Liquidators of insolvent Australian companies often pursue directors of the failed company in recovery proceedings for the benefit of creditors. Following a High Court of Australia decision in April 2016, it is now clear that a liquidator can join liability insurers of defendant directors in such proceedings, even when the insurer has denied liability under a policy. The liquidator, even though not a party to the contract, may then seek a declaration in the same proceedings that the insurer is liable to indemnify the insured defendant.

Good news for insolvency practitioners and their funders

The decision is significant for Australian insolvency practitioners and also their funders (for instance, litigation funders). Joining the insurer as a defendant facilitates ready access to the company’s insurance policy ahead of other parties, allowing a liquidator to determine the value of a claim up-front and obtain a concurrent judgment against both the defendant director and the defendant insurer. Conversely, the decision is a tactical blow for insurers, who may be forced to defend liability on a policy as a part of the wider dispute about underlying policy coverage for a claim.

The lower court rules for the liquidators

In CGU Insurance Limited v Blakeley [2016] HCA 2, the liquidators of Akron Roads Pty Ltd commenced proceedings in the Supreme Court of Victoria against directors of Akron, including Trevor Crewe and an alleged de-facto director, Crewe Sharp Pty Ltd (in liq) (Crewe Sharp). The liquidators sought an order under section 588M(2) of the Corporations Act 2001 (Cth), claiming payment for loss and damage suffered by the creditors for “insolvent trading”. Crewe Sharp made a claim on a professional indemnity insurance policy for the liquidators’ claims, which the insurer denied on the basis of certain exclusions in the policy. Crewe Sharp then entered into voluntary liquidation, and Mr. Crewe did not have sufficient assets to cover the claim brought against him. The liquidators sought an order joining the insurer as a defendant in the proceedings pursuant to section 562 of the Corporations Act (providing for statutory priority to insurance proceeds for creditors whose claims on the insolvent estate activate the underlying policy), as well as a declaration that the insurer was required to indemnify Mr. Crewe and Crewe Sharp under the policy in respect of any judgment and costs order obtained against them in the proceedings. At first instance in the Supreme Court of Victoria, the primary judge made the orders sought, and the insurer’s appeal to the Court of Appeal was dismissed.

The High Court dismisses the insurer’s appeal

The High Court granted the insurer special leave to appeal from the decision of the Court of Appeal on the grounds that the Supreme Court lacked jurisdiction to join the insurer and hear the liquidators’ claim for declaratory relief. The questions on appeal were whether the liquidators’ claim against the insurer involved a justiciable controversy between the parties (which would create federal jurisdiction), and whether the federal jurisdiction authorised the Supreme Court to make a declaration that the insurer was liable to indemnify the defendants in circumstances where the liquidators were not a party to the insurance contract. In dismissing the appeal, the High Court held that that the liquidators were not claiming against the insurer as a party to the contract. Instead, their claim was based on the legal consequence of section 562 of the Corporations Act (and section 117 of the Bankruptcy Act 1996 (Cth), the counterpart provision for personal insolvency in Australia), which afforded the liquidators a right to the proceeds of the insurance policy payable to Crewe Sharp on account of its liability to Akron. That interest, and the insurer’s denial of liability, were sufficient to create a justiciable controversy between Akron and the insurer under federal law. Therefore, the High Court held that the Supreme Court had jurisdiction to entertain the liquidators’ claim against the insurer and power to grant the declaratory relief sought.