Recent decisions by the Federal Court of Australia have considered whether an applicant should be given access to a respondent's insurance documents, with varied results.
Re Style Ltd; Merim Pty Ltd v Style Ltd  FCA 314
On 2 April 2009, Justice Goldberg in the Federal Court of Australia granted Merim Pty Ltd (Merim) access to Style Ltd's (Style) company books, including Style's directors and officers (D&O) insurance policies, under section 247A of the Corporations Act 2001 (Cth) (Corporations Act).
Merim was a shareholder of Style. It sought access to the company books so that it could consider whether to bring derivative actions against Style's directors and officers. Merim advised that the books would allow it to investigate whether Style's directors and officers had complied with their statutory and fiduciary directors' duties, misled shareholders and the market regarding the performance of the company and/or contravened the insolvent trading provisions.
Style raised various arguments against Merim's application, including that Merim was not seeking the documents for a proper purpose as it was considering a potential takeover of Style.
Justice Goldberg held that Merim had not been given satisfactory information on the financial issues it had raised and it was therefore entitled to inspect Style's books. The fact that Merim was considering a takeover of Style was not sufficient to prevent Justice Goldberg from granting access to the company books. His Honour was of the opinion that Merim was acting in good faith and that the inspection was for a proper purpose.
Scope of access
Justice Goldberg concluded that the wholesale and general inspection of Style's books would cause unnecessary disruption to Style and was therefore not appropriate. Access was only given in relation to the books that had a bearing on, and were particularly relevant to, the issues Merim had raised. This included Style's D&O insurance policies and schedules, which Justice Goldberg held fell within the definition of 'books' in section 9 of the Corporations Act.
Merim was aware that Style held D&O insurance as it is stated in Style's Annual Financial Report for the year ended 30 June 2007. However, it did not know the specifics of the coverage provided, including the limit(s) of indemnity, or whether there was a current policy. Justice Goldberg ordered that Style produce for inspection any of its current D&O insurance policies as the cover granted under any such policies would have a bearing on whether Merim would seek leave to bring proceedings on behalf of Style in its name against any of Style's directors or officers.
Justice Goldberg did not consider that a confidentiality regime was necessary as section 247A requires that the party given access must not disclose the information, other than to the Australian Securities and Investment Commission, and he believed that that requirement sufficiently protected Style.
Wingecarribee Shire Council & Lehman Brothers Australia Ltd
On 21 May 2009, Justice Rares in the Australian Federal Court ordered Lehman Brothers Australia Ltd (Lehman) to produce various insurance documents, including its D&O insurance policies, to Wingecarribee Shire Council (Council).
Lehman appealed this decision, with the Full Court of the Australian Federal Court upholding the appeal and therefore overturning the orders for Lehman to produce the documents.
The Council's proceedings related to collateralised debt obligations (CDOs) it purchased from Grange Securities Ltd (Grange), a company subsequently acquired by Lehman. Following purchase, the CDOs plummeted in value as a result of the subprime crisis. The Council alleges that Grange's financial advice, which was allegedly made by the directors, was misleading and/or deceptive.
Lehman is currently in voluntary administration. In a report to creditors dated 19 March 2009, Lehman's administrators state that Lehman may have the benefit of proceeds of insurance policies that it holds with three separate insurers, both within Australia and overseas. Limited information was provided about the nature and extent of cover provided by the policies, the identity of the insurers or whether the Council's claim would be covered.
The report to creditors included a proposed Deed of Company Arrangement (DOCA), which the administrators intended submitting to creditors at the next creditors' meeting. The DOCA provided that a pool of AU$35 million would be established to meet creditors' claims. In exchange, all creditors (including third party litigation funders acting on behalf of creditors) would provide releases in favour of Lehman, its affiliated entities and its directors and officers. No release would be provided in relation to the insurers unless a settlement was reached with insurers. In those circumstances, a release would then be provided to insurers in exchange for the settlement.
On 30 April 2009, the Council filed a motion under section 440D(1) of the Corporations Act seeking leave to proceed against Lehman and orders requiring Lehman to provide the Council with copies of all of its insurance policies, including its professional indemnity and D&O policies, and all correspondence between Lehman and its insurance brokers and insurers relating to claims or notifications of circumstances made under the policies.
Wingecarribee Shire Council v Lehman Brothers Australia Ltd (No 2)  FCA 503
Justice Rares delivered his judgment on the Council's motion on 8 May 2009, granting the Council leave to proceed against Lehman and ordering the Council's application for the insurance documents to be heard. Justice Rares held that:
'The question whether a respondent or defendant has assets that are available to satisfy a judgment and whether there is another party who may be liable, such as an insurer the subject of a charge under section 6 of the Law Reform (Miscellaneous Provisions) Act are matters which are within the power of the Court to require to be disclosed in the proceedings themselves...'
Wingecarribee Shire Council v Lehman Brothers Australia Ltd (No 2)  FCA 532
On 19 May 2009, Justice Rares heard the Council's application for access to Lehman's insurance documents.
On 21 May 2009, Justice Rares granted the Council access to Lehman's insurance policies under section 23 of the Federal Court of Australia Act 1976 (Cth) (FCA Act). His Honour relied on the principles stated by Justice Deane in Jackson v Sterling Industries Ltd (1987) 162 CLR 612 at 623, that the power conferred by section 23 extends to the making of orders to prevent the abuse or frustration of the Court's processes in relation to the matters coming within its jurisdiction.
Justice Rares stated that an abuse of process would arise if the administrators put the proposed DOCA to creditors at the upcoming meeting without providing further information regarding the insurance arrangements because if implemented, the DOCA would extinguish the Council's entitlement to claim damages from Lehman and its directors. The Council was entitled to inform itself of whether Lehman had insurance that may respond to the Council's claim as it may be entitled to seek and enforce a charge over the insurance monies under section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW).
Lehman Brothers Australia Ltd v Wingecarribee Shire Council  FCAFC 63
Lehman appealed Justice Rares' decision, contending that his Honour failed to identify anything that amounted to an abuse of process or frustration of the Court's processes within the established authorities.
The Council contended that an abuse of process would be constituted by the opinion formed by the administrators that it was in the interests of the creditors to approve the DOCA, while at the same time failing to provide adequate information about Lehman's insurance arrangements that would allow creditors to make an informed decision.
The Full Court of the Australian Federal Court upheld Lehman's appeal. It accepted that the Court does have the power to make orders for production of insurance documents under section 23, but that the exercising of the power is one of discretion. The Full Court did not agree with Justice Rares' decision that an abuse of process would result if the insurance documents were not provided. It held that:
- The passing of a DOCA that may extinguish the Council's rights was not sufficient to constitute an abuse of process.
- The administrators' opinion that creditors should accept the DOCA was not an abuse of process as it was authorised by law. The issue in question was therefore whether the failure to provide adequate details of the insurance agreements constituted an abuse of process.
- There was no evidence to suggest that the draft DOCA was likely to be passed because of the failure by the administrators to provide the information about Lehman's insurance arrangements.
- What was conceptually relevant was the need to show that a substantial number of creditors would at least have considered voting against the DOCA if the insurance arrangements were available. The Council did not establish this.
Kirby Centro Properties Limited  FCA 695
On 26 June 2009, Justice Ryan of the Australian Federal Court refused Kirby's application for access to the insurance policies of various entities in the Centro Properties Group (Centro). Three shareholder class actions have been filed in the Australian Federal Court against Centro.
They broadly relate to the classification of current and non-current debts in the unaudited 30 June 2007 financial statements and the subsequent reclassification of the debts. The Federal Court has ordered the class actions be mediated on 20 July 2009.
On 24 December 2008, Kirby (the applicant in two of the class actions) filed a Notice of Motion seeking access to:
'Any policy of insurance which responds (or is alleged by either of the respondents to respond) to any of the claims made by the applicant in the proceeding.'
Access was sought under Order 72 Rule 7 of the Federal Court Rules (concerning the conduct of mediations) and/ or section 33ZF of the FCA Act (concerning the Federal Court's general power to make orders) and/or Order 15 Rule 11 of the Federal Court Rules (concerning orders for production of documents where they relate to a matter in question in the proceedings).
Kirby sought access to the insurance policies on the basis that they are necessary for his effective participation in the mediation. Kirby queried whether Centro could meet the amount of damages the class is seeking (which his lawyers estimate to be in excess of AU$5 billion). He submitted that he required the documents so that he could confirm the existence and extent of Centro's insurance coverage in order to be able to evaluate and/or agree to any settlement proposal at the mediation. Kirby's lawyers also submitted that they required the policies in order for them to be able to recommend any settlement to the class.
Justice Ryan stated that the question was whether Centro's 'perceived financial frailty... should require disclosure to [Kirby] and his advisers of what policies of insurance are held by [Centro] and the terms of the policies'.
Justice Ryan held that:
- The traditional view that the existence, or details, of a party's insurance policies will not normally be relevant to the proof of any cause of action pleaded against that party, still applies.
- While the authorities establish that a party's insurance cover will be relevant in some causes of action, Centro's insurance cover is not relevant to the causes of action in the class actions.
- Centro would be prejudiced if access to the insurance policies was ordered as Justice Ryan may allow Kirby to know the likely limit of monies that Centro could contribute to any settlement.
- He did not accept that Kirby or his lawyer would be precluded from forming an opinion regarding the reasonableness of any settlement proposal if they did not know of the existence and extent of Centro's insurance cover.
- He did not accept that the mediation would be 'hollow' or inconsistent with the Federal Court's mediation principles if the mediation proceeded without Kirby being given access to Centro's insurance policies.
- He was not persuaded that the existence or terms of Centro's insurance policies fulfilled the requirement of Order 15 Rule 11 of the Federal Court Rules as being a matter in question relevant to the proceedings.
- It was not within the power or discretion of the Court to compel disclosure to Kirby of the presumptive insurance policies.
The decision of Merim v Style is a concerning one for both directors and officers and their insurers, especially with the continuing rise in shareholder actions. Shareholders will now be able to access D&O insurance policies, under section 247 of the Corporations Act if the shareholder can show that it is acting in good faith and with a proper purpose.
Access to such documents will impact on a shareholder's decision on whether it should commence proceedings against the directors and officers as the documents will disclose the extent of coverage available and therefore the likely resources available to meet any judgment/ settlement. This may result in more directors and officers being joined to proceedings than have been in the past, particularly if the company has minimal assets.
Applicants will also be aware of the limit(s) of indemnity available for any claim. This may mean that, where the quantum of the claim exceeds the limit(s) of indemnity, the limit(s) may set the benchmark for any settlement negotiations. This increases the chances of insurers facing full limit losses and directors being asked to personally contribute to settlements.
It is unclear if Merim v Style could be used to consider claims against the company itself where the D&O policy provides Company Securities cover (generally referred to as Side C cover), rather than derivative actions against its directors or officers. However, where shareholders have been granted access to such a D&O policy on the basis that they are considering whether to bring derivative actions against the directors or officers, this may not permit the shareholders to subsequently rely on this information to commence a securities action against the entity, if so advised.
A rise in section 247A applications seeking access to D&O insurance documents in the future can be expected.
The Full Court's decision in Lehman v Wingecarribee is also a cause for concern for insureds and their insurers. While access to the insurance documents was not granted in this case, the door has not been closed to access being granted in the future. The Full Court agreed that the Federal Court has power to order a party to produce its insurance documents under section 23 of the FCA Act, where it can be shown that failure to do so will result in an abuse or frustration of its processes. This is a higher threshold than required for a section 247A application.
Unlike the other decisions, Kirby v Centro is a welcome decision for insurers and insureds. If access had been granted, a party's insurance policies would have become documents commonly disclosed prior to mediation. This would minimise an insurer's negotiating power during mediation and increase potential full limit losses.
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