Court grants leave to proceed directly against an insurer to recover an insured liability

Limelight Articles

Limelight 02/18

Court grants leave to proceed directly against an insurer to recover an insured liability

Authors, Katherine Czoch , Nicholas Ben

Section 5 of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW)

Rushleigh Services Pty Ltd v Forge Group Limited (In Liquidation) (Receivers and Managers Appointed) [2018] FCA 26

Introduction

On 31 January 2018, the Federal Court of Australia granted leave to shareholders of a company in liquidation to proceed directly against the company’s insurers under the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (the Act).

The Act

Section 4 of the Act provides that a claimant may recover an insured liability from an insured person in the amount of the indemnity pursuant to the terms of the contract of insurance and subject to the Act.

In such proceedings, the insurer will stand in the shoes of the insured as if the proceedings were proceedings to recover damages or compensation from the insured person.

Section 5 of the Act provides that proceedings under section 4 must not be brought against an insurer without leave of the court.

Background

Forge Group Limited (Forge) was a public company that provided engineering, project management and maintenance services to Rushleigh Services Pty Ltd (claimant).

In February 2014, Forge went into voluntary liquidation and shortly thereafter liquidators were appointed following a profit write-down and a fall in its share price.

The Claimant commenced Federal Court proceedings against Forge and later joined its directors as co-respondents. However, the Claimant did not obtain the leave of the Court to proceed against Forge prior to commencing the proceedings, it instead sought retrospective leave to proceed pursuant to section 500(2) of Corporations Act 2001 (Cth).

On 7 December 2016, the Federal Court refused the Claimant’s application for leave to issue proceedings against Forge on the grounds that:

the allegations against Forge were substantially the same as those against the directors;
the prospect of returns to unsecured creditors at the end of the liquidation process was unlikely; and
there were insufficient grounds to circumvent the proof of debt process.

In July 2017, the Claimant applied for leave to join Forge’s insurers to the proceedings under the Act.

The Test

Three relevant criteria[1] must be satisfied when granting leave to join an insurer to proceedings pursuant to the Act:

an arguable case against the insured;
an arguable case that the policy responds to the applicant’s claim; and
a real possibility that, if judgment were obtained, the insured would not be able to meet it.

The Argument

The insurers conceded that the above criteria were met, but submitted that leave should be refused for the following reasons:

they would suffer irreparable prejudice because they were not well positioned to defend the claim and would incur an estimated $5.7M in legal costs;
there would be no utility in joining them because the Claimant could obtain relief through proceedings already on foot against the directors[2]; and
joining them would circumvent the earlier decision to deny the Claimant leave to proceed against Forge and would be an improper exercise of the Court’s discretion under the Act.

The Decision

The Claimant was granted leave to proceed against the insurers. In dismissing the insurers’ arguments, the Court stated that:

Forge was required under the terms of the policy of insurance to provide all necessary assistance to the insurers;
no significant weight should be given to the additional costs to the insurers for defending the proceedings, or their disadvantage as to their knowledge of the factual circumstances;
the “no utility” argument was not enlivened because the Claimant would be prejudiced by the denial of leave to proceed against the insurers if certain claims were successful against Forge, but unsuccessful against the directors;
the earlier decision to refuse leave to proceed against Forge was a decision limited to that particular application and did not preclude future applications;
an application may be made to join an insurer under the Act without first exhausting all other avenues against an insured; and
the availability of alternative avenues of recovery against an insured, such as proof of debt, may be a relevant consideration of the Court when exercising its discretion to grant leave under the Act, but it was not determinative here.

Implications

If leave to proceed against an insolvent insured is refused, the Court may grant leave to proceed against its insurer under the Act.

An applicant may not have to exhaust all alternative methods of recovery against an insured before seeking leave under the Act, such as proof of debt, although it will be a relevant consideration in the granting of leave.

The potential costs that would be incurred by an insurer in defending a claim standing in the shoes of its insured do not appear to be a relevant consideration when determining an application for leave.

Date: 26 February 2018

[1] Bede Polding College v Limit (No 3) Limited [2017] NSWSC 579

[2] See DSHE Holdings v Abboud; National Australia Bank v Abboud [2017] NSWSC 579

Katherine Czoch Principal, Sydney Direct: +61 2 8240 8029 kczoch@gclegal.com.au

This publication constitutes a summary of the information of the subject matter covered. This information is not intended to be nor should it be relied upon as legal or any other type of professional advice. For further information in relation to this subject matter please contact the author.