Australia: Non-executive director - AIG Australia Ltd v Jaques [2014] VSCA 332

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Construction of investment management insurance policy – meaning of the term of non-executive director – whether non-executive director entitled to benefit of special excess limit under the policy

Background

This was an appeal from a decision of a single judge of the Supreme Court of Victoria.

AIG issued an Investment Management Insurance Policy to the company Australian Property Custodian Holdings Ltd (Holdings) (the policy). The policy undertook to repay or reimburse an insured person for any claim made during the policy period for a wrongful management act. The policy operated from 16 July 2010 to 16 July 2011. An insured person was generally a director or non-executive director of Holdings.

Under the policy executive directors were insured for losses up to $5,000,000. Non-executive directors were entitled to extended cover by way of special excess limited to an additional $1,000,000.

Jaques sought further indemnity pursuant to the special excess limit to defend a claim brought against him as a director of Holdings, in respect to alleged wrongful managerial acts that occurred on various dates in 2006, 2007 and 2008.

A special excess limit of the policy provided as follows:

  • 4.71 - Special excess limit
    A separate excess aggregate limit of $1,000,000 for each Non-Executive Director, subject to the total aggregate limit equivalent to the Limit of Liability for all Non-Executive Directors.

A director in the policy was defined as any person who was, now is or during the policy period becomes, an executive or non-executive director of Holdings. A non-executive director was defined as any natural person who serves as a non-executive director of Holdings at the time of any wrongful managerial act.

There was otherwise no other explanation or definition to assist in determining the difference between a director and a non-executive director and it was accepted by the parties that the Corporations Act 2001 offered no definition or criteria that would aid in this regard.

Issues to be determined

The decision is primarily concerned with seeking to define what the role of a non-executive director is in modern corporate life and applying that definition to the facts of Jaques involvement in Holdings and its related entities.

In determining the issue at first instance the court was required to analyse Jaques' role over a period of time when he held roles as director of Holdings and an employee of another entity.

AIG conceded at the trial that Jaques was a non-executive director prior to 6 April 2004 and Jaques conceded that he was an executive director from 26 June 2007 but AIG did not accept that Jaques was acting as a non-executive director from 6 April 2004 up to 26 June 2007 which would entitle him to the special excess cover for claims in regard to wrongful managerial acts during this period.

Jacques involvement with Holdings, its related entities and its various personalities was far from simple. Prime Trust owned retirement villages. Holdings undertook the office of trustee of the Prime Trust. Other entities managed the businesses operated by the Prime Trust properties. Jaques accepted an invitation to become a non-executive director of Holdings in March 2001. In late 2003 Holdings negotiated to purchase a retirement village in Buderim Gardens. A management company was formed to manage the village. Jaques was asked to assist in managing the village and was employed as a general manager of Australian Property Custodians Pty Ltd (Custodians). He ceased to receive a fee from Holdings and became a salaried employee of Custodians.

However on 5 July 2004 Holdings issued a supplementary PDS which included a statement that Jaques was a director of Holdings. As an employee for Custodians Jaques also performed work for Australian Property Syndications Pty Ltd (Syndications) which was related to the Prime Trust. On 26 June 2007 the board of Holdings resolved that deeds of appointment be approved and executed to appoint Jaques as an executive director.

Jaques work and functions during the relevant period were multifaceted and hence the difficulties in characterising whether he had discharged functions as an executive or non-executive director of Holdings. The judgment examines Jaques role and duties in some detail.

Director's role - non executive

Previous authorities would suggest the role of a non-executive director is independent of corporate management. They are not bound to give continuous attention to the affairs of the corporation. Their duties are more intermittent in nature and intended to give an independent review to the actions of management. Another, characterisation was that the role of a non-executive director is to guide and monitor the company, rather than to be involved at an operational level.

Characterising the role of a non-executive director – finding of Court of Appeal

The Court of Appeal upheld the primary judge's finding that Jaques acted as a non-executive director of Holdings, and was entitled to cover under the special excess limit extension of the policy. The appeal was dismissed. The court provided helpful guidance on the roles of executive and non executive directors.

The fact that Jaques was on an employment contract with Custodians, and not with Holdings until June 2007 was an important fact that assisted the court in characterising Jaques' role with Holdings.

Relevantly, the court agreed that generally a non-executive director will be one who is not a full time operative of the company, and who is not otherwise employed by it or is delegated by it to act in its affairs.

The role of the non-executive director is generally considered to be the role of an independent overseer of the board and the company, but without operational or administrative control, which is generally left to the executive directors.

How a director is held out to the public, including the investing public, for example in company publications or corporate lodgings is not determinate.

The subjective views of the board or its individual directors as to their roles is also unlikely to be determinative.

All directors will owe a duty to exercise independent judgment and supervision as a board member. There is no different duty owed between the two roles. However the standard of care owed may vary between executive and non-executive directors.

The actual duties performed by the director is determinative of the issue. The role of a non-executive director is fundamentally different from an executive director due to their lack of involvement in the day to day management of the company.

Lessons for insurers

In circumstances where Jaques' roles in working with the Holding and related entities was multifaceted, AIG may have been better served to avoid coverage uncertainty by seeking to clearly define what it considered to be the role of a executive and non-executive director from the outset of policy cover, given the additional cover it offered to non-executive directors. As the Court of Appeal observed there was no useful definition in the policy and the Corporations Act did not assist. The parties were left to characterise Jaques conduct by relying on a handful of previous decisions of the courts with all the uncertainty that approach entailed.

The decision is otherwise a useful examination of the different roles of executive and non-executive directors, and their duties with reference to previous leading authorities. It will have relevance to corporations law generally and will assist advisors in determining the liability of directors in actions against them in future proceedings.

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