On August 4 2010 the High Court of Australia handed down judgment in CGU Insurance v One.Tel Ltd (in liq). This update reviews the decision and what it means for deeds of arrangement under Part X of the Bankruptcy Act 1966 (Cth). The judgment had a number of important features:
A Part X deed of arrangement 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 in this case could continue the proceedings initiated against One.Tel, despite the deed coming to an end.
The judgment serves as a reminder that the enforceability of a debt does not affect a debtor's liability.
Following the collapse of One.Tel, on December 12 2001 the Australian Securities and Investments Commission (ASIC) initiated proceedings against John Greaves, a former director of One.Tel. On September 4 2004 orders were entered by consent that Greaves should pay A$20 million in compensation to One.Tel and A$350,000 to ASIC. Subsequently, Greaves entered into a Part X deed of arrangement. The deed relevantly provided that:
Greaves agreed to assign to the trustee of the deed his rights under the directors and officers' (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 Greaves' liabilities;
upon receiving judgment or settlement in respect of the D&O policy, the trustee would execute a Clause 9 certificate;
upon execution of a Clause 9 certificate, Greaves would be absolutely released and discharged from liability in respect of the orders of September 4 2004; and
prior to execution of a Clause 9 certificate, the trustee and creditors would not seek to enforce the September 4 2004 orders.
Pursuant to the deed, the trustee gave CGU notice of the assignment and commenced proceedings in the Supreme Court to pursue Greaves' cause of action in respect of the A$20 million compensation order. On November 30 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 that the deed had come to an end; and
whether a 'loss' (as defined by the D&O policy) existed for which CGU could be liable.
The High Court held that the trustee was entitled to continue the Supreme Court proceedings. The deed created an equitable interest in 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 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 termination of the deed and prevented the trustee and creditors from enforcing the A$20 million compensation order against 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" Greaves, including judgments and settlements. The clause acted to bar recovery of the moneys owed by Greaves, but did not release him from liability for those debts. Accordingly, the court held that the A$20 million sought in the Supreme Court proceedings was a 'loss', because it was "an amount which Mr Greaves is legally liable to pay". Liability and others' 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 Part X deeds.
For further information on this topic please contact Amanda Banton or Anna MacFarlane at Piper Alderman by telephone (+61 2 9253 9999), fax (+61 2 9253 9900) or email (firstname.lastname@example.org or email@example.com).
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.