The High Court, in its decision in CGU Insurance Limited v Blakeley  HCA 2, held that the Supreme Court of Victoria had jurisdiction to join the professional indemnity insurer of directors of an insolvent company as a defendant to a proceeding brought by liquidators against the directors for failing to prevent the company trading whilst insolvent.
Facts and history
The proceeding was commenced by the liquidators of Akron Roads Pty Ltd (“Akron”) in the Supreme Court of Victoria against Akron, directors of Akron including a company which the liquidators alleged was a shadow director within the extended definition of director in the Corporations Act 2001 (Cth) (“Act”).
Under sections 588M(2) and 588G of the Act the liquidators claimed $14.6 million from the directors for insolvent trading.
The relevant defendants, had professional indemnity insurance with CGU. CGU had declined to indemnify those defendants in relation to the insolvent trade claim. Those defendants did not cross-claim against CGU, or apply to join it to the proceeding to challenge its denial of indemnity under the insurance contract.
In the first instance proceeding in the Supreme Court of Victoria (Akron Roads Pty Ltd (in liq) v Crewe Sharp & Ors  VSC 34 (13 February 2015), Akron’s liquidators applied to join CGU as a defendant, and leave was sought for orders including a declaration that CGU was liable to indemnify the directors in relation to any judgment obtained against them by Akron’s liquidators.
In that proceeding, Judd J made the orders sought by Akron’s liquidators [i] holding that the liquidators had standing to apply for declaratory relief because they had a sufficient interest in the proceeds of insurance. His Honour found that “there is a justiciable dispute consequent upon CGU’s denial of liability under the policy”. [ii]
CGU appealed to the Court of Appeal, contending that the Court did not have jurisdiction as the liquidators were in effect strangers to the insurance contract between CGU and the director, who themselves were not contesting the denial of liability by an insurer.
The Court of Appeal dismissed the appeal, finding that there was a sound basis for the liquidators to seek declaratory relief under the contract of insurance, due to the “real interest” of the parties in the resolution of the issue. [iii] The Court also held that it would be an abuse of process for CGU or the insured defendants to re-litigate questions dealt with in the declaratory proceedings. [iv]
The High Court was asked to consider whether the claim by Akron’s liquidators involved a matter arising under a law of the Commonwealth, which if found, would afford the Supreme Court of Victoria jurisdiction to grant the declaratory relief sought.
The High Court decision
Dismissing the appeal, the High Court found that the “interest”, involving a question arising under a Commonwealth law, which formed the basis of the claim by the liquidators and CGU’s denial of liability under the insurance policy, was sufficient for the claim to be a “justiciable controversy”.
The High Court held that, in the circumstances, the Supreme Court of Victoria did have federal jurisdiction, invested under the Judiciary Act 1903 (Cth), to entertain the claim by the liquidators that CGU was liable to indemnify the insured director defendants. The Supreme Court also had the power to grant the declaratory relief sought.
Key take outs from the High Court’s decision
- This decision gives new clarity as to the circumstances under which a party suing an insured can join that insurer into the proceedings against the insured.
- If the liquidators of Akron are ultimately successful in their claim insolvent trading against the directors, then the liquidators will have a right to the proceeds payable to the insured defendants under the insurance contract.
- The case therefore opens up a new source of funds for liquidators to pursue, which is particularly important where insured defendants are insolvent.