We have recently been involved in two voluntary administrations
which lead to Deeds of Company Arrangement (DOCA) where a creditor
sought a copy of the company's insurance policy which they knew
was in existence and which was relevant to their claim. The
creditor knew of the policy's existence due to the terms of
their contract with the company, which required the company to
maintain such a policy. The creditors in each case were keen to
learn of the amount of the indemnity which might be available to
the company under that policy, now that the company was
In each administration, the approved DOCA quite properly
retained the creditor's rights which would have existed in
liquidation under section 562 of the Corporations Act 2001. Section
562 requires any recovery by a liquidator from an insurer in
respect of a creditor's claim, to be remitted to the creditor
after deduction of the expenses incurred by the liquidator in
getting in that insurance indemnity. The creditor thereby obtains a
priority to that net asset, as compared to other unsecured
creditors. Case law has clarified that a liquidator's
remuneration incurred in getting in the insurance proceeds forms
part of those "expenses".
This priority causes any benefiting creditor to be intensely
interested in understanding what steps the liquidator, or DOCA
administrator, is taking to try to obtain the indemnity from the
insurer and when it might be obtained. The insurer is seen by the
creditor as the potential "deep pocket".
The practical difficulties and tensions with applying this
The company will have both a contractual and statutory duty to
the insurer. That most likely prevents the liquidator from
disclosing the policy and the communications with the insurer about
the claim made under it to third parties;
The liquidator also has a duty to act in the interests of the
The creditor will benefit under any policy indemnity, but is
also an adverse party in the insurer's eyes;
The insurer may not readily respond if there are doubts about
whether the policy indemnifies the claim;
The liquidator may need funding to better assert or prove the
claim or perhaps to even sue the insurer if it is wrongly refusing
The creditor is the perfect candidate to fund the liquidator,
but it will not do so without knowing about the policy and any
complications in obtaining indemnity.
The risk in giving a copy of the policy to a creditor is that
the policy might then be sought to be avoided by the insurer, or at
least it might create an argument that it could be. This is because
the policy may have confidentiality provisions, or other provisions
preventing the policy disclosure, or requiring the insurer's
consent to disclose the policy. There is also the insured's
duty to act in good faith and avert loss, the boundaries of which
are not closed: AFG Insurances Ltd v Brighton City (1972)
126 CLR 655.
A cautious insolvency practitioner is therefore unlikely to
provide a copy of the policy to the creditor.
Providing the creditor with a copy of the communications between
the insurer and the liquidator about the company's claim would
also arguably breach the insured's good faith duty to the
In the first case, the creditor had a court action on foot at
the administration date. It sought the court's leave to proceed
against the company under a DOCA. It issued a notice to produce and
subpoena for a copy of the policy. The DOCA administrator consented
to the leave being given. There was known to be a policy. Other
creditors were not affected by leave being given. The court refused
to allow that production: Commonwealth Bank of Australia v ACN
076 848 112 Pty Limited  NSWSC 666. This decision is
being appealed by the bank.
In the second case, the creditor brought a court application to
terminate the DOCA on various grounds, including for the failure of
the administrator to provide it with a copy of the terms of the
policies. In this case the judge noted that he did not think the
administrator had acted unreasonably in refusing to provide a copy
of the policy to the affected creditor: Tasmanian Water &
Sewerage Corporation Pty Ltd v Hayes  FCA 506.
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.
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A recent NSW decision has implications for liquidators of trustee companies dealing with trust funds and priority debts.
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