Most Read Contributor in Australia, September 2016
The High Court of Australia has held that a
liquidator of a company may join the company's insurer to
proceedings to seek a declaration that the insurer is liable to
indemnify the company under an insurance policy.
The liquidators of Akron Roads Pty Ltd (in Liq)
(Akron) brought proceedings in the Supreme Court
of Victoria against three former directors of the company including
Mr Trevor Crewe and Crewe Sharp Pty Ltd (In Liq) (Crewe
The liquidators alleged that the directors failed to prevent
Akron from incurring debts when it was insolvent. The liquidators
sought an order that the directors pay to them, as a debt due to
Akron, an amount equal to the amount of loss or damage suffered by
creditors of Akron for debts owed by Akron because of its
Crewe Sharp and Mr Crewe were insured under a professional
indemnity policy with CGU Insurance Ltd (CGU).
Crewe Sharp made a claim with CGU for indemnity in relation to the
claim brought against it by the liquidators. CGU denied that the
insurance policy covered the claim brought by the liquidators
because of an exclusion clause contained in the policy.
Shortly after Akron brought proceedings against Crewe Sharp, the
company went into liquidation. Crewe Sharp advised the Akron
liquidators that it was unlikely it would defend the proceedings
against it. Mr Crewe had limited assets and were insufficient to
cover the claim brought against him by the Akron liquidators.
Decision at first instance
The Akron liquidators brought an application in the Supreme
Court of Victoria seeking an order that CGU be joined as a
defendant so that the Akron liquidators could seek a declaration
that CGU was liable to indemnify Mr Crewe and Crewe Sharp under the
insurance policy for any judgment and costs orders obtained by the
Akron liquidators. The Akron liquidators claimed to be entitled to
the insurance under section 564 of the Corporations Act. Mr Crewe
and Crewe Sharp did not oppose the application, but CGU
The Akron liquidators argued that they had a sufficient interest
in the determination of CGU's liability to support their claim
to join CGU and seek a declaration. CGU opposed the joinder on the
basis that there was no claim against it by its insured and
therefore no controversy to be determined by the Court.
Justice Judd of the Victorian Supreme Court held that the claim
by the Akron liquidators, that CGU is bound to indemnify Mr Sharp
and Crewe Sharp, is connected to the Akron liquidators' claim
against the insured. Justice Judd noted that it was convenient to
resolve the dispute between the Akron liquidators and CGU at the
same time as determining the dispute between the Akron liquidators
and the insured.
Decision of the Court of Appeal
CGU sought leave to appeal to the Court of Appeal. The primary
basis for CGU's appeal was that Justice Judd erred in law in
joining it as a defendant. CGU claimed that courts do not have
jurisdiction to grant declaratory relief to a stranger as to the
meaning and effect of a private contract between parties who have
not pursued any claim relating to rights or duties under that
The Court of Appeal dismissed the appeal and upheld the decision
of Justice Judd. The Court agreed that the Akron liquidators had a
real interest in the determination of CGU's liability on the
basis that, if the Akron liquidators succeeded in their claim
against the insured, it was likely that a liquidator of Crewe Sharp
or a trustee in bankruptcy of Mr Crewe would pursue CGU to
indemnify them for any judgment and costs orders.
Decision of the High Court
CGU appealed to the High Court. The High Court held there was a
"justiciable controversy" because the Akron liquidators
had a sufficient interest in the determination of CGU's
liability to indemnify Mr Crewe and Crewe Sharp. The High Court
decided that, if the Akron liquidators were successful in their
claim against Crewe Sharp and Mr Crewe and CGU were liable to
indemnify its insured, the Akron liquidators would be entitled to
the proceeds of the insurance policy payable by the insured for any
judgment or costs order.
This decision allows liquidators and trustees in bankruptcy to
join an insurer to proceedings to determine whether he or she has a
right to the proceeds of the insurance payable to the defendant in
respect of its liability to the liquidator or trustee. This is
particularly crucial in circumstances where a defendant has
insufficient assets to satisfy a judgment, but there is an
insurance policy that may respond to the claim.
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