A recent decision of the High Court has ended an insurer’s fight to avoid being joined to insolvent trading proceedings. This decision confirms the ability of liquidators to directly pursue proceeds of insurance policies held by insolvent insured defendant directors and has important ramifications for insolvency practitioners as well as insurers and litigation funders.

Summary

CGU Insurance Limited v Blakeley & Ors [2016] HCA 2 has opened the door for liquidators to join third party professional liability insurers to insolvent trading proceedings where a director is prima facie indemnified under a relevant policy, without offending the privity of the insurance contract. Once joined, the insurer is entitled to raise any dispute in respect of its obligation to indemnify in the substantive proceedings.

This decision highlights a further potential source of funds available to liquidators and is particularly relevant in circumstances where the director being pursued is or may be bankrupt or an insolvent corporation. Indeed, the decision may prompt a liquidator who has a substantial claim against directors who are covered by a considerable D&O insurance policy to seek to join the insurer at a formative stage of proceedings, particularly in circumstances where it is apparent that the directors will be unable to satisfy a judgment.

Background

The first respondents were appointed liquidators (the Liquidators) in the winding up of Akron Roads Pty Limited (Akron). The Liquidators commenced proceedings against various Akron directors in 2013 (the Proceedings) for breaches of the s588G insolvent trading provisions and sought orders for compensation under s588M(2) of the Corporations Act 2001 (Cth) (the Act).

Amongst those directors were Trevor Crewe (Mr Crewe) and Crewe Sharp Pty Limited (Crewe Sharp), a company of which Mr Crewe was a director and which the Liquidators alleged was a shadow director of Akron.

Mr Crewe and Crewe Sharp made a claim on a professional indemnity policy held by Crewe Sharp with CGU (the Policy) and CGU denied indemnity.

Defendant directors’ ability to meet judgment or costs orders

In June 2014, Crewe Sharp was placed in a creditors’ voluntary liquidation (in which its liquidators were unfunded) and whilst Mr Crewe had not been declared bankrupt, it appeared unlikely that he could repay the sum sought by the Liquidators.

Neither Mr Crewe nor Crewe Sharp cross-claimed against CGU, sought to join CGU to the Proceedings or otherwise formally challenged its denial of indemnity under the Policy. However, Mr Crewe disagreed with CGU’s denial of indemnity and consented to the Liquidators’ joinder application.

Orders sought by the Liquidators:

In August 2014, during the interlocutory stages of the Proceedings, the Liquidators sought:

  1. an Order pursuant to Rule 9.06(b) of the Supreme Court (General Civil Procedure) Rules 2005 (Vic) that CGU be joined to the Proceedings as a defendant; and
  2. leave of the Court to amend the claim to seek a declaration that CGU was liable to indemnify Mr Crewe and Crewe Sharp under the Policy in respect of any judgment and consequent costs order made against them.

The Liquidators submitted that they had a sufficient interest in the determination of CGU’s liability on the grounds of s562 of the Act, which when applied to the circumstances of the Proceedings, provided that as a third party, the Liquidators were entitled to the proceeds of the Policy insofar as it related to the liability arising as against Crewe Sharp. The Liquidators also relied upon an analogous provision in s117 of the Bankruptcy Act 1966 (Cth) insofar as it related to any liability to be owed to the Liquidators by Mr Crewe as an insolvent party.

Decisions of the lower courts

At first instance, the Supreme Court of Victoria1 made the declaration and orders sought by the Liquidators, on the basis that in the particular circumstances of the Proceedings, the Liquidators had a sufficient interest in the proceeds of the Policy.

CGU sought leave to appeal2 on the grounds that the Liquidators were strangers to the Policy, in respect of which CGU’s denial of liability was unchallenged by any insured party. CGU’s application was dismissed on two grounds:

  1. the Liquidators had a “real interest” in the resolution of the insurance issue; and
  2. it would be akin to an abuse of process for any party to the Policy to re-litigate any questions dealt with in the Proceedings.

CGU’s appeal to the High Court

Special leave for CGU to appeal to the High Court was granted for determination of the following questions:

  1. whether the Supreme Court had jurisdiction to effect the joinder and grant declaratory relief, given that the Liquidators were not parties to the Policy and the insured parties had not challenged CGU’s denial of indemnity; and
  2. whether there was a justiciable controversy between CGU and the Liquidators in that there was no “matter” which enlivened federal jurisdiction.

CGU asserted any claim against it involved federal jurisdiction which state courts were unable to exercise.

The High Court’s decision

In February 2016, the High Court dismissed CGU’s appeal.

The plurality of the Court noted that:

  1. if the Liquidators both made out their claim against Mr Crewe and Crewe Sharp and successfully argued that CGU was liable to indemnify Mr Crewe and Crewe Sharp, the proceeds of the Policy would be payable to them pursuant to the operation of ss 562 of the Act and 117 of the Bankruptcy Act 1966 (Cth); and
  2. as a practical matter, as a result of those provisions, the Liquidators were the relevant parties who stood to benefit from the outcome of any findings of liability of CGU to Mr Crewe and Crewe Sharp; and
  3. it was this interest together with CGU’s unchallenged denial of liability under the Policy which conveyed a “sufficient” interest to constitute a justiciable controversy between the Liquidators and CGU pursuant to which the declaration was granted to join CGU to the Proceedings.

The High Court thus held that the Supreme Court had the requisite jurisdiction and had not erred in granting the declaration. CGU’s appeal was dismissed with costs.

Summary of key take-away points

  • Where a liquidator has commenced proceedings against an insolvent or bankrupt director or shadow director under the insolvent trading provisions of the Act, the court may allow the joinder of the director’s insurer to the proceedings where, first, the liquidator can show that there is a real interest in the proceeds of the insurance policy and, secondly, that there is practical utility in the joinder.
  • Subject to any order by the relevant court upholding an insurer’s denial of indemnity under the applicable insurance policy, the joinder of the director’s insurer may facilitate a direct claim by a liquidator of an insolvent director to the proceeds payable by the insurer to the insured insolvent defendants under the insurance policy. Indeed, the CGU decision arguably represents an encouragement for a liquidator who has a substantial D&O claim against a director who is insured under a D&O insurance policy but lacks the assets to satisfy a judgment, to join the insurer at a formative stage of the proceeding.
  • Liquidators will avoid the need for a multiplicity of proceedings prior to recovering a judgment debt from an insolvent director. In turn, we expect this will naturally reduce the costs involved in that recovery and consequently increase the funds available for distribution to creditors in the liquidation.
  • More broadly, the outcome of this judgment may in some instances serve to assist unfunded liquidators in securing funding from third-party funders to pursue insolvent trading claims against directors of an insolvent company, where the proceedings may otherwise have not been attractive from a risk/reward perspective.