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Liquidators Lasso the Reluctant Insurer

On 11 February 2016 the High Court of Australia handed down its reasons in CGU Insurance Limited v Blakeley & Anors [2016] HCA 2 (“Blakeley”).

The decision of the High Court has resolved inconsistent rulings of State appeal courts. It has confirmed that a liquidator may apply to join the insurer of the defendants in insolvent trading proceedings in order to seek a declaration that the insurer is liable to indemnify the applicant pursuant to the terms of an insurance policy, even in circumstances where the insurer has previously denied such liability.

In reaching this conclusion, the High Court affirmed the South Australian Full Court judgment of JN Taylor Holdings Ltd (In Liquidation) v Bond (1993) 59 SASR 432.

Background

On 9 April 2013, the liquidators of Akron Roads Pty Ltd (“the Company”) commenced proceedings against three directors (including Mr Trevor Crewe) alleging they had allowed the Company to trade whilst insolvent. Pursuant to section 588M(2) of the Corporations Act 2001 (“the Act”), the liquidators sought payment from the directors and Crewe Sharp Pty Ltd (In Liquidation) (a consultancy company of which Mr Crewe was also a director) (“Crewe Sharp”) as a de facto director of an amount equal to the loss or damage suffered by the creditors of the Company.

Mr Crewe and Crewe Sharp were covered by the same Professional Indemnity Policy issued by CGU Insurance Ltd (“CGU”). CGU denied the claims made by both parties under the policy on the basis that the subject matter of the proceedings did not fall within the scope of the policy.

Approximately a year after proceedings commenced it came to the attention of the liquidators that Crewe Sharp had entered into creditors’ voluntary liquidation and that Mr Crewe had insufficient finances to pay the liquidators if their claim was successful. Both Mr Crewe and Crewe Sharp cited lack of finances as a significant reason why they did not challenge or investigate CGU’s denial of indemnity further.

In light of these circumstances, the liquidators sought to join CGU to the proceedings (without any disagreement on the part of Mr Crewe or the liquidators of Crewe Sharp). The liquidators submitted that CGU was liable to indemnify Mr Crewe and Crewe Sharp in the proceedings for an amount of up to $5,000,000 under the policy, and as that sum would be payable to the liquidators pursuant to section 562 of the Act, that CGU had a sufficient interest to be joined as a third party to the proceedings.

Discussion

Chief Justice French, together with Kiefel, Bell and Keane JJ (with Nettle J writing separate concurring reasons) unanimously held that the appeal from the Victorian Court of Appeal be dismissed and that CGU be joined to the proceedings, on the basis that declaratory relief of the nature claimed could be sought.

The High Court resolved the differences between two lines of case law which stemmed from the South Australian Full Court and Queensland Court of Appeal as to whether an insurer has the requisite interest to allow it to be joined to recovery proceedings by a liquidator plaintiff.

In JN Taylor Holdings Ltd (In Liquidation) v Bond (1993) 59 SASR 432, Chief Justice King (with Prior and Perry JJ agreeing) found that if the liquidator had what was considered to be a real interest in the determination of the question raised by the declaration sought (even if the impact on the plaintiff is “no more than a possibility”) then the Supreme Court would have jurisdiction to join the insurer and to make a declaration as to the question of indemnity.

By contrast in Interchase Corporation Ltd (In Liquidation) v FAI General Insurance Co Ltd [2000] 2 Qd R 301, McPherson JA and Byrnes J (with Davies JA dissenting) held that the Court did not have jurisdiction to join the insurer and make declaratory relief as sought by the liquidator. The majority were of the view that joining the insurer would serve “no utility” as the declaration would not determine the insurer’s rights or duties, nor would such a declaration affect the assets or legal rights or obligations of the liquidator. Accordingly, the joining of the insurer would not assist the Court in “effectively and completely…adjudicate upon and settle all the questions” raised in the proceedings (as required by the Court rules).

The High Court’s Decision

In Blakeley, the High Court affirmed the approach taken by the South Australian Full Court in JN Taylor, namely that the insurer did have the requisite interest in the proceedings to assist the Court in adjudicating upon the matters before it.

The majority went on to state that it would “be distinctly something” to ignore the absurdity that would result if the insurer was not to be joined, such that the liquidator’s interest could be defeated simply because the defendants did not have sufficient finances to review or investigate their insurance policy further.

Conclusion

The Blakeley case provides guidance to liquidators in recovery actions as it confirms they can seek to join a party’s insurer in situations where cover under the professional indemnity policy is denied.

In light of this case, insolvency practitioners should take steps to familiarise themselves with the status of any insurance policies held and claims made by directors of companies in order to ascertain whether it is appropriate for the insurer to be joined to any proceedings which may ultimately need to be brought.

Cowell Clarke has significant expertise and experience in all aspects of corporate insolvency law. If you need any assistance concerning any insolvency related queries, do not hesitate to contact us.

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