In the High Court’s decision in CGU Insurance Limited v Blakeley [2016] HCA 2 the Court confirmed that a Liquidator can join an insurer under a director’s liability insurance policy (commonly known as a D&O Policy) to proceedings against a director, for the purpose of seeking a declaration as to whether the relevant policy responds to the Liquidator’s claims against the insured director, despite the failure of the insured director to challenge, join or cross claim against the insurer for its initial denial of indemnity.

Facts

The Liquidators of Akron Roads Pty Ltd (in liquidation) (Akron) commenced proceedings against various directors including Mr Crewe and Crewe Sharp Pty Ltd (Crew Sharpe) for breach of section 588G of the Corporations Act 2001 (Cth) for insolvent trading. Mr Crewe was a director of Crewe Sharpe and it was alleged Crewe Sharpe was a shadow director of Akron.   Mr Crewe and Crewe Sharp made a claim on an insurance policy of director and officers insurance held by Crewe Sharp which extended to Mr Crewe, but were denied indemnity by the insurer, CGU.

Crewe Sharpe was subsequently placed into creditors’ voluntary liquidation.  The financial position of Mr Crewe was not that he was bankrupt but that he would be unable to meet any judgment obtained by the Liquidators against him.

The Liquidators sought to join CGU to the proceedings to seek a declaration that CGU was liable to indemnify Mr Crewe and Crewe Sharp for breaches of the insolvent trading provisions of the Act.

The Issues

The insurer argued the Liquidators were strangers to the insurance policy and as no party to the policy had challenged the denial of indemnity, privity of contract prevented the Liquidators from bringing any claim.  The Liquidators argued that they had a sufficient interest in the proceeds of the policy.

The Liquidators relied upon the legal consequence created by section 562 of the Act which requires a Liquidator to pay an amount recovered under a contract of insurance to a third party to which it is liable and gave rise to the insurance claim.   Section 562 of the Act is analogous to section 117 of the Bankruptcy Act which provides that the right of a bankrupt under a policy of insurance vests in the trustee and imposes a similar obligation on the trustee to pay over such amounts recovered to third parties in respect of the bankrupt’s liability to them.  Although the director was not bankrupt in this case, his inability to meet any judgment was analogous to the position contained in section 117 of the Bankruptcy Act.

The Court’s view

The Court summarised the Liquidators argument to be at [67]

“…based upon the legal consequence created by s 562 of the Act in the event that CGU is liable to indemnify Crewe Sharp and, more contingently, s 117 of the Bankruptcy Act in the event that CGU is liable to indemnify Mr Crewe and he becomes a bankrupt.  That legal consequence would be the bringing into existence, in favour of the Akron liquidators, of a right to the proceeds of the insurance policy payable to Crewe Sharp in respect of its liability to Akron.  The interest upon which the claim for declaratory relief is based and CGU’s denial of liability under the policy are sufficient to constitute a justiciable controversy between the Akron liquidators and CGU involving a question arising under a law of the Commonwealth.  Because of these statutory provisions, it is the Akron liquidators who stand to benefit (to the exclusion of Crewe Sharp and Mr Crewe) from the making of the declaration sought.  It would be distinctly to ignore this reality if the liquidators’ interest in this regard could be defeated by reason of inaction on the part of Crewe Sharp and Mr Crewe against CGU given that the statutory provisions themselves deprive Crewe Sharp and Mr Crewe of all incentive to pursue a claim under the policy.”

The High Court accepted that generally an outsider has no standing to seek a declaration about the meaning and effect of a contract to which they are not a party but acknowledged that that depends on what is meant by ‘outsider’.  It went on to say 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. ”

Outcome

After the High Court approved the joining of insurer to the proceedings, the substantive proceedings were heard by the Victorian Supreme Court in April and May 2016 and the decision of the Court was handed down on 11 November 2016 in Re Akron Roads Pty Ltd (in liquidation) (No 3) [2016] VSC 657.  In its decision, the Court ultimately found the Liquidators had standing to seek the relief they claimed in respect of CGU in relation to Mr Crewe and the policy was engaged by the claim of the Liquidators.  The Liquidators failed to establish Crewe Sharp as a shadow director and therefore the CGU policy was not engaged in respect of Crewe Sharp.

Take away point

The High Court’s decision opens the door to Liquidators to join an insurer under a policy of director’s liability insurance to proceedings against a director for insolvent trading, where the relevant director is insolvent or a bankrupt and it can be shown the Liquidator has a real interest in the proceeds of the insurance policy. Certainly, Liquidators should now give careful consideration to whether any initial refusal of indemnity by an insurer under such a policy is liable to a successful challenge as a declaration that the relevant policy is in fact responsive to the Liquidator’s claim may unlock access to significant funds for the benefit of creditors.

For more information about the issues raised in the article, please contact ERA Legal.