High Court confirms insurers of insolvent companies can be joined to proceedings

Date: March 16, 2016


High Court confirms insurers of insolvent companies can be joined to proceedings

 CGU Insurance Limited v Blakeley & Ors [2016] HCA 2 (11 February 2016)

Key Points


Akron Roads Pty Ltd (in liquidation) (Akron) commenced proceedings in the Victorian Supreme Court (VSC) against Akron’s former directors including Trevor Crewe (Crewe) and Crewe Sharp Pty Ltd (CS) alleging that Crewe and CS were liable for loss and damage suffered by Akron’s creditors as a result of alleged insolvent trading.

CS claimed under their professional indemnity insurance held with CGU Insurance Limited (CGU) in relation to the insolvent trading claim. Crewe was also an insured under the policy. CGU declined to indemnify both parties on the basis of the directors and officers and trading debts exclusion in the policy.

During the proceedings, CS went into liquidation and Crewe indicated he would be unable to satisfy any judgment made against him. Akron applied to the VSC to join CGU to the proceedings as a defendant and for leave to seek a declaration that CGU was liable to indemnify CS and Crewe.  CS and Crewe were unable to take steps to contest the denial of indemnity.

Akron relied upon section 562(1) of the Corporations Act which provides that a company or its liquidator is obliged to pay to a third party any amounts received from an insurer under an insurance contract in respect of the company’s liability to a third party.

An analogous provision can be found in section 117 of the Bankruptcy Act 1966 (Cth).

At the first instance, Judd J made the orders sought by Akron and held that the liquidators were entitled to seek declaratory relief because they had “sufficient interest” in the proceeds of insurance.

On appeal, CGU contended that the Court did not have the jurisdiction to make orders with respect to liquidators as they were strangers to the insurance contract between CGU and the parties, who were not challenging the denial of liability.

The appeal was dismissed on the basis that whilst it is generally accepted the contracting parties have an interest in the contract to which they are parties, the position changes when an insured becomes insolvent and there are unpaid claimants whose claim would ordinary be responded to by an insurance policy.

The High Court Decision

CGU successfully applied for special leave to appeal to the High Court.

The High Court found that CGU’s denial of indemnity constituted a “justiciable controversy” between CGU and Akron.

The appeal was unanimously dismissed on the basis that CGU’s denial of indemnity and sections 562 of the Corporations Act and 117 of the Bankruptcy Act meant that liquidators had sufficient interest in the determination of whether CGU was entitled to deny indemnity.

Nettle J confirmed that whilst it is not normally appropriate to make decisions about the effect of a contract on application of a non-party to the contract, this was an exception as it could not be rationally said that a claimant who qualifies as a beneficiary pursuant to section 562 or section 117 is an “outsider” to the relevant policy of insurance.

Lessons Learnt

This case opens the gates for liquidators and other claimants to join insurers to proceedings when indemnity has been denied by the insurer to insolvent defendants. There may be a significant increase in exposure to third party claims as a result.

However, it should be noted that two main criteria must be met. Namely, that the insurer denies liability for a claim and the insured is insolvent and unwilling or unable to do anything to contest the denial.


For more information on this article, please contact:

Hamish Craib or Melissa Wroe

Disclaimer: This article is intended for informational purposes only and should not be construed as legal advice. For any legal advice please contact us.


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