Insurer goes bust on insolvency exclusion

Legal Directions

Kaboko Mining Ltd v Van Heerden (No 3) [2018] FCA 2055

In 2012, Kaboko was looking to develop manganese mines in Zambia. It entered into an agreement to supply ore from those mines to Noble. At the same time Noble provided a loan facility to Kaboko of US$10 million. Those funds were to be used for purposes agreed by Noble, and Kaboko agreed that ore from the mines would not be sold to any other party.

In 2014, Noble claimed Kaboko had breached the supply agreement and the loan facility. Among other breaches, Noble said ore had been sold to other parties without its consent. Noble sought repayment of the outstanding loan balance of
US$5.65 million, and served a statutory demand. Noble also alleged Kaboko’s directors had misled it about government approvals for the mines.

Ultimately Noble appointed receivers to Kaboko, which then went into administration, before entering into a deed of company arrangement.

In 2016, the administrators of Kaboko had it bring a Federal Court proceeding against its directors, alleging they had breached their duties in relation to the events involving Noble. They then sought indemnity under a D&O policy issued by AIG. It denied cover, saying the insolvency exclusion was engaged. It applied to a claim ‘arising out of, based upon or attributable to’ the actual or alleged insolvency of Kaboko, or its failure to pay debts as and when they fell due. The resulting dispute between AIG and Kaboko’s directors was determined in the Federal Court proceeding, as a preliminary question.

In the proceeding, Kaboko alleged the directors failed to ensure Kaboko complied with its obligations under the supply agreement and loan facility. AIG argued that the insolvency exclusion was engaged because the alleged breaches led to Noble demanding repayment of the loan, which in turn led to Kaboko’s insolvency. When particularising its loss, Kaboko relied upon its failure to repay the loan, and its failure to comply with the statutory demand. AIG argued that had Kaboko been able to repay the loan, the directors would not have been seeking cover. Indeed, Kaboko conceded that the alleged breaches ultimately led to its insolvency.

The court accepted that in determining whether the exclusion was engaged, it could look beyond the claim as pleaded. Having considered the background facts, it decided that the loss claimed in the proceeding did not arise or have its foundation in Kaboko’s insolvency, but rather through Kaboko losing the opportunity to develop the manganese mines. The court considered that view was also supported by commercial considerations. If AIG’s arguments succeeded, it would render the policy practically illusory, depriving directors of cover for claims based on conduct which played only some part in the alleged insolvency of their company. The court did however accept that the insolvency exclusion applied to costs of the receivers and administrators, which Kaboko had claimed from the directors as part of its loss.

Comment

Claims against directors frequently arise when control of the company passes to an insolvency practitioner. The court was concerned to confine the insolvency exclusion, to ensure the cover provided by the D & O policy was not undermined. The case is also a reminder of the importance of the words to describe how close a connection is required with the claim, before the exclusion will be engaged.

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


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