CGU Insurance Limited v One.Tel Limited (in liquidation) & Ors  HCA 26
In this recent decision, preliminary questions raised for determination in the proceeding ended up in the High Court after two appeals, over three years. Ultimately, CGU failed in its attempt to 'knock out' the claim on technical points.
Mr Greaves was a former director of One.Tel Limited and an insured under a directors and officers policy issued by CGU Insurance Limited ('the policy').
One.Tel went into liquidation and ASIC sought compensation against Mr Greaves. CGU purported to avoid the policy.
In September 2004 a judgment was obtained by consent against Mr Greaves by ASIC. The judgment required Mr Greaves to pay compensation of $20 million and $350,000 for costs of ASIC ('the ASIC compensation order').
In November 2004, Mr Greaves entered into a Deed of Arrangement pursuant to Part X of the Bankruptcy Act 1966 ('the DOA').
Under the DOA:
- Mr Greaves' rights under the policy were assigned to Mr Watson, who was the then trustee of the DOA ('the trustee')
- Clause 11 provided that upon issue of a certificate by the trustee stating that the trustee had either completed the realisation of assets or did not intend to pursue a claim under the policy, then Mr Greaves would be released from liability under the ASIC compensation order. Further, prior to execution of such certificate neither the trustee nor creditors were permitted to take any steps to enforce the ASIC compensation order against Mr Greaves other than pursuant to the arrangement constituted by the DOA.
The trustee then commenced proceedings against CGU for indemnity under the policy in respect of the ASIC compensation order.
On 30 November 2007, the DOA terminated by effluxion of time as no extension of the deed had been obtained. No certificate under clause 11 had been issued by the trustee.
CGU challenged the ability of the trustee to continue the claim given the termination of the DOA by raising preliminary questions for the court to determine.
First instance decision
It was held that once the DOA terminated:
- The trustee had no power to continue the proceedings against CGU
- Mr Greaves suffered no loss within the meaning of the policy because clause 11 of the DOA continued to operate despite termination and prevented enforcement of the ASIC compensation order.
Court of Appeal
The appeal was allowed and the matter was remitted back to the court at first instance.
CGU appealed on two main grounds being that:
- The trustee had no power to continue proceedings after termination of the DOA
- Mr Greaves suffered no loss to which the policy responded.
With respect to the first ground, it was held that upon termination of the DOA even if the trustee did not continue to hold the right to pursue the benefit of the policy pursuant to the trust created by the DOA, the trustee became a bare trustee of such rights and so there remained power for the trustee to continue the proceedings by reason of a bare trustee's obligation to get in trust property and to vindicate rights attaching to such property.
In addition, it was noted that CGU had no right to seek the due administration of the trust as this was a right of the beneficiaries of the trust not a third party, such as CGU.
Accordingly, CGU's first ground of appeal was rejected.
On the second ground of appeal, it was held that even if (as contended by CGU) the covenant not to enforce the ASIC compensation order contained clause 11 of the DOA survived the termination of the DOA, the clause did not have the effect of discharging or releasing Mr Greaves from the judgment debt. Such debt remained payable notwithstanding the trustee and creditors were prevented from taking steps to enforce the debt. The High Court reasoned that:
- The judgment debt remained and created a legal liability to pay $20 million
- A distinction should be drawn between a duty to pay and the ability of others to enforce such judgment.
In any event, the court held that clause 11 did not survive the termination of the DOA. It said the preferable conclusion was that once the DOA terminated, whilst acts carried out under the DOA remained effective, the whole of its future potential operation ceased. The fact that the stay on enforcement of the ASIC compensation order was lifted upon termination was not unfair to Mr Greaves because, according to the assumptions underlying CGU's submissions, following the termination Mr Greaves became a beneficiary under the resulting trust of the policy. In contrast, it would be unjust if following termination of the DOA One.Tel was stripped of a beneficial interest under the trust created by the DOA whilst simultaneously remaining unable to exploit its original right to enforce the ASIC compensation order against Mr Greaves by reason of clause 11. Further, it would be an unexplained anomaly if clause 11 survived termination of the DOA, but nothing else did.
Consequently, CGU's second ground was also rejected and its appeal to the High Court was unsuccessful.
Arrangements are capable of being put into place to preserve rights which an insolvent individual (or company) may have to pursue claims for indemnity under insurance policies. In the present case, following the denial of indemnity by CGU, the insured settled the claim against him and consented to a judgment debt being entered which created a legal liability for which indemnity could be claimed under the policy. Whilst the termination of the DOA before the claim against CGU had been finalised was unusual, CGU's attempt to defeat the claim on technical grounds ultimately failed.
Nonetheless, where insolvent arrangements are entered into by an insured, the precise terms of any DOA, or other insolvency arrangements, should be carefully considered in each case to determine whether, and if so how, legal rights to pursue claims under a policy have been affected by those arrangements.
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.