In a decision handed down on 11 February 2016, the High Court has confirmed that the State Supreme Courts have jurisdiction to grant relief to plaintiffs seeking to join insurers of insolvent or potentially insolvent defendants, and a declaration that the insurer is liable to indemnify the defendant. 

Introduction

The liquidators of Akron Roads Pty Ltd (Akron Roads) commenced proceedings against the company’s former directors, alleging that they breached s588G(2) of the Corporations Act 2001 (Cth) (the Act) by failing to prevent Akron Roads from incurring debts while insolvent.

The directors made a claim under their CGU professional indemnity insurance policies, however CGU refused to indemnify them, contending that the liability claimed fell within an exclusion contained in the policy.

During the interlocutory stages of the proceeding, the liquidators applied to join the insurer as a defendant and for leave to amend their points of claim seeking a declaration that CGU was liable to indemnify the directors. 

Supreme Court of Victoria & Court of Appeal

The liquidators relied on s562 of the Act, and s117 of the Bankruptcy Act 1966 (Cth), in contending that they had a sufficient interest in the determination of CGU’s liability to support their claim for a declaration and joinder of the insurer.

CGU opposed joinder on the basis that:

  • there was no claim against CGU by its insured, and therefore there was no justiciable controversy;
  • the liquidator’s interest was hypothetical and contingent upon an insured successfully enforcing a right, and s562 of the Act does not confer on a liquidator a right of action against an insurer to enforce insurance policies; and
  • the Court had no jurisdiction under s36 of the Supreme Court Act 1986 (Vic) to grant the declaratory relief sought and, if it did have jurisdiction, it should decline to do so in the exercise of discretion.

At first instance, Judd J held that the liquidators had a sufficient interest in the insurance proceeds to provide them with standing to apply for declaratory relief, and that by reason of s562 of the Act and the liquidators’ duties to the creditors of Akron Roads, there was a justiciable dispute consequent upon CGU’s denial of liability under the policy. Judd J also referred to it being “just and convenient that the dispute between the plaintiffs and CGU be resolved at the same time, and in the same proceeding, as the dispute between the plaintiffs and the insured."1

CGU unsuccessfully sought leave to appeal to the Court of Appeal of the Supreme Court of Victoria.

High Court

CGU was granted special leave to appeal to the High Court. The issue for the High Court in relation to the joinder was framed as a jurisdictional one, and the High Court was required to consider whether the Supreme Court had jurisdiction to consider the liquidators’ claim for joinder and declaratory relief.

The High Court, in two separate judgments, dismissed CGU’s appeal, and held that:

  • the interest upon which the claim for declaratory relief was based and CGU’s denial of liability under the policy were sufficient to constitute a justiciable controversy between the liquidators and CGU involving a question arising within federal jurisdiction; and
  • the lack of privity of contract between the liquidators and CGU did not defeat the liquidators’ claim, as it was based instead upon the legal consequence created by s562 of the Act (and s117 of the Bankruptcy Act, should one of the directors become bankrupt), under which they stood to benefit from the making of the declaration sought.

Implications

This decision has provided clarity for liquidators in respect of their ability to join insurers to proceedings against insolvent or potentially insolvent insureds where the insurer has denied indemnity. 

This allows liquidators to better assess their recovery prospects and to have all relevant issues (including the insurers’ liability under the policy) determined in the one proceeding.