Australia: Proceedings Against Insurers Of Liquidated Or Deregistered Companies: Further Developments And Discussion By The Courts

Tziadas v Child & Ors [2009] NSWSC 465

In Brief:

• There are various statutory mechanisms to pursue the insurers of companies being wound up or deregistered, including s 6 of the NSW Law Reform Miscellaneous Provisions Act (1946) and section 601AG of the Corporations Act 2001.
• Insurers and insurance lawyers have been anticipating cases which explore the extent to which Section 601AG 'plugs the gap' in s 6 Applications, left by The Owners – Strata Plan 50530 v Walter Constructions [2007] NSWCA 124.
• This case holds that, in a claim for contribution under s 5 of the Law Reform (Miscellaneous Provisions) Act 1946 what is required, when seeking to recover from the insurer of a deregistered tortfeasor under s 601AG(a), is to prove, at the time of hearing, that the deregistered company was a joint tortfeasor immediately before its deregistration.
• It is of course also necessary to establish, at the time of hearing, that the subject insurance policy covered the deregistered tortfeasor's liability.

Background:

George Tziadas suffered brain damage in 1996 shortly after his birth at Hurstville Community Co-operative Hospital (the Hospital) under the care of Doctors Child and Scarf (the Doctors). In 2001, three proceedings were commenced against the Hospital and the Doctors; by the infant, George, and by his parents, Con and Vickie (the Plaintiffs).

In July 2002 the Plaintiffs applied to the Court to join the Hospital's professional indemnity insurer, CGU Insurance Limited (CGU) under s 6 of the Law Reform Miscellaneous Provisions Act 1946. Section 6 provides a mechanism for a person to recover from the insurer of an entity being wound up, in this case the Hospital. CGU were the Hospital's professional indemnity insurers under a 'claims made' policy commencing 30 June 1999.

The Plaintiff's application failed at first instance but was successful before the NSW Court of Appeal in July 2004. The Plaintiffs joined CGU as a Defendant and, in 2006, the Doctors issued joint tortfeasor cross-claims against CGU under s 5 of the Law Reform (Miscellaneous Provisions) Act 1946.

Meanwhile, in May 2005, winding up of the Hospital was concluded and the Hospital was deregistered.

However, matters took an unexpected turn. On 4 June 2007 the Court of Appeal handed down its decision in The Owners – Strata Plan 50530 v Walter Constructions (in liquidation) [2007] NSWCA 124. This case held that a person could not secure a charge over an insurance policy under s 6 where the policy was not in existence at the time of the events giving rise to the claim. This meant the Court of Appeal would almost certainly not now have permitted the Doctors to sue CGU under s 6, as the relevant event (the negligence causing brain damage) took place in 1996 and the Hospital's CGU policy came into existence in 1999.

CGU therefore filed applications to strike out the Doctors' cross-claims. In response, the Doctors applied to amend their cross-claims against CGU to include a claim under s 601AG of the Corporations Act 2001 (Cth). Section 601AG is a mechanism for recovery from the insurer of a deregistered company and provides:

"A person may recover from the insurer of a company that is deregistered an amount that was payable to the company under the insurance contract if:

1. the company had a liability to the person; and
2. the insurance contract covered that liability immediately before deregistration."

Issues for Determination

The Parties agreed to have McCallum J determine three questions before further trial of the substantive proceedings.

The questions were formulated as follows:

1. Noting that the plaintiff commenced these proceedings against, inter alia, the doctors before the hospital was deregistered, does the fact that the plaintiff had not obtained judgment against the doctors prior to the deregistration of the hospital mean that the doctors cannot recover on their cross claims against CGU pursuant to s 601AG of the Corporations Act 2001?
2. In order for the doctors to recover pursuant to s 601AG of the Corporations Act, must they, when seeking to satisfy the requirement in s 601AG(a), establish that the hospital had a liability to them immediately before deregistration of the hospital?
3. If at a final hearing it is established that the hospital and the doctors are tortfeasors each liable to the plaintiff and are entitled to recover contribution from each other, then will those findings establish that the hospital "had a liability" to the doctors immediately before deregistration within the meaning of s 601AG(a) of the Corporations Act 2001?"

A supplementary question arose as to whether, if these three questions were answered in the Doctors' favour, whether the Doctors had an arguable case that the CGU policy covered the liability under s 601AG.

Decision

Justice McCallum answered these questions: "No, Yes, and Yes"; answers which were in favour of the Doctors bringing cross-claims against CGU as the Hospital's insurer.

In relation to the supplementary question, her Honour found there was an arguable case the CGU Policy covered the liability arising under S.601AG.

CGU argued that, as the Plaintiff had not yet established liability with the Hospital, the Hospital cannot be said to have "had a liability" (601AG(a)) immediately before deregistration. The Doctors argued it was sufficient if they proved such a liability at the future hearing of their claim.

CGU submitted that 'liability' in this context meant a liability which was determined and had crystallised before deregistration of the Hospital. CGU pointed to apparent support for this interpretation in the factually similar Queensland case of Suncorp Metway Ins Ltd v Clonmel P/L & Ors [2000] QSC 135.

The Doctors agued 'liability' is an ambiguous term and ought to be given a contextual interpretation, as was discussed in Crimmins v Stevedoring Committee [1999] HCA 59. Significantly, the Doctors were able to point out the Suncorp Metway case did not refer to Crimmins (which had been decided six months previous).

Her Honour decided the Suncorp Metway case was wrongly decided, insofar as it held s 601AG required the "liability" to be a determined and crystallised. Her honour found support in National Mutual Fire Insurance Co Ltd v Commonwealth of Australia [1981] 1 NSWLR 400 where the NSW Court of Appeal noted the trend towards considering the "liability" of a tortfeasor as an aspect of the tortfeasor's overall liability for damages. In that case, Glass JA approved the concept:

Finally, CGU argued if the legislators had intended to provision for future liabilities, that would have been made clearer in s 601AG. McCallum J acknowledged clearer wording of s 601AG was certainly desirable, but did not accept CGU's argument "that the wording of the section clearly refers to a liability that was determinate or crystallised immediately before deregistration."

Her honour concluded:

It is of course also necessary to establish, at the time of hearing, that the subject insurance policy covered the deregistered tortfeasor's liability.

Implications

Insurers and insurance lawyers have been anticipating cases which explore the extent to which s 601AG 'plugs the gap' left by The Owners – Strata Plan 50530 v Walter Constructions.

This case comes down strongly in favour of third parties seeking to access the insurance policies of deregistered companies. It interprets 'liability' under Section 601AG broadly, not requiring it be a liability which has accrued or crystallised, but rather as a liability which the plaintiffs and joint tortfeasors need only, in hindsight, establish at the substantive hearing of the action.

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.