Simplifying the court process

Professor Bob Baxt considers a judgement showing that a court will eliminate unnecessary burdens facing claimants in litigation if the critical central issues can be considered earlier.

While corporate law rules have been modified in the last 15 years to make it arguably easier for company directors to obtain some form of indemnity coverage in relation to claims that may be made against them acting as directors, generally speaking courts have been quite rigid in providing much flexibility to directors who need to obtain funding, or utilise indemnity arrangements that they believe operate, in order to adequately defend themselves in defending such legal actions. Now in CGU Insurance Limited v Blakeley, and others [2016] HCA 2, an attempt by the insurance company to defeat claims on behalf of relevant directors to join CGU Insurance Ltd (CGU) in an action brought by their company’s liquidators against the directors was “foiled” by the High Court of Australia in this major decision.

The liquidators of Akron Roads Pty Ltd (Akron) brought a claim pursuant to section 588G of the Corporations Act 2001 (Commonwealth) (the Act) against certain directors of Akron including Trevor Crewe, and another alleged director of Akron namely Crewe Sharp Pty Ltd (Crewe Sharp). Mr Crewe and his company had taken out a professional indemnity policy with CGU.

The liquidators of Akron asked the Victorian Supreme Court for an order to allow it to join CGU to its section 588G proceedings against the directors. This would effectively speed up any later litigation arising out of the same claim.

The action by the liquidators relied on section 562 of the Act (and a parallel provision of the Bankruptcy Act 1966 – section 117), which allowed the joinder of parties linked to a person being sued. The joinder application was made under Victorian Supreme Court Civil Procedure Rules, which allows the Supreme Court of Victoria to make an order for a person to be joined to relevant legal proceedings if “a question arises out of” or “in relation to” that person’s relationship with the party to the relevant proceedings. The court cannot make an order unless it is just and convenient so as to ensure that there is no duplication in the determination of relevant laws.

CGU opposed the application on the basis that the court did not have jurisdiction in such a matter. It claimed that the relevant party (namely Mr Crewe and his company) were not parties to the contract between it and Akron and that this application should not be given leave to proceed. Justice Judd ruled in favour of the liquidator in the Victorian Supreme Court. The Victorian Court of Appeal dismissed CGU’s appeal on the basis that any application for joinder required the balancing of relevant rights – the rights of the joint party and other parties, the relationship relating to the issues arising out of the claim and whether joinder would advance the cause of justice by ensuring that the relevant legal issues were determined. The High Court ruled on the basis of jurisdiction rather than discretion. CGU argued that section 562 of the Act did not establish any substantive rights in favour of third parties such as the liquidator.

There were reasonable grounds for suspecting that Akron was insolvent or, alternatively, would become insolvent at the time the debts were incurred.

Two judgements were delivered by the High Court: a joint judgement of Chief Justice French, Justice Keifel, Justice Bell and Justice Keane, and a separate judgement of Justice Nettle. The majority judgment noted “the Supreme Court of Victoria, enjoyed an inherent power to grant declaratory relief”. In their view section 36 of the Supreme Court Act 1986 (Victoria), in terms common to Australian states, allowed the court to rule that “a proceeding is not open to objection on the ground merely declaratory judgement is sought, and the Court may make binding declarations of right without granting consequential relief”(at paragraph 13). They noted that there were parallel provisions in the Judiciary Act of the Commonwealth. Paragraph 16 of this judgement outlined the sense of the decision to allow joinder and for the matter to be dealt with together. Their Honours noted as follows: “Akron was said to be insolvent during the [period under consideration] and further, or alternatively, throughout lesser periods.”

There were reasonable grounds for suspecting that Akron was insolvent or, alternatively, would become insolvent at the time the debts were incurred. Each of the directors was said to have failed to prevent the company from incurring the debts and to have been aware that there were reasonable grounds for suspecting that the company was insolvent or would become insolvent by incurring the debts. The directors were said, thereby, to have contravened section 588G(2) of the Act. The creditors to whom debts were owed had suffered loss and damage in relation to these debts because of the company’s insolvency.

The High Court judges then considered the terms of the relevant insurance policy, and in their view the nature of the claims were such that it was within the power of the Victorian Supreme Court to adjudicate on the relevant questions. They noted at paragraph 24: “The existence before a court of a question of the relevant subject matter class is necessary to the court’s authority to adjudication.”

They added at paragraph 26: “It is a necessary condition of federal jurisdiction, in the sense of authority to exercise the judicial power of the Commonwealth, that the matter in which the jurisdiction the court has invoked is ‘capable of judicial determination’.”

The judges then made these additional helpful comments: “It is a particular application [of a general statement of the law] to say that the matter will arise under a federal law if it involves a claim at Commonwealth law or equity or under a law of a state where the claim is ‘in respect of a right or property which is the creation of federal law’. If the source of a defence to a claim at common law or equity or under a law of a state is a law of the Commonwealth, then on that account also the matter may be said to arise under federal law” (paragraph 29).

Finally, the High Court judges described the question posed in this case in these terms: “[The] question for this appeal is whether the Akron liquidators claims for declaratory relief against CGU involved a matter arising under a law of the Commonwealth in which the Supreme Court had federal jurisdiction, invested by statute, to exercise the judicial power of the Commonwealth in the sense [described in previous paragraphs of this judgement]. Alternatively, the question may be asked whether the claim was part of the matter in which the liquidators claimed against the directors” (at paragraph 33). In their view the matter was within the jurisdiction of the Supreme Court of Victoria exercising federal power in relation to the operation of section 588G of the Act.

They went on to consider the specific questions in dispute. They added: “The key finding of Justice Judd was the claim by the plaintiffs, that CGU is bound to indemnify the insured, arises out of, or relates to, or is connected with their claim against the insured as defendants. The plaintiffs have a sufficient interest in the proceeds of insurance to provide them with standing to apply for declaratory relief. Furthermore, by reason of s 562 of the Act, and the duty of liquidators to creditors of [Akron], there is a justiciable dispute consequent upon CGU’s denial of liability under the policy”.

This was a case in which the Supreme Court exercised federal jurisdiction to evaluate the claims of the company.

The central question in this case, the majority of judges stated, could be put quite simply:  “Crewe Sharp have made a claim against CGU under the policy and CGU have denied the claim. Neither Crewe Sharp nor its liquidators nor Mr Crewe accepted the denial of liability. Mr Crewe, who was also an insured person under the policy, disagreed with the decision and consented to the joinder of CGU. The liquidators of Crewe Sharp were not in a position to investigate CGU’s denial of liability and took no position under joinder.”

In these circumstances the declaration sought by the liquidators was binding between them and CGU. These are matters that would be evaluated at trial. This was a case in which the Supreme Court exercised federal jurisdiction to evaluate the claims of the company, and its liquidators against the insurance company. In the circumstances the appeal was dismissed.

The judgement of Justice Nettle is shorter and also evaluated discretionary matters that the courts considered earlier. While there were a number of questions that would arise in the trial when the questions of potential liability would be examined in greater detail, this did not prevent the particular issues being addressed in the Victorian Supreme Court.

This is a very useful judgement showing that the courts will eliminate unnecessary burdens facing claimants in litigation if the critical central issues in the main case can be considered at an earlier stage.