Litigation involving directors of the Bridgecorp group and QBE is still on foot. Directors of the failed Bridgecorp group have claimed indemnity from QBE in respect of their defence costs. At first instance, the directors were unsuccessful (Steigrad v BFSL 2007 Ltd [2011] NZHC 1037). An appeal by one of the directors - Steigrad - was successful (Steigrad v BFSL 2007 Ltd [2012] NZCA 604 ). The Supreme Court of New Zealand has granted leave to appeal this decision.

At the centre of this litigation is the statutory charge provisions found in the Law Reform Act 1936 (NZ) s 9. Similar legislation exists in NSW, ACT and NT. The legislation does two things. It throws a “net” over certain moneys that are or may be payable under an insurance policy. It also permits certain third parties (subject, in some cases, to obtaining the leave of the court) to recover those moneys by proceedings against an insurer in the same way as they might have proceeded against the insured. In this way, the provisions protect third parties who might be unable to recover from an insured, and prevent insurance moneys from being distributed to other creditors of the insured.

Where a statutory charge is said to have arisen, three questions need to be answered:

  1. who falls under the net (who benefits from the charge);
  2. what falls under the net (to what moneys does the charge attach); and
  3. when the net falls.

The decisions of the High Court of New Zealand and the Court of Appeal of New Zealand have turned on questions (a) and (b), respectively. Question (c) has not arisen, but has been considered in Perpetual Trustees Victoria Ltd v Malouf [2012] NSWSC 1119 (see here) and Genworth Financial Mortgage Insurance Pty Ltd v KCRAM Pty Ltd (in liq) (No 2) [2011] FCA 1124 (see here).

This note summarises the findings of the High Court and the Court of Appeal in the Steigrad litigation, and suggests an alternative application of the statutory charge to the matters in dispute.

High Court decision (who’s under the net)

Steigrad and other directors of the Bridgecorp group sought access to moneys they claimed were payable to them under a D&O policy in respect of their legal costs. The court held that a statutory charge had attached to the moneys in question for the benefit of Bridgecorp investors who had signalled their intention to bring proceedings against the directors. In effect, the High Court concluded that the net fell over the Bridgecorp investors, and not the Bridgecorp directors. The directors, being outside the net, could not benefit from the charge, and so could not access the moneys.

Court of Appeal decision (what’s under the net)

The Court of Appeal focused on what, rather than who, fell under the net. It concluded that the statutory charge did not extend to that part of the moneys which were available under the policy to indemnify Steigrad in respect of his defence costs. In other words, the Court of Appeal concluded that the net fell only over the policy proceeds after carving out the amount to which Steigrad was entitled to be indemnified in respect of his defence costs. The Court adopted a construction of s 9 that read “liability to pay any damages or compensation” as limited to:

“recompense for loss suffered by Bridgecorp for which Mr Steigrad is liable: (a) as awarded by a final decision in the civil proceeding; (b) as an arbitral award; or (c) as agreed between those parties” (at [25]).

This meant that the charge did not prevent Steigrad accessing those funds, and that he was entitled to be advanced his reasonable defence costs in accordance with the terms of the policy. In coming to this conclusion, the court stated that the application of the statutory charge could not operate “to interfere with or suspend the performance of mutual contractual rights and obligations” (at [36]) and that “the purpose of s 9 is not to rewrite the bargain struck between the parties” (at [38]).

Analysis

In an earlier note we suggested that, like the Bridgecorp investors, the Bridgecorp directors also fell under the net. To the extent that the policy indemnified the Bridgecorp companies against payments made to Bridgecorp directors in respect of defence costs, those directors were third parties who, like the Bridgecorp directors, were entitled to the benefit of the statutory charge.

The effect of the Court of Appeal’s decision was to accept that the Bridgecorp directors were outside the net, but that this did not matter because the net did not cover that part of the moneys that they were entitled to claim in respect of their defence costs.

With respect, it is not clear how such a construction can be supported. There is no warrant for adopting a narrow construction of “liability to pay any damages or compensation” which includes loss suffered by Bridgecorp for which Steigrad was liable, but excludes defence costs paid by Steigrad for which Bridgecorp was liable. Both types of loss are contemplated by s 9. In National Mutual Fire Insurance Co Ltd v Commonwealth [1981] 1 NSWLR 400 (see here) the New South Wales Court of Appeal considered the scope of the phrase “liability to pay any damages or compensation” in the NSW equivalent of s 9, and concluded that it referred to a person’s overall liability, including their liability to pay contribution to another wrongdoer. The Court found that the phrase “should be treated as a comprehensive term which includes not only his primary liability to the injured party but also his secondary liability to other tortfeasors” (at [407]).

Rather than being only for the benefit of those who might claim against the directors, the charge, on its face, also benefits the directors who are entitled to be indemnified in respect of their costs in defending the proceedings. While the policy may, as the Court of Appeal in Steigrad observed at [23], distinguish between losses recoverable by Bridgecorp investors and Steigrad’s defence costs, it does not follow that the charge does.

The suggestion that a statutory provision cannot “interfere with contractual relations”, and that the scope of the statutory charge should be read down so as to accommodate a contractual right, is curious. If anything, the charge, imposed by statute and giving rise to a proprietary interest, must prevail over private contractual rights and interests, particularly where the statute is remedial in nature.

An alternative approach to that taken in the High Court and Court of Appeal would recognise the following:

  1. Who falls under the net? The charge benefits anyone with a claim against a person who is “indemnified against liability to pay any damages or compensation” under the D&O policy. This includes not only the Bridgecorp investors who are proceeding against the Bridgecorp directors, but also the Bridgecorp directors in so far as they are entitled to be indemnified by the Bridgecorp companies in respect of their defence costs. The Bridgecorp directors, like the Bridgecorp investors, are third parties, a matter that does not appear to have been considered in the litigation.

What is unclear is whether there is a single charge, which benefits both investors and directors, or two charges, one that benefits the Bridgecorp investors, and one that benefits the Bridgecorp directors. If there are two charges, the legislation provides that the charges “shall have priority between themselves in the order of the dates of the events out of which the liability arose, or, if such charges arise out of events happening on the same date, they shall rank equally between themselves” (see s 9(3), and similar provisions in other jurisdictions).

  1. What falls under the net? All insurance monies that are or may become payable in respect of the liability of the Bridgecorp directors and the Bridgecorp companies. This would include the liability of the Bridgecorp companies to indemnify the Bridgecorp directors in respect of their defence costs.

Conclusion

The conceptual difficulties surrounding the application of the statutory charge provisions in a modern context have been noted elsewhere: see eg Rein, NG Choosing your life raft: A review of Law Reform (Miscellaneous Provisions) Act 1946 (NSW), s 6, and its analogues (2007) 81 ALJ 180, Giles, RD Reflections on Section 6 (1996) 7 ILJ 1 and Drummond, SW and Mann, P Abolish Section 6 (1997) 8 ILJ 1. The Steigrad litigation illustrates some of these problems, complicated further by the practice of advancing reasonable defence costs before liability is established. Another feature of the litigation that may be complicating matters is the fact that the scope of the charge is being determined in the abstract, and not in the context of an application for leave to bring proceedings to enforce it, where the court has discretion to allow or refuse the application. Regardless of the eventual outcome, the litigation clearly demonstrates that reform or repeal of these provisions is overdue.