Professional indemnity insurers to be joined in insolvent trading claims

Insolvency: 23 March 2019

The defendants to insolvent trading claims or negligence claims brought by insolvency practitioners are often people who hold professional indemnity insurance such as company directors, solicitors, accountants or other professionals.

However, an insolvency practitioner is not usually entitled to make a claim on a person's insurance policy directly, even where the insolvent trading or negligence claim is well-founded or admitted. The insolvency practitioner is considered a stranger to the insurance policy contract.

The recent decision of the High Court in CGU Insurance Limited v Blakeley [2016] HCA 2 determined that an insolvency practitioner may be able to join a defendant's insurer and obtain relief against the insurer in respect of the defendant's conduct.

Background

Ross Blakeley, Michael Ryan and Quentin Olde of FTI Consulting were appointed joint and several liquidators (Liquidators) of Akron Roads Pty Ltd (Company) in March 2010.

In April 2013, the Liquidators commenced proceedings in the Supreme Court of Victoria against three former directors and a shadow director of the Company seeking compensation for the contravention of section 588G (insolvent trading) of the Corporations Act 2001 (Cth) (Act).

Two of the defendant directors had professional indemnity insurance with CGU Insurance Limited (CGU). Those directors made claims under the insurance policy, however, CGU rejected the claims on the basis that the conduct the subject of the proceeding was not covered by the policy.

Joinder of CGU

The Liquidators made an application to join CGU to the proceeding. They also sought declarations from the Court that CGU, pursuant to the professional indemnity policy of insurance, was required to indemnify the insured defendants in respect of the insolvent trading claim.

At first instance, his Honour Justice Judd of the Supreme Court allowed the application to join CGU. His Honour considered that it was just and convenient for the dispute between the Liquidators and CGU to be addressed in the same proceeding.

CGU appealed the decision to the Court of Appeal on the basis that the insurance policy was a private contract between the insured defendants and CGU, while the Liquidators were strangers to that contract. CGU argued that the Liquidators had no rights under the insurance policy. CGU also asserted that it had rejected the claims made under the insurance policy and so there was no point to joining it.  The Court of Appeal considered that the Supreme Court of Victoria had the power to join CGU and that there appeared to be practical utility in the joinder. CGU appealed again to the High Court of Australia.

Decision

The High Court found that the Supreme Court of Victoria had jurisdiction to join an insurer of a defendant to a proceeding where the plaintiff has a real interest in the application of the insurance policy.

The jurisdiction was found to be within the federal jurisdiction conferred on the Supreme Court of Victoria by section 39(2) of the Judiciary Act 1903 (Cth) and/or section 1337B of the Act. The question was whether there was a "justiciable controversycapable of constituting a matter for the purposes of the exercise federal jurisdiction.

Having determined that the Supreme Court of Victoria had jurisdiction to join CGU to the proceeding, the High Court unanimously dismissed the appeal.

Comment

As a result of the decision, insolvency practitioners are likely to be able to join an insurer to a proceeding and obtain direct relief against the insurer.

It also appears that the plaintiff insolvency practitioner will not need to obtain the consent or assistance of the insured defendant to make a claim under the relevant insurance policy. The fact that the insurer denies that the relevant conduct is covered by the insurance policy will not be relevant to the question of joinder.

The ability to join an insurer to a proceeding may also help to contain legal costs because it will not be necessary to bring separate proceedings against the insurer.

Insolvency practitioners should evaluate potential claims against defendants who have professional indemnity insurance including directors, accountants, solicitors and other professional advisors as it may be commercially viable to pursue such claims in light of the High Court's decision.