Australia: Insurers brought in from the cold by the High Court

Summary

The High Court of Australia has held that a liquidator of a company may join the company's insurer to proceedings to seek a declaration that the insurer is liable to indemnify the company under an insurance policy.

Facts

The liquidators of Akron Roads Pty Ltd (in Liq) (Akron) brought proceedings in the Supreme Court of Victoria against three former directors of the company including Mr Trevor Crewe and Crewe Sharp Pty Ltd (In Liq) (Crewe Sharp).

The liquidators alleged that the directors failed to prevent Akron from incurring debts when it was insolvent. The liquidators sought an order that the directors pay to them, as a debt due to Akron, an amount equal to the amount of loss or damage suffered by creditors of Akron for debts owed by Akron because of its insolvency.

Crewe Sharp and Mr Crewe were insured under a professional indemnity policy with CGU Insurance Ltd (CGU). Crewe Sharp made a claim with CGU for indemnity in relation to the claim brought against it by the liquidators. CGU denied that the insurance policy covered the claim brought by the liquidators because of an exclusion clause contained in the policy. 

Shortly after Akron brought proceedings against Crewe Sharp, the company went into liquidation. Crewe Sharp advised the Akron liquidators that it was unlikely it would defend the proceedings against it. Mr Crewe had limited assets and were insufficient to cover the claim brought against him by the Akron liquidators.

Decision at first instance

The Akron liquidators brought an application in the Supreme Court of Victoria seeking an order that CGU be joined as a defendant so that the Akron liquidators could seek a declaration that CGU was liable to indemnify Mr Crewe and Crewe Sharp under the insurance policy for any judgment and costs orders obtained by the Akron liquidators. The Akron liquidators claimed to be entitled to the insurance under section 564 of the Corporations Act. Mr Crewe and Crewe Sharp did not oppose the application, but CGU objected.

The Akron liquidators argued that they had a sufficient interest in the determination of CGU's liability to support their claim to join CGU and seek a declaration. CGU opposed the joinder on the basis that there was no claim against it by its insured and therefore no controversy to be determined by the Court.

Justice Judd of the Victorian Supreme Court held that the claim by the Akron liquidators, that CGU is bound to indemnify Mr Sharp and Crewe Sharp, is connected to the Akron liquidators' claim against the insured. Justice Judd noted that it was convenient to resolve the dispute between the Akron liquidators and CGU at the same time as determining the dispute between the Akron liquidators and the insured.

Decision of the Court of Appeal

CGU sought leave to appeal to the Court of Appeal. The primary basis for CGU's appeal was that Justice Judd erred in law in joining it as a defendant. CGU claimed that courts do not have jurisdiction to grant declaratory relief to a stranger as to the meaning and effect of a private contract between parties who have not pursued any claim relating to rights or duties under that contract.

The Court of Appeal dismissed the appeal and upheld the decision of Justice Judd. The Court agreed that the Akron liquidators had a real interest in the determination of CGU's liability on the basis that, if the Akron liquidators succeeded in their claim against the insured, it was likely that a liquidator of Crewe Sharp or a trustee in bankruptcy of Mr Crewe would pursue CGU to indemnify them for any judgment and costs orders.

Decision of the High Court

CGU appealed to the High Court. The High Court held there was a "justiciable controversy" because the Akron liquidators had a sufficient interest in the determination of CGU's liability to indemnify Mr Crewe and Crewe Sharp. The High Court decided that, if the Akron liquidators were successful in their claim against Crewe Sharp and Mr Crewe and CGU were liable to indemnify its insured, the Akron liquidators would be entitled to the proceeds of the insurance policy payable by the insured for any judgment or costs order.

Implications

This decision allows liquidators and trustees in bankruptcy to join an insurer to proceedings to determine whether he or she has a right to the proceeds of the insurance payable to the defendant in respect of its liability to the liquidator or trustee. This is particularly crucial in circumstances where a defendant has insufficient assets to satisfy a judgment, but there is an insurance policy that may respond to the claim. 

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