The party continues – insurers remain joined to insolvent trading proceedings - Insolvency/Bankruptcy

This week's TGIF considers the Victorian Court of Appeal's decision in Blakeley v CGU Insurance Ltd [2017] VSCA 378, which confirms the rights of third parties to seek direct access to proceeds of insurance.

The decision confirms that, in certain circumstances, third party creditors can commence proceedings against a defendant and also join the defendant's insurers to those proceedings.

As explored below, this may allow creditors to more efficiently recover disputed amounts covered by insurance.

BACKGROUND

This decision concerns a long-running dispute between:

the liquidators of Akron Roads Pty Ltd (liquidators), a company previously involved in the civil construction industry; and
CGU Insurance Ltd (Insurer), which provided professional indemnity insurance to Mr Trevor Crewe and his company Crewe Sharp Pty Ltd in relation to the management consulting services they provided to Akron Roads.

The liquidators made an insolvent trading claim against Crewe Sharp and Mr Crewe for more that $14,000,000. As Mr Crewe had limited assets and Crewe Sharp Pty Ltd was in liquidation, the liquidators sought to access the proceeds of insurance under:

s 562 of the Corporations Act 2001 (Cth), in relation to Crewe Sharp, which allows third parties direct access to insurance proceeds covering the company's liability where a company is in liquidation; and
the equivalent provision in s 117 of the Bankruptcy Act 1966 (Cth) for where an individual is bankrupt, in relation to Mr Crewe,.

HIGH COURT HISTORY

This dispute is the subject of the previous High Court decision in CGU Insurance Ltd v Blakeley (2016) 259 CLR 339. That decision was the subject of our earlier TGIF article: After CGU Insurance Ltd v Blakeley & Ors, liquidators welcome insurers to the party.

In short, the High Court held that the liquidators could join the Insurer to the proceeding in which the liquidators sought to establish that the directors were liable for insolvent trading. Specifically, the High Court held:

if the liquidators established the liability of the Insurer to indemnify Mr Crewe and Crewe Sharp, the proceeds of the policy would have been payable to them as a result of the operation of s 562 of the Corporations Act and s 117 of the Bankruptcy Act;
because of those provisions, in all practical respects, it was the liquidators who stood to benefit from findings made; and
this interest, in combination with the denial of liability under the policy, was sufficient to constitute a "justiciable controversy" between the liquidators and the Insurer.

SETTLEMENT DEED - A CHANGE OF CIRCUMSTANCES?

After the High Court decision, the liquidators entered into a settlement deed with Mr Crewe and Crewe Sharp, whereby Mr Crewe and Crewe Sharp consented to judgment in respect of the insolvent trading claims. Under the terms of the deed:

The liquidators agreed to enforce the judgment:
1. first, against any proceeds of the insurance policy; and
2. secondly, only once the claim on the insurance policy had been exhausted, against Mr Crewe for the amount of $125,000.

Mr Crewe assigned to the liquidators, 'any and all amounts recovered under the policy in relation to the [insolvent trading] claims' ...

As a result of the settlement deed, consent orders were made that Mr Crewe pay the liquidators the sum of approximately $12 million as a debt due to Akron Roads.

When the matter returned to the Supreme Court of Victoria, the Insurer argued that because the settlement deed removed any possibility that Mr Crewe would become bankrupt, the deed had removed the factual basis for the High Court's decision that the Insurers should remain parties to the proceeding.

As recounted in a further TGIF article ( Liquidators welcome insurers to the party...again), Robson J held that the effect of Mr Crewe assigning the benefits of the policy to the liquidators meant that there still was a justiciable controversy between the liquidators and the Insurers.

ISSUE ON APPEAL

One issue on appeal was whether the Insurer was still properly a party to the liquidators' claim against Mr Crew where the Settlement Deed removed the risk that Mr Crewe would become bankrupt.

DECISION ON APPEAL

The Court of Appeal (Ferguson CJ, Whelan and McLeish JJA) unanimously held that the liquidators were properly joined to the proceedings in relation to Mr Crewe. The Court stated that:

In our opinion the judge's conclusion was correct. The reasoning in CGU v Blakeley continues to apply. The settlement deed preserves and, indeed, enhances the liquidators' interest in the declaration which it seeks, and the existence of a 'justiciable controversy'.

COMMENT

This decision confirms that creditors may be able to obtain an assignment of rights to insurance proceeds from a debtor, and then join the insurer to the primary proceedings brought to establish the insured party's liability. This promises greater efficiency for creditors, as both primary liability and any issues regarding recovery under the policy (such as non-disclosure or scope of indemnity) can be determined in a single proceeding.

The significance of this decision goes beyond liquidators. In this case, the third parties seeking to access insurance funds happened to be liquidators. But the rights under s 562 of the Corporations Act and s 117 of the Bankruptcy Act are available to any third party to whom (an insured) liability is owed by a bankrupt or a company in liquidation.

But, even further, a debtor need not necessarily be bankrupt or in liquidation for claims like this to be brought. Proactive creditors could, if appropriate, settle their claims against the individual or company on the mutually beneficial basis that:

the debtor assign to the creditor the debtor's right to proceeds of insurance; and
the creditor recover against the debtor amounts limited to the proceeds of insurance, with the creditor promising not to pursue the individual into bankruptcy or the company into liquidation.

Therefore, where there is insurance in place, there is significant scope for proactive creditors to use these provisions to directly recover more than they would as a distribution on their proof of debt.

YET ANOTHER ROUND?

Note, however, this issue may not be finally settled. The liquidators have filed an application for special leave to appeal to the High Court in relation to parts of the Victorian Court of Appeal judgment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.