This recent decision by the High Court expands the possibilities
for claimants to recover in some circumstances where an insolvent
company has potentially applicable insurance, even where the
relevant insurer denies indemnity applies.
This decision is critical for both insurers looking to protect
their interests, or for creditors who are proceeding against
companies in liquidation or directors with limited assets who may
have been denied insurance.
The question for consideration by the High Court recently was
whether the exercise of the Supreme Court of Victoria's federal
jurisdiction extended to joining the insurer - CGU - under Section
562 of the Corporations Act (and Section 117 of the
Bankruptcy Act – equivalent). On this occasion, it
was not considered with the exercise of the discretion in making
the declaration, which had been considered by the trial judge in
the Court of Appeal.
The proceeding related to a company in liquidation, seeking to
proceed against three (3) former directors and a de-facto director,
for breaching their duties under the Corporations Act,
specifically in relation to insolvent trading.
The directors were insured in respect of their liabilities under
a professional indemnity policy with CGU and sought to claim under
that policy. CGU, however, denied indemnity on the basis of certain
exclusions under the policy. In circumstances where one of the
directors went into liquidation, and another had significantly
limited assets, the liquidators sought leave from the Victorian
Supreme Court to join CGU to the proceedings, so as to seek a
declaration that CGU was liable to indemnify the Directors under
The question was whether there was a justiciable controversy
between the liquidator and CGU, so as to give rise to a cause of
action for the third party. The joint judgment of the High Court
found the operation of the legislation, the denial of the indemnity
and the insured's non-acceptance of that denial, provided the
liquidator with a "sufficient interest" to constitute a
justiciable controversy. Justice Nettle found it to be a "real
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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