Important Features of this Judgment
- A Pt X Deed may create an equitable assignment of the rights, such that obligations continue after the Deed has come to an end.
- The Trustee of the Part X Deed of Arrangement can continue the proceedings initiated against One.Tel, despite the Deed coming to an end.
- Serves as a reminder that the enforceability of the debt does notaffect a debtor’s liability.
Following the collapse of One.Tel, on 12 December 2001 the Australian Securities and Investments Commission (ASIC) initiated proceedings against Mr John Greaves, a former director of One.Tel. On 4 September 2004, orders were entered by consent that Mr Greaves pay $20 million in compensation to One. Tel and $350,000 to ASIC. Subsequently, Mr Greaves entered into a Pt X of the Bankruptcy Act 1966 (Cth) Deed of Arrangement (the Deed). The Deed relevantly provided:
- Mr Greaves agreed to assign to the Trustee of the Deed his rights under Directors and Officers’ Policy (D&O Policy) he held with CGU.
- The Trustee would apply any amount received under the D&O Policy to ASIC and One.Tel in discharge of Mr Greaves’ liabilities.
- Upon receiving judgment or settlement in respect the D&O Policy, the Trustee would execute a certificate (Clause 9 Certificate).
- Upon the execution of a Clause 9 Certificate, Mr Greaves would be absolutely released and discharged from liability in respect of the orders of 4 September 2004.
- Prior to the execution of a Clause 9 Certificate, the Trustee and creditors would not seek to enforce the 4 September 2004 orders.
Pursuant to the Deed, the Trustee gave CGU notice of the assignment, and commenced proceedings to pursue Mr Greaves’ cause of action in respect of the $20 million compensation order (the Supreme Court Proceedings). On 30 November 2007 the Deed terminated.
The questions that lay at the heart of the appeal were whether the Trustee was entitled to continue the Supreme Court Proceedings, despite the fact the Deed had come to an end, and whether a “loss” (as defined by D&O Policy) existed for which CGU could be liable.
The High Court Judgment
The High Court held that the Trustee was entitled to continue the Supreme Court Proceedings. The Deed created an equitable interest in Mr Greaves’ rights in the D&O Policy in favour of the Trustee, who in turn, held those rights on trust for the benefit of the beneficiaries. In fact, the judgment stated that because it held that interest on trust, the Trustee was duty bound to get in and realise the value of the equitable interest, namely, to continue the Supreme Court Proceedings.
CGU submitted that clause 11 of the Deed continued to operate after the termination of the Deed and prevented the Trustee and creditors from enforcing the $20 million compensation order against Mr Greaves. Accordingly it argued that there was no “loss” to indemnify. Ultimately, the High Court held that on proper construction of the clause, it did not operate after termination of the Deed. It also stated that even if the clause continued after termination, a “loss” would exist. The D&O Policy defined “Loss” as “the amount payable in respect of a claim made against” Mr Greaves and included judgments and settlements. The clause acted to bar recovery of the monies owed by Mr Greaves, but did not release him from liability for those debts. Accordingly, the Court held the $20 million sought in the Supreme Court Proceedings was a “loss”, because it is “an amount which Mr Greaves is legally liable to pay”. Liability and other’s ability to enforce payment are not the same.
The High Court’s judgment relied heavily on the specific wording of the Deed. In relation to submission regarding the operation of the Bankruptcy Act, the High Court stated:
It is not necessary to deal with these arguments. Indeed, in view of the fact that the form of Pt X now is very different from the form to which the parties’ arguments were addressed, it is undesirable to do so.
Nonetheless the judgment is significant as it highlights what can be achieved under Pt X Deeds.