Australia: Insurers must come to the liquidator's party

Last Updated: 7 March 2016
Article by Mark Waller and Chris Erfurt

Most Read Contributor in Australia, August 2016

Key Points:

In some circumstances a plaintiff/claimant can bypass a defendant (even an insolvent one) and seek a declaration against the defendant's insurer.

The High Court has confirmed that, if a defendant is insolvent, the plaintiff may seek a declaration that the defendant's insurer is liable to indemnify the defendant, at least when:

  • the insurer has denied liability;
  • the defendant has not accepted the denial of liability; and
  • the defendant is unable or unwilling to pursue the claim against the insurer (CGU Insurance Limited v Blakeley [2016] HCA 2).

This ought to prevent insurers from denying liability or sitting on the fence as a strategy to frustrate claims by those who have a real interest in insurance proceeds where the insured itself either cannot or has no incentive to pursue a claim. However, it does not mean that a plaintiff/claimant can otherwise bypass an insured defendant (even an insolvent one) and go straight to their insurer.

The insurer's denial

On 9 April 2013, the liquidators of Akron Roads commenced insolvent trading proceedings against three former directors of Akron Roads (including Mr Crewe) and Crewe Sharp Pty Ltd, alleged to be a de factor or "shadow" director of Akron Roads. Crewe Sharp claimed indemnity in respect of the claim under a professional indemnity insurance policy issued to it by CGU.

On 6 March 2014, CGU denied indemnity and on 20 June 2014, Crewe Sharp entered into creditors' voluntary liquidation.

On 20 August 2014, the Akron liquidators applied to join CGU as a defendant to the proceedings and for leave to amend their claim to seek a declaration that CGU is liable to indemnify Mr Crewe and Crewe Sharp under the insurance policy in respect of any judgment obtained against those parties.

On 13 February 2015, the Supreme Court of Victoria made those orders. CGU unsuccessfully appealed against those orders to the Court of Appeal and then to the High Court.

The question on appeal to the High Court

The question on appeal to the High Court was whether federal jurisdiction invested in the Supreme Court of Victoria authorises the Supreme Court to entertain a claim by a plaintiff for a declaration against a defendant's insurer that the insurer is liable to indemnify the defendant.

The question was within the subject matter area of federal jurisdiction because it depended upon the existence of a liability of Mr Crewe and Crewe Sharp under the Corporations Act (ie. federal legislation) to enliven the indemnity obligation under the insurance policy. Although this may seem straightforward, the parties and the Victorian courts had not proceeded on that basis.

To enliven the requirement to claim declaratory relief, however, there also needed to be a justiciable controversy between the Akron liquidators and CGU.

The Akron liquidators were entitled to join CGU and seek the declaration

Section 562 of the Corporations Act essentially requires a liquidator of an insolvent company (such as Crewe Sharp) to pay over to third party liability claimants (such as the Akron liquidators) amounts recovered under a liability contract of insurance (such as the CGU policy) in respect of the insolvent company's liability to the third parties, after the liquidator has deducted its expenses of or incidental to getting in the insurance proceeds.

Section 117 of the Bankruptcy Act 1966 (Cth) contains an analogous provision in respect of bankrupt individuals.

Accordingly, although neither Crewe Sharp, nor its liquidators, nor Mr Crewe, had accepted CGU's denial of indemnity (and Mr Crewe in fact disagreed with the decision and consented to the joinder of CGU), none of them had an incentive to pursue CGU because any potential gain would need to be handed over to the Akron liquidators.

CGU had argued that the courts had no jurisdiction at the suit of a stranger (ie. the Akron liquidators) to grant declaratory relief as to the meaning and effect of private contract (ie. the insurance policy) between parties (ie. CGU, Crewe Sharp and Mr Crewe) who will not pursue any claim relating to rights or duties under that contract. However, the majority in the High Court found that:

  • the claim did not involve principles of contract law or privity of contract because the Akron liquidators were not claiming as a party to the insurance contract nor as persons otherwise entitled to the benefit of that contract;
  • rather, the claim was based upon the legal consequence created by section 562 of the Corporations Act if CGU is liable to indemnify Crewe Sharp;
  • that legal consequence would be the bringing into existence of a right of the Akron liquidators to the proceeds of the insurance policy payable to Crewe Sharp in respect of its liability to the Akron;
  • that interest and CGU's denial of liability constituted a justiciable controversy between the Akron liquidators and CGU;
  • the effect of section 562 of the Corporations Act and section 117 of the Bankruptcy Act is that it is the Akron liquidators, to the exclusion of Crewe Sharp and Mr Crewe, who stand to benefit from the declaration sought; and
  • it would be to "distinctly to ignore" that reality if the Akron liquidators' interest could be defeated by reason of inaction by Crewe Sharp (whose liquidators were without funds) and Mr Crewe against CGU given that the statutory provisions deprived them of any incentive to pursue a claim under the insurance policy.

Practical implications and limits of the CGU decision

If CGU had succeeded, then absent some other direct right of a plaintiff to proceed against a defendant's insurer (eg. as a party to the insurance policy or under a statutory provision such as section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) or its equivalents in the ACT and NT), a plaintiff claiming against an insolvent but insured person would be in the invidious position of having to either first obtain a judgment against the insolvent party, or waiting for the company to be deregistered so as to use section 601AG of the Corporations Act, or funding the defendant's liquidator or trustee in bankruptcy to pursue a third party claim against the insurer. A corollary of this is that insurers could have frustrated potentially valid claims by denying liability or sitting on the fence.

The High Court's decision does not mean, however, that a plaintiff/claimant can always bypass a defendant (even an insolvent one) and seek a declaration against the defendant's insurer. Clearly, it was relevant to the majority's decision that neither Crewe Sharp nor its liquidators nor Mr Crewe had the ability and willingness to pursue the insurance claim. That will not always be the case, even if a company is insolvent or an individual is bankrupt (for example, a liquidator may have funds and use those funds to pursue an insurance claim).

There is a further matter that still may lead to further dispute as a result of the decision. A plaintiff could seek to join a defendant's insurer prior to the formal insolvency of a defendant if an insured defendant has insufficient means to satisfy the claim and does not pursue the insurer. Although such circumstances may give the plaintiff a real interest in seeking a declaration against the insurer (because a judgment against the defendant may otherwise be ineffectual), such circumstances would not be on all fours with the ratio of the majority decision, which turned upon the legal consequence of section 562 of the Corporations Act (and by implication, section 117 of the Bankruptcy Act), which only operate in an insolvency context.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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