Akron Roads Pty Limited (Akron) and its liquidators brought proceedings against the directors of Akron, including Crewe Sharp Pty Limited (Crewe Sharp) and Trevor Crewe (Crewe). They allege the directors breached the Corporations Act by failing to prevent Akron from trading while insolvent. They seek damages of $14.6 million.
Crewe Sharp and Crewe sought indemnity for the claim under a professional indemnity policy with CGU Insurance Limited (CGU). CGU denied indemnity. Crewe Sharp and Crewe did not challenge the denial.
Crewe Sharp subsequently went into liquidation and did not participate in the proceedings. Although Mr Crewe is not bankrupt, he has insufficient assets to cover the claim.
The liquidators sought leave to join CGU as a defendant and, if successful, propose to seek a declaration that CGU indemnify Crewe Sharp and Crewe for their liability to compensate Akron. Crewe consented to CGU’s joinder and indicated he disagreed with the denial of indemnity. Crewe Sharp was unfunded, not in a position to investigate a claim against CGU and took no position on the application.
The liquidators relied on s 562 of the Corporations Act and s 117 of the Bankruptcy Act. Section 562 of the Corporations Act provides that, where a company in liquidation held insurance for liability to third parties and a payment is received pursuant to that insurance, the liquidator of the company must pay that money to the third party to the extent necessary to discharge that liability, in priority to other payments. Section 117 of the Bankruptcy Act contains comparable provisions with respect to a bankrupt individual.
CGU opposed the application on the basis that, inter alia, there was no justiciable controversy between the liquidators and CGU given the liquidators were not a party to the contract of insurance. In addition, CGU argued that the declaratory relief sought was in respect of circumstances that had not occurred and might never happen. Specifically, for the policy to respond, the liquidators would first need to succeed in their claims against Crewe or Crewe Sharp and until this liability was established the liquidators’ interest in the policy would be hypothetical.
The Supreme Court of Victoria allowed the joinder of CGU and found that the liquidators had sufficient interest in the proceeds of insurance to provide them with standing to apply for declaratory relief.2 CGU’s appeal to the Victorian Court of Appeal was dismissed.3
CGU’s appeal to the High Court of Australia (the High Court) was unanimously dismissed.
The majority4 noted that if the liquidators made good their claims against Crewe Sharp and Crewe, and established that CGU was liable to indemnify its insured, the proceeds of the policy, so far as they relate to Crewe Sharp, would have been payable to the liquidators subject to s 562 of the Corporations Act. If Crewe became bankrupt, then s 117 of the Bankruptcy Act would have a similar effect. The High Court therefore considered that the liquidators’ claim did not depend upon the principles of contract law or privity of contract and it was irrelevant that the liquidators were not a party to the contract of insurance.
The High Court considered that the liquidators’ interest pursuant to s 562 of the Corporations Act, s 117 of the Bankruptcy Act and CGU’s denial of indemnity was sufficient to constitute a justiciable controversy between them.
The High Court’s decision means that CGU’s liability to indemnify the directors will be determined at the same time as the directors’ liability to the liquidators and not in any subsequent proceedings.
The High Court’s decision clarifies certain circumstances in which courts will permit the joinder of insurers to proceedings on the application of a non-party to the insurance contract. The court’s considerations will include the most practical and cost effective method of resolving the dispute.
The clearest cases will involve liquidators who stand to benefit from the provisions of s 562 of the Corporations Act or s 117 of the Bankruptcy Act.