Australia: Directors and Officers – the year ahead

Last Updated: 5 January 2013
Article by Paul Garnon

Fallout from ICAC Inquiry into NSW Mining Licences

Proceedings have been commenced in the Federal Court for "misleading and deceptive" conduct against 16 individuals and companies, including the Obeid family, stockbrokers Brent Potts and Peter Gray, as well as directors and officers of Cascade Coal, a company at the centre of the Inquiry. 1

News reports indicate that companies associated with wealthy property developer Denis O'Neil, and Alfa Romeo dealer and yachtsman Neville Crichton, have decided to sue over a $13 million investment in Cascade Coal. They claim that, as a consequence of misleading and deceptive conduct and breach of trust, they invested in Cascade, but the money was forwarded not to Cascade as agreed, but rather ended up with a third party, which, through a complex web of companies, was linked to the Obeid family. 2

The possibility that the broker may also claim has been raised as well. It is said that Sydney stockbroker Brent Potts will consider launching a legal action over losses resulting from the raising of $28 million from some of Sydney's wealthiest businessmen to invest in Cascade Coal. Brent Potts is said to have put in about $1 million of his own cash. 3

The ICAC Inquiry is set to continue early this year. Another entity, Australian Water Holdings, is said to also be the subject of investigations. 4

The Federal Court litigation filed just before Christmas 2012, and the prospect of further claims and/or cross-claims, is likely to see directors reviewing their D&O insurance cover.

Bridgecorp Decision

There is at least some respite for directors as they may take comfort from a New Zealand Court of Appeal decision handed down just before Christmas on 21 December 2012. The Court of Appeal overturned the New Zealand High Court's controversial interpretation of s 9 of the Law Reform Act 1936 (NZ Reform Act) in Steigrad & Ors v BFSL 2007 Limited & Ors (Bridgecorp). 5

While not binding on Australian courts, Bridgecorp caused shockwaves around the Australian and New Zealand D&O market because it cast doubt on the extent to which directors and officers could claim on their insurance cover to help pay for defence costs in criminal and civil proceedings.

In New South Wales, similar legislation to the NZ Reform Act, s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) arguably applied in a similar way, imposing a charge on all insurance moneys. If so, insurers could be prevented from paying defence costs if they formed part of the overall limit of the insurer's indemnity obligation.

Section 9 of the NZ Reform Act relevantly provided:

"If any person (hereinafter in this part of this Act referred to as the insured) has, whether before or after the passing of this Act, entered into a contract of insurance by which he is indemnified against liability to pay any damages or compensation, the amount of his liability shall, on the happening of the event giving rise to the claim for damages or compensation, and notwithstanding that the amount of such liability may not then have been determined, be a charge on all insurance money that is or may become payable in respect of that liability."

In Steigrad v BFSL 2007 Limited & Ors, 6 the New Zealand Court of Appeal found that as a matter of statutory interpretation, the section was silent about the imposition of a charge on insurance money payable to a director for defence costs, even though the payment of costs might eat into the fund of money available to pay the claimant.

Furthermore, such an interpretation would also impact the insurer's contractual obligation to reimburse directors' costs. The imposition of such a charge did more than protect the claimant's interest, it impermissibly interfered with the D&O policy in relation to the payment of defence costs.


Time will tell whether relevant legislation in Australia will be interpreted in the same way. Nonetheless, there is cause for some optimism for directors and officers for the year ahead insofar as defence costs are concerned. The decision provides some certainty as to how the law in this area operates, and we expect that brokers and insurers will also welcome the decision.

Unfortunately, there does not appear to be any respite for directors and officers who will continue to come under close scrutiny, particularly those being called to appear before ICAC.


1 "16 sued over $13m Cascade Coal deal" - Sydney Morning Herald, Thursday, 3 January 2013
2 "16 sued over $13m Cascade Coal deal" - Sydney Morning Herald, Thursday, 3 January 2013
3 "Broker in Obeid deal may sue too" – The Australian, Thursday, 3 January 2013
4 "ICAC seizes on Australian Water's link to Obeid family" - Sydney Morning Herald, Monday, 17 December 2012
5 Steigrad v BFSL 2007 Limited & Ors, HC Auckland CIV-2011-404-611, 15 September 2011
6 [2012] NZCA 604

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