CGU & Blakeley - the Conclusion?
In CGU Insurance Limited v Blakeley [2016] HCA 2 previously summarised by William Roberts earlier this year the High Court of Australia found that a potential plaintiff can pursue a claim against an insolvent company’s insurer under that company’s insurance policy. This was controversial because it was a) untraditional, and b) enlivened the possibility of a swathe of unanticipated potential claims by plaintiffs brought directly against the insurer of an insolvent or bankrupt insured.
Based on the High Court’s decision, the claimants were free to sue the insurer, and did so. The case was remitted to the Supreme Court of Victoria for further consideration. Several weeks ago, Justice Robson handed down a comprehensive judgment in Re Akron Roads Pty Ltd (in liquidation) (No 3) [2016] VSC 657, which determined the numerous issues arising out of the insurer’s denial of the insurance claim, which was being pursued by claimants other than the insured.
Who’s who?
Insureds
Crewe Sharp Pty Ltd (in liquidation) (“Crewe Sharp”) – insured company in the business of providing ‘management services’. Engaged by Akron Roads to provide those services, including the appointment of a director. Claim by plaintiffs was undefended as Crewe Sharp was in liquidation.
Mr Trevor Crewe – sole director of Crewe Sharp. Appointed as a director of Akron Roads as part of the services being provided by Crewe Sharp. Settled claim by the plaintiffs.
Plaintiffs
Akron Roads Pty Ltd (in liquidation) – company which engaged Crewe Sharp for ‘management services’. Became insolvent and its claim was being brought by liquidators (identified below).
Ross Blakeley, Michael Ryan & Quentin Olde – the joint and several liquidators of Akron Roads. NB: not the liquidators for the insolvent insured (Crewe Sharp).
Other
CGU Insurance Limited – insurer for Crewe Sharp & Mr Crewe pursuant to a professional indemnity policy.
Robert Sill & John Sill – directors of Akron Roads. Settled claim by the plaintiffs.
Relevantly, the plaintiffs alleged that:
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Crewe Sharp was a shadow director of Akron Roads;
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Mr Crewe and Crewe Sharp breached section 588G(2) of the Corporations Act 2001 (Cth) by failing to prevent Akron Roads from incurring debts whilst insolvent; and
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CGU was liable to indemnify Mr Crewe and Crewe Sharp.
Expanding on Standing
The most interesting aspect of this decision, were the arguments relating to the deed of settlement entered into by the plaintiffs and Mr Crewe in March 2016. The relevant terms of that deed were that consent judgment was entered against Mr Crewe for $12,992,880.05, but the plaintiffs would only pursue Mr Crewe for $125,000 of that sum. The plaintiffs expressly reserved their rights to pursue CGU for the difference between the judgment sum, and the amount paid by Mr Crewe.
As may be recalled from the High Court decision, one of the factors which permitted the plaintiffs to pursue CGU directly was the operation of section 117 of the Bankruptcy Act 1966 (Cth) in relation to Mr Crewe and section 562 of the Corporations Act 2001 (Cth) in relation to Crewe Sharp. On that basis, CGU argued that because Mr Crewe had settled the claim against him, he was no longer threatened with bankruptcy and accordingly, the standing provided by section 117 was no longer extended. The liquidators counter-argued that the deed provided them with alternative standing by assigning them any amounts paid under the policy.
The Supreme Court of Victoria was not persuaded by either of those arguments. The Court instead applied the reasoning of Nettle J from the High Court decision and found that the justiciable controversy survived the settlement deed, as well as Mr Crewe’s solvency, and the plaintiffs retained standing to seek declaratory relief from CGU.
Liability of the Insureds
Before considering the insurance claim, the Supreme Court of Victoria was required to determine whether there was a liability to be insured against.
On the facts, it does not appear to have been controversial that there was a breach of section 588G(2); however, section 588G(2) (in conjunction with section 588(M)) only creates a liability for breaches by a director. Mr Crewe was clearly a director, however, the plaintiffs sought to allege that Crewe Sharp was a shadow director and, accordingly, also liable.
The Court made a finding that Crewe Sharp was not a shadow director. This was based on the view that any director services were being provided through Mr Crewe himself, and any managerial services over and above Mr Crewe’s services as director were ‘entirely appropriate and not consistent with being conducted by a director’.
As Crewe Sharp was not a director, it could not be liable for a breach of section 588G(2). Accordingly, CGU could only be found liable to cover Mr Crewe’s liability, if otherwise required to indemnify. The Court found that, because the settlement deed restricted Mr Crewe’s liability to $125,000, CGU was only obliged to indemnify for $125,000. This was despite the fact that consent judgment was entered against Mr Crewe for $12,992.880.05 (although the $5m policy limit would have applied) and despite the fact that the settlement deed purported to reserve the plaintiffs’ right to pursue CGU over and above the $125,000. The Court said that “the insured is only to be indemnified for the actual damage or loss suffered by the insured” (our emphasis).
This seems to be an appropriate application of the principles of indemnity in circumstances where the insured settles the matter without the insurer’s input, or without the insurer being a party to the settlement.
Denial of Claim
In addition to the above defences, CGU also denied liability on a more traditional basis – arguing that the policy did not respond, arguing that an exclusion applied, and arguing that there was innocent non-disclosure or innocent misrepresentation that entitled it to reduce its liability to zero pursuant to sections 21 and 28 of the Insurance Contracts Act 1984 (Cth).
The Court found as follows:
CGU denied claim because:
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Court decided:
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The policy does not respond to Mr Crewe’s liability
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The policy did respond, however, it was capped at $125,000 due to the settlement deed.
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The policy does not respond to Crewe Sharp’s liability
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The policy would respond, however, Crewe Sharp was not a director and therefore not liable.
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Exclusion for claims ‘arising from a libility to pay trading debts, trade debts or the repayment of any loans’.
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Did not apply – as the claim arose from a breach of director’s duty not to trade, rather than a trading debt.
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Exclusion for claims ‘(if an insured is either an incorporated body or a director or office of an incorporated body) arising from any act, error or omission of a director or officer of that incorporated body while acting in that capacity’.
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Did not apply – as the exclusion applied to acts performed as a director or officer of the insured, rather than of an unrelated ‘incorporated body’.
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The insured failed to disclose and/or misrepresented the services being provided (i.e. Mr Crewe taking on the role of director of Akron Roads).
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If Crewe Sharp had disclosed that it was providing director and officer services to Akron Roads, then CGU would either have not entered into the policy, or would have required an exclusion for claims arising out of those services.
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Ultimately, CGU succeeded due to the insured’s breach of section 21 of the Insurance Contracts Act. Mr Crewe conceded that the fact that he was providing director and officer services to Akron Roads would be relevant to CGU’s decision to issue the policy. The plaintiffs argued that the broad definition of ‘management services’ might have included the provision director and officer services, however, the argument was defeated by a representation made by the insurance broker, who said of the ‘management services’: “none of the risks [sic] stuff you do not like (capital raising, bus valuations, M&a etc). Its all strategic management consulting centered around HR services”.
The Court considered this to be an innocent misrepresentation and, based on the underwriting evidence led by CGU (that CGU would not have issued the policy), the liability of CGU was reduced to zero, pursuant to section 28.
Is it over?
We consider the case unlikely to be appealed further by either party. The plaintiffs lost on an uncontroversial point (innocent misrepresentation) involving settled principles of law and a sound interpretation of the evidence. From CGU’s point of view, Justice Robson’s comments/interpretation on the ‘justiciable controversy’ issue might be inviting, however, given it obtained a favourable outcome, it is our expectation that CGU will not pursue the issue further.