Further consideration of non-disclosure, misrepresentation and joinder of insurers

Legal Directions

Blakeley v CGU Insurance Ltd VSCA 378

Introduction

This decision is the latest in a long running dispute between the liquidators of Akron Roads Pty Ltd (in liquidation) (Akron) and its insurer, CGU Insurance Ltd (CGU).

Background and earlier decisions

The factual background concerned a $14 million claim by the liquidators for insolvent trading against Crewe Sharp Pty Ltd (in liquidation) (Crewe Sharp) and one of its directors, Trevor Crewe (Crewe), who was sued as a shadow or de facto director of Akron.

The liquidators also sought a declaration against CGU that it was bound to indemnify Crewe Sharp and Crewe under a professional indemnity policy. The policy described Crewe Sharp’s business as ‘management consultancy’.

Prior to the trial at first instance, CGU challenged the liquidators’ standing to seek declarations against it in the High Court.

The liquidators asserted their standing arose via s562 of the Corporations Act 2001 (Cth) in respect of Crewe Sharp, which allows third party access to insurance proceeds held by companies in liquidation, and via the equivalent provisions in the Bankruptcy Act 1966 (Cth) for Crewe (who was not yet a bankrupt, but stood to become one)..

The High Court determined that the liquidators were permitted to act against CGU directly in relation to the insolvent trading action due to the existence of a ‘justiciable controversy’ between them and CGU [1].

Following the High Court’s decision, the liquidators, Crewe Sharp and Crewe entered into a deed of settlement whereby Crewe Sharp and Crewe agreed to have judgment entered against them for insolvent trading. The deed stated that enforcement of the judgment would proceed firstly in respect of any proceeds of the CGU policy (which had a $5 million limit) and secondly, against Crewe for the sum of $125,000, which he had arranged to be held on trust. This arrangement would see Crewe avoid bankruptcy.

Consent orders were entered requiring Crewe to pay the liquidators $12.9 million as an amount due to Akron.

The proceeding went to trial with only CGU opposing the liquidators’ claim. Robson J ultimately held in CGU’s favour, on the basis that cover extended to the Akron directorship as it fell within the meaning of the term ‘management consultancy’; however, Crewe Sharp and Crewe had contravened the non-disclosure and misrepresentation provisions of the Insurance Contracts Act 1984 (Cth) by failing to disclose the directorship to CGU. CGU gave persuasive evidence, via the underwriter who issued the policy, that it would have either not issued the policy or excluded the Akron directorship from cover had it known of the directorship at the relevant time.

Robson J gave judgment on various other issues, including holding that the settlement entered into by Crewe and the liquidators did not extinguish the existence of a justiciable controversy between the liquidators and CGU, and that due to the settlement deed, Crewe’s liability was restricted to $125,000, meaning that was the total amount recoverable by the liquidators against him. Finally, he dismissed the liquidators’ claim against Crewe Sharp on the basis that it was not acting as a de facto or shadow director of Akron, and therefore had not engaged in insolvent trading.

The decision was appealed by both parties.

Appeal

The liquidators’ grounds of appeal included challenging the findings on non-disclosure and misrepresentation, and that Crewe’s liability was limited to $125,000.

CGU cross-appealed on a number of grounds, including against the finding that the liquidators had standing to act against CGU following the deed of settlement, and that the policy responded to the insured’s claim.

On all issues except one, the Court of Appeal agreed with the trial judge. Their Honours held that cover was available due to the directorship falling within the meaning of ‘management consultant’. However, there had been non-disclosure and misrepresentation via the failure to disclose the directorship, meaning that the liquidators’ appeal failed. In forming this view, significant weight was given to the evidence from the CGU underwriter regarding what CGU would have done had it known of the Akron directorship. Their Honours described this evidence as ‘credible and compelling’ and stated that the judge’s conclusions based on this evidence were ‘unimpeachable’.

On the issue of whether there was still a ‘justiciable controversy’, the Court of Appeal dismissed CGU’s appeal, holding that Robson J had been correct in his view that the High Court’s reasoning was still good notwithstanding the effect of the deed of settlement. The Court of Appeal held that the terms of the deed of settlement in fact enhanced the liquidators’ interest in CGU, and therefore the level of justiciable controversy between them.

Finally, the Court of Appeal overturned the trial judge’s decision that $125,000 represented the extent of Crewe’s liability and therefore the amount that CGU was required to indemnify if the policy was enlivened. This was due to the existence of a binding High Court authority[2] that was not brought to the attention of the trial judge. The Court of Appeal ruled that the trial judge would have followed this decision had he known about it.

Comment

The Court of Appeal’s decision confirms that creditors (including but not limited to those represented by liquidators) will be able to seek from debtors (including those that are not yet bankrupt or in liquidation) an assignment of rights to the debtor’s insurance proceeds, and then join the insurer to the proceedings against the debtor pursuant to the relevant provisions of the Corporations Act and Bankruptcy Act.

The decision also underlines the significance in non-disclosure and/or misrepresentation cases of the evidence of underwriters regarding what action the insurer would have taken had there not been a disclosure or misrepresentation.

Further information / assistance regarding the issues raised in this article is available from the author, Ben Dowling, Special Counsel or your usual contact at Moray & Agnew.

[1] CGU Insurance Ltd v Blakeley (2016) 259 CLR 339
[2] CGU Insurance Ltd v One.Tel Ltd (in liquidation) (2010) 242 CLR 174


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