One door closes, another one opens? Leave to proceed against insurers despite failed application to proceed against insolvent insured

The Federal Court of Australia has granted leave to shareholders of a company in liquidation to proceed against the company's insurers under the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW), after an earlier application for leave to proceed against the company was refused.

This decision is a warning to insurers that, where leave to proceed against an insolvent insured has been refused, it may still be granted to proceed against its insurer.

This article discusses this recent decision and provides important takeaways for insurers and their advisors.

Background

The Federal Court of Australia has granted leave to shareholders of a company in liquidation to proceed against the company's insurers under the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (CL(TPC) Act), after an earlier application for leave to proceed against the company was refused.

This is not the first case under the new legislation, which replaced section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (LR(MP) Act) in June last year, where leave has been granted to pursue a company's insurers.¹ However, Justice Markovic's judgment² provides the most detailed consideration to date of factors relevant to the exercise of the Court's discretion when determining whether leave should be granted.

Prior application to proceed against company in liquidation

In December 2014, a representative proceeding was commenced by Rushleigh Services Pty Ltd (Rushleigh) against Forge Group Limited (in liq.) (receivers and managers appointed) (Forge), and two of Forge's former directors.

In determining Rushleigh's application for leave to proceed against the company in liquidation, his Honour Justice Foster refused to grant leave because (among other things):

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

Application to proceed against insurers under new Act

In July 2017, Rushleigh applied for leave to join Forge's insurers, Chubb Insurance Australia Limited, Allianz Australia Insurance Limited, and Axis Speciality Europe SE (together, Insurers) to the proceedings directly, under the (then brand new) CL(TPC) Act.

Unlike its predecessor, which creates a statutory charge over certain insurance monies, the CL(TPC) Act creates a standalone cause of action, permitting claimants to force insurers to stand in the shoes of their insureds, effectively as a 'subrogated defendant'. However, as with its predecessor, the right to recover from insurers under the CL(TPC) Act is not unlimited. Among other things, the Court must give leave to the claimant to proceed against the insurer.

In determining whether leave should be granted, Justice Markovic noted the decision in Bede Polding College v Limit (No 3) Limited & Anor,⁵ where it was held that, for leave to be granted (under the LR(MP) Act), a claimant must show three things:

• 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.

Here, there was no dispute that all three of these criteria were met. Instead, Insurers submitted that leave should not be granted for the following reasons:

• if leave was granted, Insurers would suffer irreparable prejudice as they were not as familiar with the factual matrix or relevant documents as Forge, and defence costs were estimated at $5.7 million (with $2 million for discovery costs alone);
• as in the case of DSHE Holdings Ltd (receivers and managers appointed) (in liq) v Abboud; National Australia Bank v Abboud (DSHE Holdings)⁶, there would be no utility in joining the insurers as parties; and
• joining Insurers to circumvent the outcome of the earlier application for leave to proceed against Forge would not be a proper basis for the exercise of the discretion.

Justice Markovic was not persuaded by any of the Insurers' arguments, and noted that:

• the policy terms required Forge to provide all necessary assistance to its insurers;
• significant weight should not be given to the additional costs faced by Insurers upon being joined or the fact they are inherently less well-positioned to defend proceedings compared to their insured;
• the circumstances here can be distinguished from those in DSHE Holdings, as the potential for certain claims to succeed against Forge but not against the directors would only serve to prejudice the plaintiffs if leave were not given for the insurers to stand in Forge's place;
• Justice Foster's decision to refuse leave as against Forge was limited to the circumstances of that application, and did not preclude a future application under the LR(MP) Act as then in force;
• there is no requirement under the CL(TPC) Act for a claimant to exhaust all avenues for proceeding against the insured directly before leave may be given to proceed against an insurer;⁷ and
• while the availability of the proof of debt procedure may be a relevant factor in the exercise of the discretion to grant leave under the CL(TPC) Act, it was not determinative here because:

1. a number of claims against Forge overlapped with claims against the directors, such that substantially the same claims would need to be proven in two different forums with potentially inconsistent results;
2. if Rushleigh and the other group members' proofs of debt were rejected by Forge's liquidators, they would need to appeal, and any such appeal would traverse many of the same issues to be determined in the main proceedings while also potentially leading to inconsistent findings between any such appeal and the main proceedings; and
3. the refusal of leave to proceed against Forge does not mean that it cannot be found liable to Rushleigh or the group members — the CL(TPC) Act provides that an insurer stands in the place of its insured, as if they were the insured, therefore a finding of liability against Insurers standing in Forge's place would still be a "loss" for the purposes of policy response.

Important takeaways for insurers and their advisors

Where leave to proceed against an insolvent insured has been refused, leave may still be granted to proceed against its insurer.

The availability of alternative methods of claiming against the insured directly, such as by proof of debt, does not preclude leave being granted to proceed against an insurer, although it is a relevant consideration.

The fact that insurers will incur costs in defending proceedings if joined, and that they are not as well-positioned to defend proceedings as their insureds, is unlikely to be an important factor in determining whether leave to proceed against insurers ought to be granted.

If you are interested in reading the full decision for Rushleigh Services Pty Ltd v Forge Group Limited (in liquidation) (receivers and managers appointed), [2018] FCA 26, you can read it here.

¹ See, e.g. Zaki v Better Buildings Constructions Pty Ltd [2017] NSWSC 1522.

² Rushleigh Services Pty Ltd v Forge Group Limited (in liquidation) (receivers and managers appointed) [2018] FCA 26

³ Broadly speaking, the plaintiffs allege misleading or deceptive conduct, false representations and failures to disclose certain information to the Australian Stock Exchange in breach of the Corporations Act 2001 (Cth). IMF Bentham is also involved as litigation funder for the plaintiffs.

⁴ An application for transfer of proceedings to the Supreme Court of New South Wales was also refused, for other reasons. For full reasons, see Rushleigh Services Pty Ltd v Forge Group (in liq) (receivers and managers appointed) [2016] FCA 1471.

⁵ [2008] NSWSC 887.

⁶ [2017] NSWSC 579. DSHE Holdings concerned an application to join a number of directors and officers insurers to proceedings under the LR(MP) Act in circumstances where the insured directors and officers were already parties to the proceedings. As the insurers had already confirmed indemnity (subject to reservations) in respect of the plaintiffs' claims, his Honour Justice Stevenson held there was no utility in joining the insurers.

⁷ Her Honour also cited the NSW Law Reform Commission Report that led to the enactment of the CL(TPC) Act, which expressly noted that the Act is intended to permit a claimant to recover where a defendant is a corporation in liquidation, notwithstanding the existence of the proof of debt process.