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High Court confirms liquidators may apply to join a Director's Insurer where indemnity is denied

Caseflash 16 February 2016

On 11 February 2016, the High Court delivered judgment in CGU Insurance Limited v Blakeley.

The High Court decision brings to an end a fight by CGU to prevent the liquidators of Akron Roads Pty Limited (in liquidation) (Akron) joining CGU as a defendant to insolvent trading proceedings against the former directors of Akron.

Background

On 9 April 2013, the liquidators of Akron commenced proceedings in the Supreme Court against the former directors and (relying on the extended definition of “director” in section 9 of the Corporations Act) Crewe Sharp Pty Limited (in liquidation) (Crewe Sharp).

The liquidators sought an order under section 588M(2) of the Corporations Act that the directors and Crewe Sharp pay to them, as a debt due to Akron, an amount equal to the amount of loss or damage suffered by creditors of Akron in relation to debts owed by Akron because of its insolvency.

On 4 December 2013, Crewe Sharp made a claim on a professional indemnity policy with CGU for indemnity in relation to the claim brought against it by the liquidators. One of the individual directors was also insured under that policy.

CGU denied that the insurance policy covered the liability asserted by the liquidators. The director and Crewe Sharp did not accept the denial.

On 20 August 2014, Akron’s liquidators filed an interlocutory process seeking an order that CGU be joined as a defendant and for leave to file and serve amended points of claim seeking a declaration that CGU was liable to indemnify the director and Crewe Sharp under the insurance policy.

On 13 February 2015, the trial judge made the Orders sought by the liquidators of Akron. CGU made an application for leave to appeal those Orders, which was heard by the Court of Appeal on 15 June 2015. The Court of Appeal ordered that the application for leave to appeal be granted but that the appeal be dismissed.

CGU was granted special leave to appeal against the judgment and Order of the Court of Appeal to the High Court.

High Court Decision

The High Court unanimously confirmed that a third party, such as a liquidator, can join a defendant’s insurer and seek a declaration of rights under the insurance agreement, provided that the third party has a ‘real interest’ in the performance of the agreement and that there is practical utility in the Court making the declaration.

The High Court agreed with the liquidators’ submission that their real interest arose by virtue of section 562 of the Corporations Act (with respect to Crewe Sharp) and section 117 of the Bankruptcy Act (with respect to the director). These sections together with CGU’s denial of cover under the policy and the non-acceptance of that denial by Crewe Sharp and the directors, gave the liquidators a ‘sufficient’ or ‘real’ interest for the joinder of CGU to the proceedings.

Interestingly, the decision may lead to a defendant’s insurer being joined to proceedings prior to the winding up or bankruptcy of a defendant. In Akron, the director was not bankrupt at the time of the hearing of the liquidators’ application. Section 117 of the Bankruptcy Act was enlivened because the Court found that if the liquidators succeeded against the director the evidence suggested he would not have sufficient assets to meet the claim and that he would be declared bankrupt.

If you have any queries regarding this CaseFlash or require Commercial Litigation & Insolvency legal advice please do not hesitate to contact Kirsten Farmer, Partner.


Kirsten Farmer, Partner
Sydney

Caseflash 16 February 2016
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