On 2 July 2007 New Zealand property development company
Bridgecorp Group (Bridgecorp) was placed
into receivership, owing investors nearly NZ$500 million.
In the aftermath of the collapse, the NZ Securities Commission
brought numerous criminal and civil claims against the directors of
Bridgecorp in relation to their conduct. Some of the
Bridgecorp Companies also indicated that they would bring
proceedings against the directors.
In addition to a policy covering breach of statutory
obligations, companies in the Bridgecorp Group held a NZ$20 million
D&O insurance policy which indemnified the directors in respect
of both liability incurred as a result of acts or omissions as
directors, as well as the costs incurred in defending legal
proceedings. When the coverage provided by Bridgecorp's
statutory liability policy was exhausted, the directors sought to
access the proceeds of the D&O insurance policy in order to
fund their legal costs of the criminal trial.
The receivers of a number of the Bridgecorp companies
(Receivers) objected to this, asserting
that they had a charge over the proceeds of the D&O insurance
policy, pursuant to s 9 of the Law Reform Act 1936 (NZ)
– an equivalent provision to which exists in NSW in s 6
of the Law Reform (Miscellaneous Provisions) Act 1946
In short, the court found that the Receivers' charge over
the insurance proceeds meant that the directors could not fund
their defence costs using the D&O policy. The court held
that the payment of defence costs "should not reduce the pool
of funds that would otherwise have been available to meet claims in
respect of which a charge has arisen", since to do so would
deny to the Receivers the fruits of enforcing the charge.
A big factor in the court's finding was the fact that
Bridgecorp elected to bundle both its cover for defence costs
and its cover for claims for damages and
compensation, which left the directors vulnerable once they began
to face large civil claims. It was also noted that Bridgecorp
could have obtained a statutory liability policy which provided a
higher level of cover for defence costs, which would have removed
(or at least delayed) the directors' need to rely on the
D&O insurance policy to fund their defences.
The court was heavily influenced by the fact that the
Receivers' claim was significantly greater than the level of
cover provided under the D&O policy. The Court observed
that its finding would likely have been different if the claim was
for an amount significantly less than the cover available under the
D&O policy, holding that in such circumstances the charge would
likely only extend to the expected amount of the claim and its
associated costs, meaning some funds from the policy may have
remained available to the directors.
Lessons for directors and officers
Directors and officers should consider purchasing a separate
insurance policy designed specifically to provide cover for costs
incurred in defending claims. This case shows that, while
cost effective, there may be risks involved in policies that bundle
cover for defence costs with cover for damages and compensation.
While the decision in this case is currently only binding in
New Zealand, in making its finding the court drew on a decision
from the High Court of Australia and, with similar legislation
existing in NSW, the principle may later be adopted by Australian
We note that the matter is not finally settled, as a notice of
appeal against the NZ High Court's decision has been filed.
Further developments regarding the appeal will be featured in
future editions of e-News.
Swaab Attorneys was the highest ranking law firm and the
13th best place to work in Australia in the 2010 Business Review
Weekly Best Places to Work Awards. The firm was a finalist in the
2010 BRW Client Choice Awards for client service and was named the
winner in the 2009 Australasian Legal Business Employer of Choice
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).