In the recent decision of CGU Insurances Limited v Ross Blakeley, Michael Ryan and Quentin Olde as joint and several liquidators of Akron Road Pty Ltd (In liquidation) (Akron Roads), the High Court of Australia (High Court) held that federal jurisdiction vested in the Supreme Court of Victoria (Court) and accordingly, the Court was able to determine an application by the liquidators to join a third party insurer to their proceeding (including any declaration sought by the liquidators directly against the third party insurer that it be liable to indemnify the insolvent parties that the liquidators sued).
This decision impacts upon:
- The ability of liquidators to directly recover against directors and other parties that are insolvent where an insurance policy is in existence; and
- Conversely, insurance companies that insure directors and other parties that become insolvent in claims brought or commenced by liquidators.
Overview of facts
In essence, the brief facts of this decision are as follows:
- The liquidators of Akron Roads commenced proceedings in the Supreme Court of Victoria against the directors of Akron Roads. In addition, a further party was joined as a defendant, Crewe Sharp Pty Ltd (Crewe Sharpe), a company that one of the directors of Akron Roads was a director of and provided consultancy services to Akron Roads. It was alleged that Crewe Sharpe was acting as a “Shadow Director”. Crewe Sharp was in liquidation. Although the directors were not yet bankrupt there was allegedly insufficient assets to meet liabilities;
- The liquidators of Akron Roads sought an order pursuant to the Corporations Act that the directors of Akron Roads and Crewe Sharp pay an amount for loss and damage suffered by the creditors of Akron Roads in relation to debts incurred by those directors due to their failure to prevent the company from trading whilst insolvent;
- Crewe Sharp made a claim on its professional indemnity policy with CGU for indemnity in relation to the claim brought against it by the liquidators of Akron Roads. One of the directors of Akron Roads was also an insured person pursuant to that particular insurance policy;
- CGU denied coverage pursuant to the insurance policy. CGU was of the view that the claims against Crewe Sharp and Mr Crewe were expressly framed as arising from breaches of their directors’ duties and therefore were not encapsulated by the policies. In particular, the insurance policy allegedly contained an exclusion for the liability of directors “arising from any act, error or omission of a director or officer of that incorporated boy while acting in that capacity“. Further, CGU also relied upon an exclusion of claims “arising from a liability to pay trading debts, trade debts, or the repayment of any loan“. In addition, the defence of CGU alleges that Mr Crewe and Crewe Sharp breached their obligations under the Insurance Contracts Act 1984 (Cth) by failing to disclose that they provided company director and officer services; and
- Later in the proceeding, the liquidators of Akron Roads filed an application seeking an order that CGU be joined directly as a defendant. Although not a party to such obligations the liquidators of Akron Roads sought leave for an amended claim to be served seeking a declaration that CGI was liable to indemnity Mr Crewe and Crewe Sharp pursuant to the insurance policy with respect to any judgement and costs order obtained by the liquidators of Akron Roads against them (Relief sought by Liquidators).
The decisions of the lower Courts
The Supreme Court of Victoria made orders seeking the Relief sought by the Liquidators. In particular at paragraph 48 of the reasons provided the judge at first instance stated:
“The claim by the plaintiffs, that CGU is bound to indemnify the insured, arises out of, or relates to, or is connected with their claim against the insured as defendants. The plaintiffs have a sufficient interest in the proceeds of insurance to provide them with standing to apply for declaratory relief. Furthermore, by reason of s 562 of the Act, and the duty of liquidators to creditors of Akron Roads, there is a justiciable dispute consequent upon CGU’s denial of liability under the policy.”1
The Court of Appeal of Victoria also found in favour of the liquidators, dismissed the appeal of CGU and allowed the Relief sought by the Liquidators. In particular, it concluded2 “For present purposes, all that matters is that the first and second respondents have a sound basis for seeking declaratory relief, on the basis that there may be practical utility in having an issue in which they have a real interest resolved in this manner.”
The decision of the High Court
The High Court dismissed the Appeal by CGU. In other words, the High Court found in favour of and supported the position of the liquidators of Akron Roads.
In essence, the matter before the High Court was essentially argued based on ‘jurisdiction’. The majority of the High Court found that, among other things:
- The claim raised by the liquidators of Akron Roads (ie. the claim against the parties for failing to prevent insolvent trading) was one that fell within the subject matter area of the federal jurisdiction;
- The claim of the liquidators of Akron Roads was one that reflected a justiciable controversy between the liquidators of Akron Roads and CGU. If the liquidators were successful in their claim for damages suffered due to the failure of the directors to prevent insolvent trading, along with establishing liability of CGU, then by virtue of section 562 of the Corporations Act (in the case of Crewe Sharp) and section 117 of the Bankruptcy Act (in the case of Mr Crewe if he were to become a bankrupt) the proceeds of the CGU insurance policy would be remitted to the liquidators of Akron Roads. The majority held that the claim of the liquidators is consequential upon the operation of section 562 of the Corporations Act (or section 117 of the Bankruptcy Act as the case may be). Accordingly, the interest (ie. right to proceeds) upon which any declaratory claim was based along with CGU’s denial of liability was sufficient to constitute a justiciable controversy between the liquidators and CGU that involved a law of the Commonwealth; and
- Regard was had to issues of practical significance such as the re-litigation of similar issues.
As a result, the High Court determined that the Victorian Supreme Court had federal jurisdiction to consider a claim by the Liquidators of Akron Roads along with the power to grant the Relief sought by the Liquidators.
Implications of the decision
The implications of the above mentioned decision are wide ranging in liquidations involving both liquidators and insurers. In the case of liquidators, among other things, this decision is likely to encourage liquidators in circumstances where insurance policies are in play, in relation to defendants that are insolvent, to seek to pursue and join the insurers of the director (or other parties).
Conversely, such a decision will mean that insurers will need to be alert where policy holders go into liquidation or some other form of insolvency. Where those insolvent policy holders face claims from third parties that are also insolvent, insurers will need to be prepared for claims made by insolvency practitioners directly.
This article was written by Grant Whatley, Partner.
1Paragraph 52 of CGU Insurance Limited v Blakeley & Ors  HCA 2 at  commenting on paragraph 48 of the decision of Judd J at first instance.
2Paragraph 58 of CGU Insurance Limited v Blakeley & Ors  HCA 2 at  commenting on paragraph 37 of the decision of the Victorian Court of Appeal.