When a company is deregistered, it ceases to exist.[1] So what happens when a person has a genuine claim against that company but fails to commence proceedings before it is deregistered?

Section 601AG of the Corporations Act 2001 (Cth) (s 601AG) was inserted into the Corporations Act to “short cut” the need for a person (claimant) to reinstate a deregistered company and require its insurer to instead stand in its shoes.  The operation of these provisions provides the capacity, when utilised appropriately, to assist insolvency practitioners recover amounts from insurers that would have otherwise been payable under the insurance contract without the expenditure of time and cost of reinstating a deregistered company.

This article looks at problems in the operation of s 601AG and how this affects recoveries and possible areas for reform to improve its operation.

  1. SECTION 601AG GENERALLY

Section 601AG creates a new cause of action allowing a claimant to recover directly from the insurer an amount that would have been payable by the company,[2] provided that immediately before deregistration[3] the following two conditions are met:

  1. the deregistered “had a liability” to the claimant; and
  2. the company’s insurance contract covered that liability;

Section 601AG short cuts the need to reinstate the company, with the associated time and costs and enables the claimant (as the ultimate recipient) to pursue the insurer directly.[4]

It puts the insurer in the shoes of the company to the extent it relates to the underlying causes of action the claimant had against the company, [5] as well as putting the claimant in the company’s position to the extent it relates to the insurance contract.[6]

  1. INTERACTION BETWEEN SECTION 601AG AND SECTION 601AH

Section 601AH of the Corporations Act (s 601AH), allows “a person aggrieved by the deregistration” of a company to apply for the reinstatement of its registration.[7] If the Court is satisfied it is ‘just’ that the company’s registration be reinstated, it can make such an order[8] and other associated orders.[9]

Sections 601AG and 601AH need to be read together as s 601AH provides the wider remedy and s 601AG “is the narrower provision which obviates the need to use s 601AH to the extent of its operation”.[10]However, s 601AG does not completely obviate any need to seek reinstatement” of a deregistered company.[11] This will depend on the availability and worth of the s 601AG cause of action.[12]

If it was clear that where s 601AG applies, the reinstatement of the company under section 601AH would put the claimant in no better position than that provided by s 601AG and the claimant would not be a “person aggrieved by the deregistration” as required by s 601AH.[13]

If, however, the only means of redress is an action against the company itself, that would be sufficient for the claimant to be a “person aggrieved by the deregistration”of the company. This was the case in Stone as:

  1. the claimant was not able to establish the existence of the company’s insurance contract or its terms;
  2. it was not clear that the claimant’s original cause of action against the company had accrued before its deregistration; and
  3. there were concerns as to the worth of the s 601AG cause of action against the insurer as the insurer was itself in liquidation.[14]

But what if a claimant has a properly instituted s 601AG proceeding and the company is subsequently reinstated under s 601AH, but before the Court has made a final determination on the claimant’s s 601AG claim? Is the s 601AG cause of action lost upon reinstatement, thereby entitling the insurer to the summary dismissal of the claim? That was the insurer’s position in Langridge v Insurance Commission of Western Australia.[15]

However, Barker J held the plaintiff had an accrued cause of action under section 601AG and was entitled to maintain it against the Insurer, despite the reinstatement of the company. [16]

  1. THE OPERATION OF SECTION 601AG

3.1 THE FIRST CONDITION – “THE COMPANY HAD A LIABILITY”

The first condition for the application of s 601AG is that “the company had a liability” to the claimant.[17] This condition raises the question as to what is meant by the term “liability”.

There are two types of liability to be considered. The first is the primary liability of a company. In Hutchinson v ASIC,[18] it was held that the relevant liability was one where the claimant had “a fully-constituted cause of action against the company”. Not in the sense that it was “certain to succeed” or “one to which there was no defence”. Rather, in the sense that it could succeed in default of a defence being filed.[19] However, if the company had a defence available to the underlying claim, that defence is a matter that went “directly to the existence and quantum of the “liability””,[20] and could be raised by the insurer in defence of a claim under s 601AG .[21] 

The other type of liability is the company’s secondary liability, which is the liability to a claimant who is a joint tortfeasor who is claiming contribution under a provision like s 6 of the Law Reform Act 1995 (Qld) (LRA). It has been held that such a cause of action does not accrue until judgment has been obtained by a plaintiff against a defendant.[22] 

The lead case on the secondary liability of a company is Tzaidas.[23] In that case, the insurer argued that as no primary liability had yet been established by the plaintiffs against either of the two defendants, it followed that the company defendant could not have “had a liability” under s 601AG immediately before its deregistration.[24] 

McCallum J held that, to the extent Suncorp Metway was authority for the proposition that “the term “liability” in s 601AG [was] confined to a liability that was ascertained, crystallised or determined immediately before deregistration”, it was wrong and she was not required to follow it.[25] Her Honour held that “liability” for the purpose of s 601AG included a company’s “secondary liability” for contribution to a joint tortfeasor. All that needed to be proved was that the company was a joint tortfeasor immediately before deregistration.[26] That a plaintiff had not obtained judgment against one of the defendants did not prevent recovery under s 601AG.[27]

3.2 THE SECOND CONDITION – “THE INSURANCE CONTRACT COVERED THAT LIABILITY”

The second condition is that the insurance contract covered the liability immediately before deregistration.

There are two types of insurance policies, occurrence-based policies and claims made (or claims made and notified) policies. Occurrence-based policies are generally easier to deal with because the cover they provide is activated as soon as the specific occurrence covered has occurred, subject to any exclusion/s that apply under that policy.

More difficulty arises in regard to claims made policies. This is because, although a cause of action to which the policy may respond has accrued, cover under that policy will not be triggered until a claim is made against the insured and (in most cases) notified to the insurer during the period of insurance. As a claim may not be made until several years after the cause of action accrues, this can cause significant problems for the claimant in bringing a claim under s 601AG.

The first problem is when the claimant fails to make a claim against the company during the period of insurance. If no claim was made during that period, the policy will not cover it,[28] unless the company had notified the insurer of known facts or circumstances that could give rise to a claim under the insurance contract. Had it done so s 40(3) of the ICA (s 40(3)) would extend cover to a claim that arose out of those facts or circumstance made after the expiry of the policy.

There have been no cases where it has been held that a claimant could rely on s 40(3) in bringing a claim against an insurer under s 601AG. But the comments of Beech-Jones J in Smart  suggest this is possible.[29]  

But what happens if the company failed to notify the insurer of those facts or circumstances, or otherwise provided notification of a claim actually made by the claimant?

Section 54(1) and (2) relevantly provide that where an insurance contract would have enabled the insurer to refuse to pay a claim, either in whole or in part, because of an act of the insured or some other person, that occurred after the contract was entered into (but not an act that caused or contributed to the loss) the insurer may not refuse to pay the claim by reason only of that act. The insurer’s liability is simply reduced by the amount representing any prejudice it suffered because of the act.

When it comes to the failure to notify of an actual claim, on the assumption that the position of Beech-Jones J in Smart is correct, the claimant would be able to rely on s 54 to extend cover under the policy.[30] 

The same cannot be said if the claimant only had s 40(3) to rely on. It has been held that s 54 does not apply to a failure to notify of facts or circumstances under s 40(3).[31] Therefore, the insurance contract would not respond and the claimant would not be able to satisfy the second condition in s 601AG.

If a claimant can get past the above, it will still have to contend with the other wording of the insurance contract. The liability must come within the insuring clause and not otherwise be excluded by one of the exclusions. [32]

3.3 INSURED VS THIRD PARTY BENEFICIARY

Section 601AG allows a claimant to make a claim directly against “the insurer of a company that is deregistered”. But what if the company is not an insured under an insurance contract, but a third party beneficiary instead.

Section 11 of the ICA defines a “third party beneficiary” to mean:

a person who is not a party to the contract but is specified or referred to in the contract, whether by name or otherwise, as a person to whom the benefit of the insurance cover provided by the contract extends.

Section 48 of the ICA (s 48) gives a third party beneficiary a right to recover under the insurance contract even though they are not a party to the contract and they are essentially placed into the same position as an insured.[33] 

These sections are relevant to a consideration of s 601AG because s 51 of the ICA (s 51) is similar in operation to s 601AG.

Originally s 51 applied to allow a claim directly against the insurer where the insured had died or could not, after reasonable inquiry, be found. It had been held that s 51 only applied to the named insured and did not extend to third party beneficiaries under s 48.[34] Section 51 was subsequently amended to also apply to third party beneficiaries.[35] 

There have been no cases that have determined whether s 601AG is limited in operation to insureds under an insurance contract like the original wording of s 51 or whether a broader operation applies to allow a claimant to make a claim against the insurer when it is a third party beneficiary. But in Smart v AAI Ltd,[36]Beech-Jones J said that there are a number of reasons that this approach should be adopted[37] 

It is supported by the text of s 601AG. In particular the phrases “payable to the company under the insurance contract” and “covered that liability” are apt to include such modification of the insurer’s rights under the contract as may have occurred by reason of the operation of the Insurance Contracts Act. Further, it is consistent with the purpose of s 601AG as discussed in Almario. If the plaintiff in an action under s 601AG is precluded from invoking provisions of the Insurance Contracts Act then they will be forced to re-register the company so it can invoke them.

The issue in the case of a s 601AG cause of action is whether the amount payable for the  liability was payable “under the insurance contract” as required by s 601AG if it is only s 48 that entitles the company to that amount. This is because it is a statutory provision, not the insurance contract, under which the amount is payable. Arguably, this would prevent the claimant from relying on s 601AG and would have to reinstate the company’s registration under s 601AH. However, this would defeat the purpose of s 601AG and is inconsistent with the comments of Beech-Jones J in Smart. Uncertainty will remain until a determination of a Court is made or Parliament amends the statutory provision.

3.4 LIMITATION PERIOD

If the limitation period of the underlying claim against the company has expired (and was not able to be extended) prior to the company being deregistered, then the first limb of s 601AG will not be met as the company no longer “had a liability” to the claimant immediately before deregistration. But what happens when the limitation period has not expired when the company is deregistered?

Although s 601AG creates a new cause of action it does not contain a limitation period within which a proceeding must be brought.

It was held by Porter J in Allianz Australia Insurance Ltd v Mercer,[38] that the new cause of action created by s 601AG is governed by the limitation period of the underlying cause of action so that the s 601AG cause of action is a continuation of that existing cause of action and is subject to the unexpired limitation period.[39] 

What then happens if the limitation period expires after the company is deregistered, but before the claimant can bring a claim under s 601AG against the insurer. The claimant cannot rely on s 601AG, but may still be able to apply to reinstate the registration of the company under s 601AH(1) with an order under s 601AH(3)(d) that the period after deregistration does not count for limitation purposes.[40]

  1. POSSIBLE AREAS FOR REFORM

Given the issues that have arisen and the continuing untested areas of the application of the law amendments could be made to improve the current operation of s 601AG to  confirm that:

  1. s 601AG applied to companies who were third party beneficiaries to an insurance contract as defined in the ICA; and
  2. claimants in a s 601AG cause of action could rely on provisions of the ICA that would have otherwise been available to the company had it not been deregistered.

These amendments could be made to s 601AG itself, or s 51 of the ICA could be amended to covered deregistered companies and to include the above proposed amendments. If the later were to occur, s 601AG may have to be repealed.

While this may appear somewhat harsh to an insurer since its insured no longer exists, the claimant still needs to be able to satisfy two rather strict and difficult to satisfy conditions to be able to establish that it has a claim under s 601AG.

The amendments suggested to clarify its operation, particular in regard to its interaction with the ICA, where its operation is yet to be determined by a court would assist where the prospect of the public waiting for most likely an insolvency practitioner with sufficient funds to run a test case against a well funded insurer may result in a long wait.

In the interim recourse to s 601AG is available subject to practicalities such as having sufficient information to determine if a possible claimant would meet the established test in each set of specific circumstances as they arise.