In a decision which potentially increases the assets available to liquidator and bankruptcy trustee plaintiffs, the High Court in CGU Insurance v Blakeley1 has recently determined that plaintiffs may seek to join insurers to proceedings in circumstances where indemnity under the insurance contract is denied and the defendants to the primary claim are bankrupt or being wound up or likely to become so as a result of the claim.

The decision is of particular relevance to liquidators in bringing proceedings against directors in circumstances where the insurer under a professional indemnity policy has denied indemnity.

In this case the liquidators of Akron Roads Pty Ltd (In liq) (Akron) were entitled to join CGU Insurance Limited (CGU) to insolvent trading proceedings brought against Trevor Crewe and Crewe Sharp Pty Ltd (In Liq) (Crewe Sharp) in circumstances where CGU had denied indemnity under the relevant policy. The liquidators were entitled to seek a declaration that CGU was liable to indemnify Mr Crew and Crewe Sharp under the policy.

Key Messages

This decision is likely to encourage liquidators and other claimants to join insurers to proceedings where the defendants are insolvent or likely to become insolvent if the claim is successful and the insurer has denied indemnity.

Further, the decision gives insurers an incentive to actively engage in the process of deciding whether to indemnify from an early stage given the increased likelihood of joinder to proceedings.

The decision may also increase the regularity of claimants seeking disclosure of insurance contracts at an early stage of proceedings.

Background

The liquidators of Akron commenced Supreme Court insolvent trading proceedings under s588M(2) of the Corporations Act 2001(Cth) (Act) against Mr Crewe and Crewe Sharp. Mr Crewe was both a former director of Akron and a director of Crewe Sharp. Crewe Sharp provided consultancy services to Akron. The liquidators alleged that Crewe Sharp was a director of Akron under the extended definition under s9 of the Corporations Act 2001 (Cth) (Act).

In response, Crewe Sharp sought indemnity under the professional indemnity policy that Crewe Sharp held with CGU. Mr Crewe was an insured under the policy. CGU denied indemnity under the policy.

Crewe Sharp entered into a creditors’ voluntary liquidation and its liquidators informed Akron’s liquidators that it was unlikely to defend the insolvent trading claim. Mr Crewe was not a bankrupt, but he did not have sufficient assets to meet a successful insolvent trading claim.

Accordingly, Akron’s liquidators applied for an order that CGU be joined as a defendant to the proceeding and sought to amend its claim to seek a declaration that CGU was liable to indemnify Mr Crewe and Crewe Sharp under the policy.

The liquidators’ position was that s562 of the Act provided the support for the joinder.

In summary, s562(1) provides that:

  1. where a company is, under a contract of insurance, insured against liability to third parties;
  2. if such a liability is incurred by the company; and
  3. an amount in respect of that liability is received by the company or the liquidator from the insurer

the amount must, after deducting relevant expenses, be paid by the liquidator to the third party in respect of whom the liability was incurred to the extent necessary to discharge the liability.

An analogous provision is found at s117 of the Bankruptcy Act 1966 (Cth).

The trial judge and Court of Appeal found that the liquidators of Akron were entitled to join the insurers to the proceedings and seek a declaration that CGU was liable to indemnify Mr Crewe and Crewe Sharp.

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Issue on appeal

The issue on appeal was whether there was a ‘justiciable controversy’ between Akron’s liquidators and CGU to enable the Court to determine whether the declaration sought by the liquidators should be made. To exercise judicial power of the Commonwealth a court is required to determine a dispute that is ‘concrete’ or of an ‘adequate adversarial nature’ as opposed to, for instance, giving a purely advisory opinion or answering a hypothetical question.2

Decision

The Court found that CGU’s denial of liability under their policy constituted a justiciable controversy between Akron’s Liquidators and CGU. By reason of CGU’s denial of indemnity and the legal consequence of s562 of the Act and s117 of the Bankruptcy Act the liquidators had sufficient interest in the determination of the question as to whether CGU was entitled to deny indemnity – the interest being that, if CGU was required to indemnify the defendants, the liquidator of Crewe Sharp and the bankruptcy trustee of Mr Crewe would be required to pay the insurance monies to the liquidators of Akron in the event of a successful insolvent trading claim.

This conclusion was reached despite the liquidators of Akron having no substantive right directly against CGU and there being no privity of contract between the liquidators of Akron and CGU.

This article was written with the assistance of Grace Pisano, Graduate Lawyer.