johnson for his legal costs of the proceeding having regard to: first, the terms of the Keybridge Constitution; second, a 'Director's Access, Indemnity and Insurance Deed' (Keybridge Deed) entered into between Keybridge and Mr Johnson dated 28 July 2017; third, a 'Director's Access, Indemnity and Insurance Deed' entered into between Bentley and Mr Johnson dated 13 March 2009 (Bentley Deed); and fourth, the terms of an 'Elite Directors and Officers Liability Insurance Policy' issued in favour of Bentley by Chubb Insurance Ltd?

(2)    If the answer to (1) is yes, then should there be any right of contribution as between Keybridge and Bentley with respect to indemnifying Mr Johnson?

16    These issues fall to be considered in circumstances where Mr Patton was long ago indemnified by Keybridge for his legal costs of and incidental to the proceeding pursuant to the terms of a Keybridge Deed to which he was a party, which was on the same terms as the Keybridge Deed executed by Mr Johnson. Keybridge apparently made those payments to Mr Patton without dispute. I will assume, having regard to their duties as directors, that the Keybridge directors in resolving to pay Mr Patton had regard to the terms of Mr Patton's Keybridge Deed.

17    As this brief summary reveals, Keybridge has chosen to indemnify one of its directors but not another, in circumstances where both directors were involved in the same litigation, and both had in effect the same measure of success and failure. On its face that is an incongruous result. However, the issue before me falls to be determined having regard to the evidence.

18    As explained below, Mr Johnson has incurred substantial legal costs payable to Squire Patton Boggs relating to the trial, the costs hearing and this indemnity proceeding. Keybridge has declined to indemnify Mr Johnson in relation to those legal costs either under the Constitution or the Keybridge Deed. Bentley has made certain payments to Mr Johnson by way of 'advances' for the purpose of paying those costs. Presumably this has saved Mr Johnson from being personally exposed and pursued in relation to those costs by Squire Patton Boggs while questions as to indemnity remain in dispute, although Mr Johnson has potentially taken on an equivalent liability to Bentley to repay those advances. Mr Johnson has also sought to have the legal costs met by directors and officers (D&O) insurance policies taken out by each of Keybridge and Bentley. Cover has been declined to date.

19    Before embarking on a consideration of the competing contentions, I will set out the various terms of the documents and communications upon which the parties relied.

The Keybridge Constitution

20    The relevant clause of the Constitution is clause 10, which provides as follows:

10    Indemnity and insurance

10.1    Persons to whom rules 10.2 and 10.5 apply

Rules 10.2 and 10.5 apply:

(a)    to each person who is or has been a director, alternate director or executive officer (within the meaning of rule 9.3(a)) of the company; and

(b)    to such other officers or former officers of the company or of its related bodies corporate as the directors in each case determine,

(each an Officer for the purposes of this rule).

10.2    Indemnity

The company must indemnify each Officer on a full indemnity basis and to the full extent permitted by law against all losses, liabilities, costs, charges and expenses (Liabilities) incurred by the Officer as an officer of the company or of a related body corporate.

10.3    Limit on indemnity

The indemnity in rule 10.2 does not operate in respect of any liability of the Officer to the extent that Liability is covered by insurance.

10.4    Extent of indemnity

The indemnity in rule 10.2:

(a)    is enforceable without the Officer having to first incur any expense or make any payment;

(b)    is a continuing obligation and is enforceable by the Officer even though the Officer may have ceased to be an officer of the company or its related bodies corporate; and

(c)    applies to Liabilities incurred both before and after the adoption of this constitution.

10.5    Insurance

The company may, to the extent permitted by law:

(a)    purchase and maintain insurance; or

(b)    pay or agree to pay a premium for insurance,

for each Officer against any Liability incurred by the Officer as an officer of the company or of a related body corporate including, but not limited to, a liability for negligence or for reasonable costs and expenses incurred in defending proceedings, whether civil or criminal and whatever their outcome.

10.6    Savings

Nothing in rule 10.2 or 10.5:

(a)    affects any other right or remedy that a person to whom those rules apply may have in respect of any Liability referred to in those rules;

(b)    limits the capacity of the company to indemnify or provide or pay for insurance for any person to whom those rules do not apply; or

(c)    limits or diminishes the terms of any indemnity conferred or agreement to indemnify entered into prior to the adoption of this constitution.

10.7    Deed

The company may enter into a deed with any Officer to give effect to the rights conferred by this rule 10 or the exercise of a discretion under this rule 10 on such terms as the directors think fit which are not inconsistent with this rule 10.

The Keybridge Deed

21    The relevant terms of the Keybridge Deed (as entered into separately by each of Mr Johnson and Mr Patton) are:

4.1    Indemnity by the Company

Subject to the terms of this document, the Company must, to the extent that the Director is not otherwise indemnified, indemnify the Director to the fullest extent permitted by the Corporations Act, the Competition and Consumer Act and any other applicable law, against:

(a)    any Liability incurred by the Director before or after the date of this document as an officer of the Company or as an officer or trustee of a Relevant Entity;

(b)    legal costs or any Liability for legal costs incurred by the Director in Defending Legal Proceedings for a Liability or an alleged liability incurred or alleged to be incurred by the Director as an officer of the Company or as an officer or trustee of a Relevant Entity, or in seeking relief from such a Liability under the Corporations Act, the Competition and Consumer Act or any other applicable law (including under any legislation applying to trustees); and

(c)    any Liability for legal costs incurred by the Director in connection with any Legal Proceeding relating to the Company or a Relevant Entity which involves the Director because of their present or former capacity as an officer of the Company, or present or former capacity as an officer or trustee of a Relevant Entity.

4.2    Nature and duration of indemnity

The indemnity provided under clause 4.1 continues in full force even if the Director has ceased to be an officer of the Company or an officer or trustee of any Relevant Entity when the Director makes a claim under the indemnity.

The Bentley resolutions to make advances

22    As at 17 November 2023, Mr Johnson had received $529,543.36 from Bentley in respect of legal costs of and incidental to the proceeding. The parties are not agreed as to the nature, basis or legal characterisation of these payments. However, they are evidenced by three circulatory resolutions of the directors of Bentley, all of which were said to have been signed as a resolution in writing by the directors pursuant to the Constitution. The relevant parts are extracted below (all with original emphasis included).

23    The first resolution was dated 6 February 2020:

Resolved:

(1)    The Company advance the sum of $89,467.62 (Advance) to Director, William Johnson, pursuant to Mr Johnson's Director's Access, Indemnity and Insurance Deed (dated 13 March 2009), to meet part of the sum of $330,699.76 in legal costs incurred by Mr Johnson with Squire Patton Boggs (SPG) (including Counsel fees and other disbursements totalling $89,467.62) (inclusive of GST) in respect of Federal Court proceedings in the matter of Bentley Capital Limited v Keybridge Capital Limited [2019] FCA 1675 (File WAD 475 of 2019), on the following terms:

(a)    The Advance is on an interest free and unsecured basis;

(b)    Mr Johnson shall immediately apply the receipt of the Advance to SPG's Trust Account to meet the SPG disbursements totalling $89,467.62;

(c)    Each of Mr Johnson and the Company reserve their rights in the matter.

24    The second resolution was dated 20 July 2020:

Resolved:

(1)    The Company advance the sum of up to $241,232.14 (Total Advance) to Director, William Johnson, pursuant to Mr Johnson's Director's Access, Indemnity and Insurance Deed (dated 13 March 2009), to meet the balance of the sum of $330,699.76 in legal costs incurred by Mr Johnson with Squire Patton Boggs (SPG) (including Counsel fees and other disbursements) (inclusive of GST) in respect of Federal Court proceedings in the matter of Bentley Capital Limited v Keybridge Capital Limited [2019] FCA 1675 (File WAD 475 of 2019) (Legal Costs), on the following terms:

(a)    The Total Advance be made progressively as follows (each an Advance):

(i)    $41,232.14 immediately;

(ii)    $40,000 on or about the 14th of each month between August and December 2020 (inclusive);

(b)    The Total Advance is on an interest free and unsecured basis;

(c)    Mr Johnson shall immediately apply the receipt of each Advance to SPG to satisfy the Legal Costs;

(d)    Each of Mr Johnson and the Company reserve their rights in the matter.

25    The third resolution was dated 22 November 2021:

Resolved:

(1)    The Company advance $85,464.39 (Advance) to Director, William Johnson, pursuant to Mr Johnson's Director's Access, Indemnity and Insurance Deed (dated 13 March 2009) (Dr's Deed), to meet the legal costs incurred by Mr Johnson with Squire Patton Boggs (SPB) (including disbursements) (inclusive of GST) in respect of Federal Court proceedings in the matter of Bentley Capital Limited v Keybridge Capital Limited (No. 2) [2021] FCA 1318 (File WAD 475 of 2019) and ancillary and related matters (Legal Costs), on the following terms:

(a)    The Advance is on an interest-free and unsecured basis;

(b)    Mr Johnson shall immediately apply the receipt of the Advance to SPB to satisfy the Legal Costs;

(c)    Each of Mr Johnson and the Company reserve their rights in the matter.

(2)    The Company advance such amounts (as approved by the Board, comprising the independent Directors) (Advances 2) to Director, William Johnson, pursuant to Mr Johnson's Dr's Deed, to meet the legal costs incurred by Mr Johnson with SPB in seeking an indemnity claim from Keybridge Capital Limited (KBC) for legal costs incurred in the matter of Bentley Capital Limited v Keybridge Capital Limited [2019] FCA 1675 and Bentley Capital Limited v Keybridge Capital Limited (No. 2) [2021] FCA 1318 (File WAD 475 of 2019), and ancillary and related matters (Legal Costs 2), on the following terms:

(a)    Mr Johnson shall provide a copy of SPB invoices in respect of the Legal Costs 2, for review and approval by the Company;

(b)    The Advances 2 are on an interest-free and unsecured basis;

(c)    Mr Johnson shall immediately apply the receipt of each of the Advances 2 to SPB to satisfy the Legal Costs 2;

(d)    Each of Mr Johnson and the Company reserve their rights in the matter.

26    It should be noted that the first and second resolutions followed the delivery of reasons in Bentley (No 1) and related to costs that had already been incurred and proceedings that had been determined. The first part of the third resolution related to and post-dated Bentley (No 2) and so again related to fees that had been incurred for proceedings that had been determined. The only advance from Bentley that related to costs yet to be incurred and in relation to proceedings not yet determined were the proposed advances the subject of the second part of the third resolution (relating to this application).

The Bentley Deed

27    The relevant indemnity terms of the Bentley Deed (clauses 4.1 and 4.2) are in effect identical to those in the Keybridge Deed (clauses 4.1 and 4.2 extracted above). This is important. It means that having regard to clause 4.1 of each deed, Bentley has agreed to indemnify Mr Johnson to the extent that he is not otherwise indemnified; and Keybridge has agreed to indemnify Mr Johnson to the extent that he is not otherwise indemnified. If one party moves first to indemnify Mr Johnson, it appears that the other party will not be obliged to do so (subject to contribution).

28    This brings into focus the nature of the payments by Bentley the subject of the resolutions. It is apparent from the wording of the Bentley resolutions that the advances to Mr Johnson were purportedly made pursuant to the terms of the Bentley Deed.

29    The parties have assumed that the reference in the resolutions is directed to clause 6 of the Bentley Deed, which provides relevantly:

6.    PAYMENT OF COSTS BEFORE THE OUTCOME OF PROCEEDINGS IS KNOWN

6.1    Restriction on indemnity

If the Director's entitlement to indemnity for any legal costs depends on the outcome of a Legal Proceeding, the Company must not provide indemnity until that outcome is known.

6.2    Advances to Director

Subject to the terms of this document and the Corporations Act, the Company or a Relevant Entity may, at the request of the Director and on such terms (including interest, repayments and security) as it thinks fit, advance monies (including by way of a loan, either free of interest or at a rate determined by the Company's Board) to the Director to meet any costs or expenses of the Director incurred in circumstances relating to the indemnities provided under this document and prior to the outcome of a Legal Proceeding. However, no such advance is to be made in respect of legal costs incurred in a Legal Proceeding initiated by the Company against the Director.

6.3    Repayment of advances by Director

Within 28 days of the outcome of the Legal Proceeding, the Director must repay to the Company:

(a)    all amounts advanced to the Director under clause 6.2 and all accrued interest on those advances; and

(b)    any amounts expended by the Company under clause 5 which are amounts for legal expenses which the Corporations Act, the Trade Practices Act or any other applicable law prohibits the Company from paying.

6.4    Indemnity by the Company

The Company must within 28 days of the outcome of the Legal Proceeding indemnify the Director from any legal expenses for those proceedings which are within the scope of the indemnity in clause 4.1 and which the Corporations Act, the Trade Practices Act and any other applicable law permits the Company to pay. The amount the Company is required to pay to the Director under that indemnity must be applied towards repayment of any amounts advanced under clause 6.2 and interest accrued.

Insurance

30    Keybridge held a D&O liability insurance policy (referred to in correspondence as the Lockton insurance policy) in respect of Mr Johnson's directorship of Keybridge. Mr Johnson apparently made a claim under the Keybridge D&O policy, but it was rejected on the basis the policy did not respond to the claim. In a paper prepared by Mr William Ho, Bentley's company secretary, for the purpose of the second resolution dated 6 February 2020, Mr Ho refers to the fact that both Mr Johnson and Mr Patton made claims on the Keybridge D&O policy (page 114, affidavit filed 31 May 2022). The claim by Mr Johnson and its rejection are cited in the Chubb letter dated 7 November 2023 referred to below. I infer that the same policy extended to Mr Patton as a fellow director at the relevant time. I also infer that Mr Patton's claim was rejected: I infer this on the basis that, having regard to the Constitution and clause 4.1 of the Keybridge Deed, it is highly unlikely that Keybridge would have paid Mr Patton (see [10], [20] and [21] above) if the insurer under the Keybridge D&O policy had accepted his claim.

31    Bentley held a D&O liability insurance policy with Chubb, which extended to cover, on certain terms and conditions, a person acting at the request of Bentley as a director of an 'outside entity', such as Keybridge.

32    On 23 November 2019 Bentley notified Chubb of a claim under the policy in relation to Mr Johnson's liability for costs as a director of an 'outside entity' (Keybridge), but Chubb has not accepted that the policy responds to the claim.

33    Communications between Bentley's insurance broker and Chubb were in evidence. The communications included extracts from the policy, although the policy as a whole was not in evidence. No objection was taken to the admissibility of the communications.

34    Relevantly, by email dated 26 February 2020 an officer of Chubb wrote to Bentley's insurance broker indicating that on the information currently before Chubb, it did not consider there to be 'a triggered claim under the policy'. Chubb sought further information to clarify certain matters.

35    There were (apparently) further communications on 14 September 2023 and 18 October 2023 on behalf of Bentley to Chubb responding to requests for information.

36    By letter dated 7 November 2023 Chubb wrote to Mr Ho setting out background facts to the claim and concluding with the following 'preliminary coverage determination' ('Insuring Agreement B' being the relevant part of the policy):

Preliminary views on coverage

Insuring Agreement B

Relevantly, Insuring Agreement B of the Policy provides that:

'The Insurer will pay to, or, on behalf of the Company, all Loss resulting from a Claim first made during the Policy Period against an Insured Person where the Company has indemnified or agreed to indemnify such Loss'

The definition of Claim includes 'a civil…proceeding…against an Insured Person, for a Wrongful Act'. In turn, the definition of Wrongful Act includes 'with respect to any Insured Person: (a) any actual, alleged or proposed breach of trust, act, error, omission, misstatement, misleading statement, misrepresentation, defamatory statement, libel, slander, neglect or breach of duty or any other matter claimed against an Insured Person by reason of their acting in the capacity of an Insured Person'.

Mr Johnson is a director of Bentley, being the Company. However, consistent with the views set out in our email of 26 February 2020, the Proceeding does not constitute a Claim against Mr Johnson, as the Proceeding was prosecuted by himself and Bentley. As such, Insuring Agreement B of the Policy is not triggered insofar as the Proceeding is being prosecuted by Mr Johnson.

This leaves the Mr Patton's Counterclaim against Mr Johnson. In our view, the Counterclaim simply seeks relief and various declarations regarding the validity or invalidity of the First and Second Meetings and the resolutions passed at those meetings, as well as the costs of the Proceeding. It follows that there is no Wrongful Act alleged by the Counterclaim and therefore no Claim which triggers Insuring Agreement B.

We invite Mr Johnson to make submissions on Insuring Agreement B before we make a final determination on coverage.

(original emphasis)

37    Further, the letter from Chubb explained that the policy was an excess-only policy, which, on Chubb's view, would only cover costs that were not otherwise covered. According to counsel for Mr Johnson, Chubb's position was that Chubb would not agree to cover Mr Johnson's costs until it was informed of the outcome of this proceeding, at which point it would ascertain whether any cover would be provided.

38    So much appears to be supported by the 7 November 2023 letter:

Extension 2.6 Outside Directorship

Notwithstanding our preliminary view that Insuring Agreement B is not triggered, and for completeness, we consider the potential application of Extension 2.6 of the Policy, which provides that:

'(i)    This Policy shall extend to include an Insured Person who at the specific request, or knowledge and consent, of the Company is a director, officer, trustee, governor, board advisor, board observer or equivalent of any Outside Entity in their capacity as such.

(ii)    Cover under this Extension shall be excess of any indemnification provided by the Outside Entity and any valid and collectible directors and officers liability insurance, including any policies listed in the Proposal or any endorsement for an Outside Entity, where such payment is made in respect of the Outside Entity.

…

(iv)    If the Outside Entity's directors and officers liability insurance is provided by the Insurer or any member of Chubb, then the total aggregate amount of available cover for Loss under this Extension shall be reduced by the amount paid to the Outside Entity or any Insured Person under such insurance.'

Keybridge is an Outside Entity because it is not a Subsidiary of Bentley and has no securities traded on any exchange in the USA.

Mr Johnson is a Director or Officer because he is a director of Bentley, being the Company, and therefore he is an Insured Person. Mr Johnson is also a director of Keybridge, being an Outside Entity, at the specific request or knowledge and consent of Bentley. Accordingly, by sub-paragraph (i) of Extension 2.6, cover under the Policy would extend to Mr Johnson in his capacity as a director of Keybridge, if Insuring Agreement B of the Policy is triggered (which is not presently the case). However, any cover afforded under Extension 2.6 would be in excess of any indemnification provided by Keybridge and any valid and collectible directors and officers liability insurance, where such payment is made in respect of Keybridge. To that end:

•    any indemnification by Keybridge in respect of Mr Johnson's costs is subject to the outcome of the further costs hearing scheduled for 7 December 2023; and

•    as discussed above, Keybridge's insurer denied indemnity in respect of Mr Johnson's claim for his costs.

Accordingly, the outcome of the further costs hearing is also relevant before we can make a final assessment on the application (if any) of Extension 2.6 of the Policy. In the meantime, we reserve our rights under the Policy and at law to assess the availability of any cover under Extension 2.6.

Please let us know the outcome of the further costs hearing and whether Mr Johnson has or intends to challenge the indemnity decision of Keybridge's D&O insurer.

(original emphasis)

39    By the time of the hearing before me, Bentley had not responded further to Chubb. According to counsel for Mr Johnson, there was no expectation that Chubb would change its view.

The competing positions of the parties

40    Keybridge accepts that Mr Johnson is entitled to indemnity under the terms of the Keybridge Deed, except where Mr Johnson is 'otherwise indemnified' (as that term is used in clause 4.1 of the Keybridge Deed), or to the extent that his liability is 'covered by insurance' (as that term is used in clause 10.3 of the Constitution). It asserts that Mr Johnson has been 'otherwise indemnified' for his liability to pay costs to Squire Patton Boggs by the payments from Bentley. It also asserts that Mr Johnson has failed to establish that his liability is not covered by insurance.

41    Mr Johnson and Bentley submit, on the other hand, that the payments received by Mr Johnson in order to assist him to pay legal costs to Squire Patton Boggs did not constitute provision of an indemnity. They submitted that such payments, which they say were made under clause 6 of the Bentley Deed, were not made pursuant to any obligation to indemnify. To the extent the resolutions might be interpreted to the contrary, they rely on the principle that resolutions are not to be construed as if they have inevitably been drafted with the same care and formality as contracts, statutes or the like, referring to AD Lang, Horsley's Meetings; Procedure, Law and Practice (LexisNexis Butterworths Australia, 7th ed, 2015) at [11.3]. Mr Johnson and Bentley accept that clause 4 of the Bentley Deed obliges Bentley to indemnify Mr Johnson in accordance with and subject to its terms, but contend that no payments have been made by way of indemnity as yet.

42    Bentley says in the alternative that if the payments it made to Mr Johnson had the effect of indemnifying him, then there should be a right of contribution from Keybridge to Bentley, because both Keybridge and Bentley were obliged to indemnify Mr Johnson, relying on Albion Insurance Co Ltd v Government Insurance Office of New South Wales (1969) 121 CLR 342 (Barwick CJ, McTiernan, Kitto, Menzies and Windeyer JJ); and Haider v Gudelj [2021] ACTCA 9; (2021) 16 ACTLR 1 (Murrell CJ, Loukas-Karlsson and Perry JJ).

43    Bentley's position is that neither insurer has responded to Mr Johnson's claims.

44    By way of important context, I infer having regard to the terms of the Keybridge Deed made with Mr Patton and the Constitution, and to the duties of its directors at the time indemnity was granted, that Keybridge would not have indemnified Mr Patton unless it had been satisfied that Mr Patton was not otherwise indemnified or covered for those costs, including being satisfied that Mr Patton was not indemnified or covered by either the Keybridge D&O policy or any other insurance.

Consideration

What is the nature of the payments by Bentley?

45    I do not consider on balance that the payments by Bentley pursuant to the resolutions constituted payments to indemnify Mr Johnson. It follows that Mr Johnson has not been indemnified by Bentley as yet, although, as addressed below, he is entitled to be so indemnified.

46    There are number of matters that have led me to the view that the payments were not made in order to indemnify Mr Johnson, but were deliberately provided by way of advances that Mr Johnson was obliged to repay.

47    Having regard to the context, the payments were made at a time when the position in relation to Chubb's obligations to indemnify Mr Johnson remained unclear, and when questions as to which insurer/entity was obliged to indemnify Mr Johnson were live. For example, it is apparent from the board paper prepared by Mr Ho for the purpose of the 6 February 2020 resolution that Bentley understood that:

Bentley's/William Johnson's claim in respect of these legal costs vis a vis Bentley's Insurance Policy is subject to and contingent on William Johnson not obtaining relief from Keybridge/Keybridge's Insurer.

48    Mr Ho referred in the same paper to the capacity for Bentley to make advances to Johnson under the Bentley Deed.

49    Some difficulty arises from the reference in the resolutions to payments being made 'pursuant to' the Bentley Deed. The parties proceeded on the basis that this refers to clause 6 of the Bentley Deed, which permits advances to directors. I agree this is the sensible reading of the resolutions.

50    It can be accepted that clause 6 is intended to address statutory restrictions on a company indemnifying its officers, such as under s 199A of the Corporations Act 2001 (Cth). There is no doubt that companies can structure payments by agreement so as to avoid conduct in contravention of provisions such as s 199A. See, for example, Note Printing Australia Ltd v Leckenby [2015] VSCA 105; (2015) 50 VR 44 at [62]-[65]; Leckenby v Note Printing Australia Limited [2014] VSC 538 at [59], [63] (Sifris J); and William John Jefferies v Indigenous Land Corporation [2015] NSWSC 1616 at [49]-[50] (Rein J). These cases highlight the fact that an indemnity is normally understood as a payment that cannot be recovered from the recipient. A payment by way of an advance or loan but with an obligation to repay does not constitute a traditional indemnity.

51    It is apparent that clause 6 of the Bentley Deed is framed in a manner that permits payments to be made to a director so that they may meet their personal obligation to pay legal fees but is coupled with an obligation to repay those amounts. If the company is obliged to indemnify the director then it must do so, but in turn the director is to apply the funds upon receipt towards repayment to the company of the advances and any interest.

52    There are some anomalies in attempting to apply the terms of clause 6 to the manner in which the resolutions operate. For example, clause 6 is drafted on the premise that advances are made to the director in advance of 'the outcome of a Legal Proceeding' (the phrase used in each sub-clause of clause 6). Leaving aside the second part of the third resolution, all advances pursuant to the resolutions were made to Mr Johnson in relation to proceedings that had already been determined.

53    Even so, reading the resolutions in the context of the Bentley Deed it is apparent that the advances were not made in order to indemnify Mr Johnson. It is tolerably clear that by referring to the Bentley Deed, Bentley chose to make advances (cl 6.2), intended that the funds would be repaid (cl 6.3) and that if it indemnified Mr Johnson it would pay Mr Johnson accordingly (cl 6.4). Whilst clause 6.4 provides a mechanism by which Mr Johnson is obliged to apply any funds received by way of indemnity from Bentley under clause 6.4 against his liability to repay advances made under clause 6.2, this mechanism does not retrospectively accord the advances the status of indemnity payments at the time they were made.

54    It was open to Bentley to resolve to make payments to Mr Johnson on terms it approved, and those terms are evidenced by the resolutions. Bentley appears to have quite deliberately used the language of an advance in the resolutions and has reserved its rights. Accompanying the description of each tranche of funding as an 'advance' were references to the advance being 'interest free' and on an 'unsecured basis'. Such language is not consistent with a payment intended to indemnify a person for liability. Unless there is some basis upon there might be an obligation to repay funds that are advanced or loaned, references to interest rates and whether security is required are irrelevant. Further, nothing in the language of the resolutions suggests that Bentley was purporting or agreeing at that time to make payments under clause 6.4.

55    The context in which the payments were made also supports a finding that the funds were advances under clause 6.2. Mr Johnson had already incurred a not insignificant liability to Squire Patton Boggs. At the time, Keybridge had not agreed to indemnify Mr Johnson, and nor had any insurer, and the priority of such obligations was contested. It is unsurprising that Bentley might assist Mr Johnson by providing an advance or a loan (indeed the board paper uses the language of 'advances' and 'loan') until the legal issues surrounding priority between the potential indemnifying parties could be determined.

56    I also note consistent with this position, Bentley's annual reports referred to the decision to provide funds to Mr Johnson using the language of legal costs, advances and a subsequent 'review' (this example being from the FY21/22 half yearly report):

During the half year, the Company advanced $33,082 loan funds in respect of William Johnson's legal costs incurred in circumstances where Mr Johnson's Director's Deed with the Company provides a procedure for the advancement of monies in this regard. The Board agreed to advance these funds in accordance with the relevant provision of Mr Johnson's Director's Deed and subject also to various conditions agreed with Mr Johnson, including advancing indemnity claims vis a vis third-parties and insurance claims and a review of the position thereafter. The Company and Mr Johnson have also each reserved their respective rights in the matter.

57    Keybridge, on the other hand, submitted that the wording of clause 6.2 and Bentley's conduct in providing advances under it indicated that Bentley accepted Mr Johnson was 'entitled' to have his legal fees paid under the Bentley Deed. It contends that properly understood, clause 6.2 only permitted Bentley to pay money for costs incurred in circumstances 'relating to the indemnities provided under the Deed', and that accordingly it was conceded by Bentley that the payments were for the purpose of such an indemnity.

58    In my view this misapprehends the way in which the resolutions and clause 6 should properly be understood. Nor do I consider the page of the board paper prepared for the 6 February 2020 resolution relied upon by Keybridge in its submissions (page 114, affidavit of Mr Ho dated 31 May 2022) contains such a concession. It is clear that Bentley at the time of the advances was aware of the potential for it to have an obligation to indemnify Mr Johnson but it was also aware of the competing potential indemnifiers and insurers. In those circumstances it is difficult to accept that Bentley conceded that an immediate unconditional obligation to indemnify existed at the time the advances were made. I do not interpret the resolutions to evidence any such concession, and it would be odd to use the language of 'advances' in such circumstances.

59    I find that the payments have not operated to indemnify Mr Johnson. There is no evidence that Mr Johnson has repaid the advances, that Bentley had purported to indemnify him despite these ongoing proceedings or that there has been satisfaction of the advances affected by application of a notional or actual payment of indemnity.

60    However, none of that changes the fact that, having regard to my finding below in relation to the absence of insurance cover, Bentley is currently obliged under the Bentley Deed to indemnify Mr Johnson in accordance with clause 4.1 of the Bentley Deed. I will return to this.

Is Mr Johnson's liability covered by other insurance?

61    I am satisfied on the balance of probabilities that liability to Mr Johnson has been denied under the Keybridge D&O liability policy. I rely on the communication dated 7 November 2023 between Chubb and Mr Ho that records this outcome (and which has not been challenged), but further I rely on the inference I have drawn that cover was denied to Mr Patton by the insurers under the Keybridge D&O policy, an inference based on the fact that Keybridge has indemnified Mr Patton under the Keybridge Deed. On its own case, Keybridge would not have been obliged to indemnify Mr Patton under the Keybridge Deed if insurance had responded to that liability. I place significant weight on this inference. Having denied cover to Mr Patton, it can reasonably be assumed in the circumstances that the insurer would also have denied cover to Mr Johnson

62    The question then is the role of Bentley's Chubb insurance policy.

63    As the communications from Chubb reveal, Chubb has to date declined cover.

64    I observe that counsel for Mr Johnson understood that copies of both judgments (Bentley (No 1) and Bentley (No 2)) were provided to Chubb for the purpose of its consideration of the claim. I also infer this to be the case having regard to the references to both decisions in the Chubb correspondence and the fact that it would be highly unlikely that the judgments would not have been provided by Mr Ho in response to requests for information from Chubb. Chubb therefore had knowledge of the circumstances and nature of the proceedings and the manner in which the Court had addressed the liability of the parties at the time Chubb wrote its 7 November 2023 letter. It is difficult to know what further information Bentley could provide Chubb in these circumstances. Whilst there might be room for some debate about Chubb's response in relation to whether the counterclaim triggered liability, the 'excess' clause on its face appears to limit Chubb's liability in the circumstances, such that it arises only to the extent the same liability is not covered by indemnification provided by Keybridge.

65    The Chubb insurance policy was not in evidence. Mr Ho said Chubb did not agree to the policy being produced. Assuming that to be Chubb's position, the policy could have been the subject of a subpoena issued at the request of either party. Regardless, Keybridge did not object or make any submissions as to reliance on the clauses that were extracted in the 7 November 2023 letter. Nor did Keybridge seek to join Chubb. I have no reason to doubt that the correspondence from Chubb accurately extracts the relevant parts of the policy, and Bentley did not suggest otherwise.

66    Keybridge relied on Jefferies, in which directors sought indemnity for legal costs under a 'Deed of Access, Indemnity and Insurance' they had entered into with the defendant (ILC). The relevant clause, clause 6.2 (set out at [5] of the reasons), provided in part that:

ILC indemnifies the Director out of the property of ILC, to the extent and for the amount that the Director is not otherwise entitled to be indemnified and is not actually indemnified, against any liability for legal coasts …

67    In Jefferies, the directors accepted that they needed to establish that they had no other indemnity nor insurance to indemnify them against legal costs (at [7]). ILC disputed that they had established that they had no other indemnity nor insurance. The directors were cross-examined and relevantly indicated that although they did not have an insurance policy with respect to their activities as directors of ILC, they had entered into deeds of indemnity with other companies of which they were directors, and that those companies may have insurance in respect of their activities as directors of ILC. However, they were not aware of whether such policies might contain clauses 'in relation to outside directorship', and the Court declined to take judicial notice of the existence, content or ubiquity of such clauses (at [20]-[27]). The Court noted that ILC could have issued subpoenas in that regard.

68    Having regard to Mr Johnson's evidence and in particular the Chubb correspondence, I am satisfied that Mr Johnson has discharged his onus to establish on the balance of probabilities that there is no source of insurance cover available to otherwise indemnify him for the costs he has incurred. I accept on the information before me that it is unlikely that Mr Johnson would have access to insurance from Chubb in circumstances where its excess cover terms provide to the effect that it is not obliged to afford cover where there are other indemnifiers who are liable to meet in full the costs he has incurred. I note that there was no evidence to suggest that neither Keybridge nor Bentley could meet the full amount required to indemnify Mr Johnson for the relevant costs.

Is Bentley obliged to indemnify?

69    Bentley is obliged to indemnify Mr Johnson under clause 4.1 of the Bentley Deed.

70    Having regard to clause 6.4, there is an accounting process under the deed that must be implemented and followed, but the net effect (on the assumption that sums have been advanced to Mr Johnson to cover all relevant costs) is that upon Bentley meeting its obligation to indemnify, Mr Johnson must receive and apply such funds in repayment of the advances.

71    However, having regard to my findings, clause 4.1 operates so that Bentley is obliged to indemnify Mr Johnson to the extent he is not indemnified by Keybridge.

Is Keybridge obliged to indemnify?

72    In circumstances where I am satisfied that Mr Johnson is not indemnified by the Keybridge D&O policy, or relevantly by the Chubb policy, Keybridge is also obliged to indemnify Mr Johnson under clause 4.1 of the Keybridge Deed

73    Having regard to my findings, clause 4.1 operates so that Keybridge is obliged to indemnify Mr Johnson to the extent he is not indemnified by Bentley.

How should the double indemnity be given effect?

74    There is clearly no entitlement to be indemnified twice and neither Mr Johnson nor Bentley suggested otherwise.

75    The indemnities from Keybridge and Bentley are on the same terms and operate in relation to the same liability. Both Keybridge and Bentley are liable to indemnify Mr Johnson. If Bentley were to move first to indemnify Mr Johnson, then Keybridge might argue that no obligation remains on its part under clause 4.1 of the Keybridge Deed. Bentley might argue to the same effect if Keybridge were to move first.

76    But the indemnities do not cancel each other out. Rather, in such circumstances liability is to be divided and issues of proportional liability or contribution become relevant.

Should there be contribution?

77    Bentley raised contribution on the basis that if I found that the advances it made to Mr Johnson comprised indemnity payments, then it sought equitable contribution for those payments from Keybridge. Had I found that the payments comprised indemnity by Bentley, then I would have found that it was entitled to contribution from Keybridge. Although I have not found that the advances had that effect, the obligation on the part of Bentley to indemnify Mr Johnson arises in any event. So too does the question of contribution, in circumstances where I have found both Keybridge and Bentley are under a co-ordinate liability. Both parties made submissions on whether contribution should be ordered.

Principles

78    The equitable principle of contribution does not shift the initial obligation for an indemnifier to pay what might be a disproportionate share of liability where there is more than one indemnifier. Once a disproportionate sum is paid, a right of contribution may arise.

79    The leading authority is Albion at 349-351 (Kitto J), which was referred to and confirmed by the High Court more recently in Lavin v Toppi [2015] HCA 4; (2015) 254 CLR 459 at [32]:

The rationale of the right to contribution, both at law and in equity, was described by Kitto J in Albion Insurance Co Ltd v Government Insurance Office (NSW) [(1969) 121 CLR 342 at 349-350] 'as one of natural justice' which ensures 'that persons who are under co-ordinate liabilities to make good the one loss (eg sureties liable to make good a failure to pay the one debt) must share the burden pro rata' [see also HIH Claims Support Ltd v Insurance Australia Ltd (2011) 244 CLR 72 at 87 [36]]. In cases of suretyship, the concern is to ensure that the common burden of suretyship is borne equally as between co-sureties, so that the exercise by a creditor of its contractual right under its guarantee to recover the guaranteed debt in full from one of several co-sureties does not leave that surety to bear a disproportionate share of the burden of suretyship.

80    In AMP Bank Limited v Brown and Kavanagh [2017] NSWSC 313, Kunc J addressed in some detail the authorities relevant to the general principle of equality as between co-sureties, stating at [40]:

The authorities disclose four exceptions to the general principle of equality as between co-sureties (the 'accepted exceptions'):

(1)    Contract, or something less than contract, being the manifestation of a common intention to modify or exclude rights to contribution;

(2)    Where one surety has obtained the whole benefit of the guarantee;

(3)    Where one surety is guilty of 'fraud, illegality, wilful misconduct or gross negligence';

(4)    Equitable defences such as clean hands.

81    Contribution was also addressed by the Court of Appeal in Haider where the case law was examined, and the following principles distilled at [139]:

…

(a)    The doctrine of contribution among sureties is founded in equity.

(b)    Contribution is available where the claimant and the respondent are under 'co-ordinate liability' to make good the one loss. This is because payment by the claimant to the creditor also discharges the respondent's liability and, as the respondent derives the benefit of release from liability to the creditor, they should also bear the burden proportionately.

(c)    The operation of the principle should not be defeated by 'too technical an approach'. It is no answer to a claim for contribution that the claimant supplied monies to the principal debtor for the purpose of the principal debtor discharging the liability to the creditor (as in Mahoney), or that 'co-ordinate liability' derives from different sources of legal liability (such as statute and contract).

(d)    The rationale for 'co-ordinate liability' is the parties' imputed intention to share the common obligation equally. This inference will not be displaced lightly. However, if at the time when the obligation is undertaken, it is the parties' express or imputed common intention that, as between themselves, the burden should be borne by only one of them, there is no 'co-ordinate liability'. The circumstance that only one party will benefit from the transaction may inform the imputation of intention.

(e)    A claimant will fail in their claim for contribution if their conduct has 'an immediate and necessary relation to the equity sued for' such that they do not come to equity with 'clean hands', for example (as referred to in Dering) where they bored the hole in the ship that caused the loss of the ship and its cargo.

No exception to equal contribution established

82    Keybridge complains that the conduct of Bentley or Mr Johnson should be taken into account in denying that it has any obligation of contribution. That is, it asserts the Court should have regard to a lack of clean hands. However, it properly accepts that if I am not persuaded on that argument, then there should be equality of contribution.

83    In support of its argument, Keybridge referred to Bentley's failure to make early and transparent disclosure of the fact that it had made payments of the advances to Mr Johnson; and its delay in raising the question of contribution.

84    In answer to these matters, Bentley contended that it had only become an active participant in this proceeding once Keybridge disclosed the basis upon which it resisted the indemnity claim. Once that basis was disclosed, Bentley sought contribution by amendment to the originating process in March 2023. Bentley said that evidence filed prior to that time was compiled on behalf of Mr Johnson, and it should not be considered accountable for any shortcomings in that regard. In any event, it said, the payment of the advances was public information, disclosed in the annual reports of Bentley. An affidavit was filed in May 2022 that contained information about the advances, including copies of the papers prepared by Mr Ho that were provided to the directors at the time. Bentley submitted that there was no deliberate withholding of information in that regard.

85    Further, whilst Mr Johnson's earlier affidavits filed for this application could have disclosed his receipt of the advances, there is no evidence to support the drawing of an inference that there was any subterfuge or deliberate attempt by Bentley or Mr Johnson to conceal such advances. The evidence viewed collectively does not justify a conclusion that this would be the more probable inference to be drawn. Indeed, as Mr Johnson no doubt knew, there was disclosure of the advances in Bentley's public records. A more benign inference that might be drawn is that at the relevant time both Mr Johnson and Bentley proceeded on the basis that no indemnity had been granted by Bentley, and so the significance of a potential argument that the advances had constituted the grant of indemnity was not apparent to them until it was relied upon by Keybridge. Bentley then filed further evidence. Regardless, I am unable on the evidence before me to draw an inference that would support a finding that Bentley's conduct was coloured so as to amount to an absence of clean hands.

86    As to Keybridge's assertion that Bentley delayed raising the question of contribution, in hindsight, there is no doubt that Mr Johnson and Bentley could have been more forthcoming at an earlier time about the resolutions and advances made, the relevant correspondence with insurers and the prospect of seeking contribution. However, there is some substance to their submission that a significant period of time passed between when the question of indemnity arose in the costs proceeding, and when Keybridge clearly ventilated the reasons why it purported to deny indemnity. According to the evidence before the Court, such ventilation occurred by way of submissions filed by Keybridge on 1 August 2022, prior to a court-directed mediation scheduled for 9 September 2022. In response, Squire Patton Boggs wrote to Keybridge's then solicitors on 2 September 2022 informing them that, failing any resolution at the mediation, Bentley would proceed to apply for leave to amend the originating process to relevantly claim contribution. In the end Bentley did so, and filed evidence in March 2023 annexing relevant correspondence.

87    I am not persuaded that there has been conduct on the part of Bentley that can properly be characterised as displaying an absence of clean hands, as that expression is understood in equity.

Outcome

88    It follows that in all the circumstances assuming Bentley now moves forthwith to indemnify Mr Johnson for his legal costs, Keybridge is then obliged to contribute to those costs equally by making contribution to Bentley. No exception to the principle of equality is established.

Other arguments not dispositive

89    Mr Johnson and Bentley made a number of other submissions as to purported inconsistences arising out of the Constitution and the Keybridge Deed. For example, they contended that the reference to 'insurance' in the Constitution was to be read as a reference only to insurance taken out by Keybridge. It has not been necessary to resolve such alleged inconsistencies in order to resolve the application before me.

Assessing costs and the proposed reference

90    In light of my findings, there remain issues to be resolved as to the quantum of legal costs incurred by Mr Johnson, whether Bentley's participation in the proceedings had any impact on Mr Johnson's liability for such costs and how the costs properly the subject of the indemnity are to be assessed. These matters were raised by Keybridge prior to the hearing of this application, and the parties agreed that, if Bentley established a right of contribution, such matters could properly be the subject of a reference under s 54A of the Federal Court of Australia Act 1976 (Cth).

91    I agree that proposed course is appropriate, and I will order that there be a reference out to a registrar of this Court, acting as a referee.

Orders

92    It is appropriate that the parties prepare an agreed minute of proposed orders (or failing agreement, competing orders) that reflect these reasons and propose the questions to be answered by the referee. The parties should communicate with chambers within seven days as to both the time period they require for this task and any other appropriate programming orders they seek.

93    I will hear from the parties as to the costs of this application in due course.

Associate:

Dated:    30 September 2024