A liquidator may join and enforce a D & O / Management Liability Insurer to a claim against a recalcitrant company officer

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CGU Insurance Ltd v Blakely

In CGU Insurance Limited v Blakeley [2016] HCA 2, the High Court unanimously held that a defendant’s insurer may be joined as a third party to proceedings and a declaration made that the insurer is liable to indemnify the defendant pursuant to section 562 of the Corporations Act 2001 (Cth) (“the Corporations Act”).

The facts

In April 2013, proceedings were commenced in the Supreme Court of Victoria by the Liquidators of Akron Roads Pty Ltd (In Liq), the Respondents, against former directors of the company pursuant to section 588M(2) of the Corporations Act. Under this provision, where a director has contravened his or her duty under section 588G of the Act by failing to prevent insolvent trading by a company, the company’s liquidator may recover a debt due to the company as an amount equal to the loss or damage suffered from the director.

Crewe Sharp, a former director of the Company, made a claim under a policy of professional indemnity insurance which had been taken out against CGU Insurance.  Trevor Crewe, also a former director, was covered by the same policy. CGU denied it was liable to indemnify the directors by citing certain exclusions contained in the policy’s terms, and neither Trevor Crewe or Crewe Sharp were in position to challenge this denial.

Despite the fact the directors themselves had no intention or ability to challenge CGU’s decision in relation to indemnity, the Liquidators sought orders that CGU be joined as a defendant to the proceeding and that a declaration be made that CGU was liable to indemnify the former defendants subject to the policy of insurance.  Section 562 of the Corporations Act was relied upon by the Liquidators to support their claim as it placed them in a position of priority in respect of any proceeds of contracts of insurance that were payable to the directors.  Section 117 of the Bankruptcy Act 1966 (Cth) affords the same priority in cases where a bankrupt is insured under a contract of insurance against liability to third parties.

First instance and Court of Appeal Proceedings

In February 2015, Judd J granted the orders sought by the Liquidators, joining CGU as a defendant to the proceeding and granting the declaratory relief requested. In June 2015, CGU’s application for leave to appeal the orders of Judd J was heard and dismissed by the Court of Appeal.

Issue on appeal before the High Court

In September 2015, CGU was granted special leave to appeal to the High Court. The issue on appeal was whether the federal jurisdiction vested in the Supreme Court of Victoria authorised the Court to grant a declaratory order in favour of the Liquidator as against CGU as insurers of the defendants. The Court confirmed that the Supreme Court had both the federal jurisdiction which authorised them to entertain the claim and the power to grant the relief sought by the Liquidators.

Decision of the High Court

The High Court unanimously found in favour of the Liquidators, holding that their claim for relief was a justiciable controversy falling within the Supreme Court’s federal jurisdiction. The was due to the fact that the Liquidators’ proceedings against the directors involved a “matter” which arose under a Commonwealth Law, namely sections 588G and 588M of the Corporations Act, which the Supreme Court has jurisdiction to entertain by way of section 39(2) of the Judiciary Act 1903 (Cth).  Further, there was a justiciable controversy before the court in that there was a dispute between the Liquidators and the directors, and the controversy between the directors and CGU as to CGU’s liability to indemnify them against the Liquidator’s claims formed part of this single controversy before the Court, and arose out of the same substratum of facts. The Court also held that the Liquidators had a real interest in establishing that the insurer was liable to indemnify the directors.

Significantly the Court held that the Liquidator’s statutory entitlement under s 562 of the Corporations Act should not be defeated due to the fact the defendants had not challenged CGU’s denial of liability. Further, as the Liquidator’s claim was founded upon a statutory entitlement, the privity of the insurance contract as between CGU and the defendants was not impinged, as was contended by CGU.

On the inappropriateness of permitting outsiders to seek declaratory relief regarding the meaning and effect of a contract, which the parties to the contract have not themselves raised as an issue, Nettle J noted that “[a] plaintiff to whom s 562 of the Corporations Act or s 117 of the Bankruptcy Act gives a right to be paid in priority out of the proceeds of a policy of insurance against an insolvent defendant’s liability to the plaintiff is not an “outsider” in any rational sense of the word.”[1]

Significance of the case

The rights vested in liquidators pursuant to section 562 of the Corporations Actand section 117 of the Bankruptcy Act have been clearly upheld by the High Court in this case. Whilst this entitlement is clearly grounded in statute and does not operate as a blanket right that may be exercised to join insurers to proceedings in any circumstance, the number of third party claims are likely to increase in the wake of this decision. Of further importance to note is that in those cases where defendants who are unwilling or unable to pursue a claim against their insurer subject to a private insurance policy, an insurer may still be joined to a proceeding and declared liable to indemnify a defendant when challenged by another party with a real interest in the matter.

References

Akron Roads Pty Ltd (in liq) v Crewe Sharp [2015] VSC 34

CGU Insurance Limited v Blakeley [2015] VSCA 153

CGU Insurance Limited v Blakeley [2016] HCA 2

Corporations Act 2001 (Cth)

[1] CGU Insurance Limited v Blakeley [2016] HCA 2, Nettle J at [92], [96].

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