Australia: Change In Financial Position Of The Company Ought To Have Been Disclosed Prior To Policy Inception

Last Updated: 14 October 2008
Article by Richard M Midgley

Martin John Green in his capacity as liquidator of Arimco Mining Pty Limited (in liquidation) v CGU Insurance Limited & Ors [2008] NSWSC 825

The Supreme Court of New South Wales upheld a denial of indemnity by CGU under a directors and officers policy on the grounds of misrepresentation and non disclosure by the insured, thereby avoiding a potential liability of about $21 million.

The claim was brought by liquidator against directors for insolvent trading. The liquidator also made a direct claim against CGU as the insurer of the directors, following its denial of indemnity.

The court undertook an analysis of the financial and operational position of the company between the date of the annual report for the company and policy inception, some 6 months later. This was for the purpose of determining whether changes which had occurred in that interim period were relevant to the risk and ought to have been disclosed. The court then considered what CGU would have done had the relevant information been disclosed before it accepted the risk.


Arimco Mining Pty Limited, part of the ARL Group, mined gold and copper.

In mid December 1998, the ARL Group submitted a proposal form to CGU as part of its application for directors and officers cover.

With its proposal, the ARL Group provided its annual report for the year ended 30 June 1998. The annual report disclosed an operating profit of $3.59 million from an operating revenue of $152 million. It foreshadowed growth in the following year.

The proposal form asked whether there was 'any subsequent information of a material nature not disclosed in the attached financial statements ... that could affect the financial position...[of the Group]'. ARL answered 'No'.

CGU issued a policy to the ARL Group (including Arimco) and their directors and officers, for the period 31 December 1998 to 31 December 1999.

In January 1999, the ARL Group suffered significant operating losses. Arimco sustained an operating loss of $5.4 million.

Mr Green was appointed as voluntary administrator of Arimco and later appointed as liquidator.

In 2001, claims were foreshadowed against the directors of Arimco and the directors notified CGU of this. CGU denied liability to indemnify the directors in relation to any foreshadowed claim.

In 2004, Mr Green commenced proceedings against the directors seeking recovery of more than $21 million. It alleged the directors participated in insolvent trading.

A direct claim was also made by Mr Green against CGU, as the directors' insurer, pursuant to s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 which allows a direct claim against an insurer in particular circumstances.

In July 2006, the claim against the directors was settled on the basis that judgment was entered against each of the directors for $15 million. CGU did not participate in this settlement and the direct claim against CGU proceeded to trial.

CGU's position

The threshold issue was whether the directors would have been entitled to indemnity under the policy in respect of the insolvent trading allegations.

CGU argued that it was entitled to reduce its liability to nil because of non disclosure and misrepresentation by Arimco and its directors, in relation to the financial position and operations of the Group.

CGU called expert evidence to the effect that by the end of December 1998:

  • The financial position of the ARL Group had deteriorated materially due to the falling copper price, operating losses in the 5 months to November 1998 and the need for reassessment of the carrying value of the mines
  • The Group had no reliable forecast due to significant changes at the mines
  • The Group patently had liquidity problems: it had used the proceeds of a rights issue (which monies were supposed to be used for exploration purposes) for payment of trade creditors
  • ARL's financiers were reviewing its facilities
  • A third party claim for $15 million had been made against the Group.
  • Further expert evidence was called by CGU from an experienced mining engineering company director to the effect that:
  • By 31 December 1998 certain information in the Group's 30 June 1998 report ceased to be a fair and accurate description of its financial position
  • By November 1998, there had been significant change in the prospects, profitability and reserves of the areas mined such that by November, and more so by December 1998, ARL's financial position had deteriorated considerably
  • The ARL board was aware in November 1998 of significant adverse changes in mining operations and the need for revised forecasts
  • ARL's financiers were conducting a review of facilities and the indications concerning the review were negative
  • Reported results had led to a significant downward revision of reserves at ARL's 2 largest mines.
  • CGU contended that had the substantial changes in the operation of the mines and the financial position of the Group and / or the third party claim for $15 million been disclosed then it would have added an insolvency exclusion to the policy.

This exclusion would have excluded indemnity for any liability of the directors for insolvent trading. CGU also contended it would have only offered a policy with a lower limit of liability.

Liquidator's response

The liquidator submitted that the Group had been in operation successfully for an extended period and had suffered ups and downs on a number of occasions. Thus, the matters known to the directors did not ring alarm bells and did not require disclosure.


The court reviewed the obligations of insureds under s 21 of the Insurance Contracts Act 1984. That sections requires disclosure of matters that:

  • The insured knows to be a matter relevant to the decision of the insurer to accept the risk and, if so, on what terms or
  • A reasonable person in the circumstances could be expected to know to be a matter so relevant.

Permanent Trustees v FAI was cited as confirming that the word 'know' in s 21 is a strong word which required more than a suspicion or belief on the part of the insured. Rather, it required a true belief with sufficient assurance to justify the term 'know'.

Einstein J found that the Group had represented to CGU that its annual report as at 30 June 2008 fairly represented its position in December 1998. This was done by the Group providing a copy of the annual report with the proposal and answering 'no' to the proposal question whether there had been any subsequent material information that could affect the Group's financial position or operations.

In fact, since the annual report, there had been significant adverse operational changes which had affected Arimco's position and performance.

It was found that by December 1998, the directors knew that:

  • There had been significant adverse changes at a number of the mines
  • Financial forecasts available to directors were no longer accurate and required revision
  • Cash resources and net assets had fallen
  • The operations were behind budget and had become loss making
  • The Group had a severe liquidity problem and was on extended terms with some creditors and was holding back cheques each month
  • A third party had made a $15 million claim against the Group.
  • It was held these matters ought to have been disclosed to CGU because they were relevant to the risk being underwritten.

Ultimately, the court held that had the misrepresentation and non disclosure not occurred then CGU would have added an insolvency exclusion to the policy. However, had the $15 million third party claim against the Group been disclosed only, it was found CGU would have only issued an exclusion specifically relating to that claim.


This decision provides a useful analysis of the type of information that is seen to be relevant to assessment of risk for underwriters of D&O policies. It also highlights the need for insureds, and the desirability for their brokers, to carefully consider whether material provided to the insurer remains current and does not misrepresent the risk due to changed circumstances.

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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