Potent antidote to denial: at behest of liquidators, court declares insurer must indemnify directors


CGU Insurance Limited v Blakeley [2016] HCA 2

Liquidators brought action against company directors under s 588M(2) of Corporations Act 2001 (Cth) – Liquidators sought to join third party insurer after insurer denied liability – Supreme Court had jurisdiction to grant declaratory relief on liquidators’ application – Meaning of justiciable controversy

Where a director has breached the duty imposed by s 588G of the Corporations Act 2001 (Cth) to prevent insolvent trading, the liquidator of the company may recover the amount of loss or damage suffered by creditors as a result of that breach directly from the director under s 588M(2).  In turn, where a company under external administration[1] or a bankrupt[2] is insured against liability to third parties, the liquidator or trustee must pay the proceeds to the affected third party (in a liquidation, less the expenses of getting in that sum).  These simple observations lead to a pressing question.  Can a liquidator with a right to recover under s 588M(2) overcome its lack of privity to the insurance contract and seek a declaration that a director’s or de facto director’s insurer indemnify the director under the insurance policy in respect of a successful claim made against the director under s 588M(2)?

This question is vital where an insurer denies liability, and the director does not propose to challenge the insurer’s denial.  If the wronged company’s liquidator were not permitted to seek such a declaration, the interests of third parties who suffered loss through the director’s breach of their duty to prevent insolvent trading might well be defeated by the insurer’s denial of liability.

The High Court of Australia recently determined in CGU Insurance Limited v Blakeley [2016] HCA 2 that a declaration that an insurer indemnify a director could be made on the company’s liquidator’s application where the director’s trustee in bankruptcy or a liquidator is obliged to pay insurance proceeds to an affected third party.

Central to this decision was the determination that the liquidator’s claim involved a matter arising under a law of the Commonwealth in which the Supreme Court of Victoria had jurisdiction to exercise the Commonwealth’s judicial power.[3]

The plurality’s reasoning may be summarised thus:

  1. The company’s liquidator’s claims against the directors arose under s 588M and therefore relate a matter arising under a federal law.  The company’s liquidator’s claim for declaratory relief against the insurer also satisfied the subject matter requirement as ‘[i]t depended upon the existence of a liability under s 588M of the Act said to enliven the indemnity obligation under the CGU insurance policy.’[4]
  2. There was a justiciable controversy between the company’s liquidator and the insurer because the company’s liquidator’s claim was founded on ‘the legal consequence’ created by the statutory obligations imposed on a director’s trustee in bankruptcy or liquidator if the insurer is liable.  Therefore, ‘[t]he interest upon which the claim for declaratory relief is based and [the insurer’s] denial of liability under the policy are sufficient to constitute a justiciable controversy between the [company’s] liquidators and [the insurer] involving a question arising under a law of the Commonwealth.’[5]

The declaration sought by the company’s liquidator would be binding as between the company’s liquidator and the insurer.  As between the insured director and the insurer, ‘it is unlikely that [the insured] or [the insurer] would be permitted to relitigate, in subsequent proceedings, issues which had been determined or which could properly, and should, have been agitated in the proceedings against [the insurer].’[6]  While the plurality noted that the ‘application of preclusive doctrines against relitigation’ in the particular case was theoretical, Nettle J held that ‘it would be an abuse of process for [the insurer] to deny liability’ in such subsequence proceedings.[7]  To ensure the application of the doctrine of issue estoppel Nettle J considered it necessary that the liquidators’ points of claim be amended to seek a declaration as against both the insured directors and their insurer, rather than the insured directors alone, with the effect that the insured directors be bound by the declaration and be entitled to assert the benefit of the declaration against the insurer.[8]

This decision seems destined to have broader consequences than simply improving the pathway to recovery from directors who have breached their duty to prevent insolvent trading.  The decision suggests more generally, by operation of s 562 of the Corporations Act 2001 (Cth) and s 117 of the Bankruptcy Act 1966 (Cth), that a claimant against an insolvent insured may have sufficient interest to seek a declaration against an insurer that has denied liability and that can be joined as a party to a proceeding seeking recovery from an insolvent insured.

[1] Corporations Act 2001 (Cth) s 562.

[2] Bankruptcy Act 1966 (Cth) s 117.

[3] CGU Insurance Limited v Blakeley [2016] HCA 2 at [70] per French CJ, Kiefel, Bell and Keane JJ and at [113] and [120] per Nettle J.

[4] At [34] (French CJ, Kiefel, Bell and Keane JJ).

[5] At [67] (French CJ, Kiefel, Bell and Keane JJ).

[6] At [68] (French CJ, Kiefel, Bell and Keane JJ).

[7] At [104] (Nettle J).

[8] At [112] (Nettle J).

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