CGU Insurance Limited v Blakeley & Ors [2016] HCA 2

The High Court of Australia has held unanimously¹ that a person who commences proceedings against an insolvent company or a bankrupt individual can join that defendant’s insurer to the proceedings and seek a declaration that the insurer is liable to indemnify the defendant.

In a decision which potentially increases the assets available to liquidator and bankruptcy trustee plaintiffs, the High Court in CGU Insurance v Blakeley¹ has recently determined that plaintiffs may seek to join insurers to proceedings in circumstances where indemnity under the insurance contract is denied and the defendants to the primary claim are bankrupt or being wound up or likely to become so as a result of the claim.

CGU Insurance Limited v Blakeley [2016] HCA 2

Liquidators brought action against company directors under s 588M(2) of Corporations Act 2001 (Cth) – Liquidators sought to join third party insurer after insurer denied liability – Supreme Court had jurisdiction to grant declaratory relief on liquidators’ application – Meaning of justiciable controversy

The High Court of Australia in CGU Insurance Ltd v Blakeley & Ors [2016] HCA 2 unanimously confirmed that a third party can join a defendant’s insurer to a proceeding and seek a declaration of rights under the insurance agreement, provided that third party has a ‘real interest’ in the performance of the agreement and that there is practical utility in the court providing that declaration.

When a company is deregistered, it ceases to exist.[1] So what happens when a person has a genuine claim against that company but fails to commence proceedings before it is deregistered?

In a previous article, we addressed some of the pitfalls of drafting subpoenas and provided some tips and tricks for the drafting of subpoenas (see “The Pitfalls of Subpoenas”). Since that article, the NSW Court of Appeal has addressed the issue again with a timely warning to insurers that improperly drafted subpoenas will be set aside, in whole or in part.

Key Points:

Section 562A of the Corporations Act does not apply where liquidator realises a sum of money by assigning the proceeds of the reinsurance claim to a third party.

Liquidators of insurance companies face a major quandary when assessing reinsurance recoveries.

A new Court decision may undercut the legislative policy that reinsurance proceeds should be quarantined from the normal rules for paying out creditors of insolvent companies.

The High Court’s recent decision in Selig v Wealthsure Pty Ltd [2015] HCA 18 carries a warning for both financial service providers and their professional indemnity insurers.

Background

Introduction

Early in his or her appointment a liquidator in a creditors' voluntary liquidation (CVL) should consider applying to the Court to convert the CVL to a Court ordered winding up in insolvency.  Conversion may benefit the unsecured creditors, in whose interests the liquidator acts, by enabling the liquidator to pursue claims and make recoveries not available in a CVL. 

The reasons liquidators have applied for conversion include:

The Australian Corporations Act 2001 provides that a company in liquidation that holds insurance for the benefit of third parties must pay the proceeds of the insurance policy to those third parties in priority to other creditors.  Insurance proceeds payable to third parties under this provision are subject to deductions of "any expenses of or incidental to getting in" those proceeds.  The liquidator of Brighton Hall Securities Pty Ltd sought directions from the court regarding the liquidator's entitlement to deduct his fees and expenses from the insurance proceeds.