In the matter of Reed Constructions Australia Pty Ltd (in Liquidation) – Walley v Chubb Insurance Australia Ltd

HIS HONOUR: By notice of motion filed 11 June 2019, the applicant liquidators of Reed Constructions Australia Pty Ltd seek leave pursuant to s 5 of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) to bring proceedings against Chubb Insurance Australia, (Chubb) and to join Chubb as a defendant to pending proceedings in the Equity Division which they are bringing against Mr Geoffrey Vere Reed, a director of the company. The application is opposed, separately, by Chubb and Mr Reed.

The underlying proceedings are for declarations and orders for the payment of money pursuant to s 588M of the Corporations Act 2001 (Cth) for debts incurred between 31 January 2012 and 15 June 2012 (when voluntary administrators were appointed pursuant to s 436A) by the company while it is said to have been insolvent. The claim is in an amount of some $11.795 million. The proceedings were commenced in 2016 and are presently listed for hearing in October 2019 (some two months’ time) with an estimate of slightly more than two weeks. No point has been taken about the delay in bringing this application (which should also presumably have been by way of interlocutory process rather than notice of motion, although nothing turns on that). I have had the benefit of full written submissions, including written submissions in reply, in advance of the hearing and oral submissions today. In light of the imminence of the hearing it is desirable that the application be resolved promptly.

Reed Constructions Australia was a subsidiary of Reed Building Group Pty Ltd which was the insured under a ForeFront Portfolio policy of insurance issued by Chubb providing, relevantly, coverage for Directors’ and Officers’ liability of up to $11 million inclusive of costs - see cl V.(A)(3) (“Defence Costs are part of and not in addition to the applicable maximum Limit of Liability ... the payment by the Company of Defence Costs erodes such Limit of Liability”).

The detail of the insurance policy does not presently matter. It is accepted that Mr Reed notified Chubb of the claim represented by the proceedings brought against him in October 2016. The detail of Chubb’s response to that notification has been the subject of extensive submissions before me and needs to be reproduced quite fully.

Chubb's letter of 21 November 2016 provides:

The letter goes on to say:

In a nutshell, Chubb has by that letter formally advised that it will advance defence costs to Mr Reed during the conduct of the defence of the proceedings, subject to the possibility that they may need to be repaid, has made it plain that it is reserving its rights under the policy, but nonetheless has confirmed that the policy responds to a claim which has been properly notified to it. There is no direct evidence before me on point, but I see no reason to doubt that Chubb has, on the basis summarised above, made indemnity to Mr Reed in respect of substantial defence costs incurred by him to date.

The liquidators originally joined another director, Mr Derry Bernard Hill, suing him in respect of the same debts incurred by the company in respect of the same period. The proceedings against him have relatively recently been compromised. The terms of that compromise are confidential. The application before me has been conducted today on the basis that notwithstanding allowance being made for such settlement, the liquidators’ claim remains sufficiently large to exhaust whatever is left of Chubb’s $11 million policy.

The litigation predates the 2017 Act. Even so, it is that statute, rather than s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW), that applies. The latter applies only to “actions brought against insurers under that section before the commencement” of the 2017 Act: see s 12. Although the litigation was commenced in 2016, the application to proceed against Chubb was made in 2019 so it is the 2017 Act that is applicable.

Provisions of this kind have a long history. In addition to the 1946 Act, provision has long been made in compulsory third party insurance for the insurer to be joined to proceedings between a plaintiff who alleges negligence on behalf of an insured driver in circumstances where there is a dispute between insured and insurer: see Insurance Australia Ltd v Dent [2019] NSWCA 134.

Section 4 of the 2017 Act provides:

The background to the 2017 Act is helpfully reproduced by Markovic J in Rushleigh Services Pty Ltd v Forge Group Ltd (In Liq) (Recs and Mgrs Apptd) [2018] FCA 26; 355 ALR 248 at [37]-[48], including the portion of the New South Wales Law Reform Commission report which stated that “proceedings can be instituted against the insurer before [relevantly, the insurer’s liability] have been finally established, but only with leave of the court”: 4.24. The following paragraph of the report states:

The requirement of leave is imposed by s 5, which is as follows:

Although the requirement of leave is preserved, the 2017 Act proceeds quite differently from s 6 of the 1946 Act. Rather than conferring a proprietary interest in the form of a statutory charge over “insurance moneys”, as was the case with former s 6, s 4 of the 2017 Act speaks directly of a right of recovery against the insurer. Where an insured apparent has an insured liability to a person, who is known as the claimant, then s 4 permits the claimant to recover the amount of the insured liability from the insurer in proceedings before a court.

It has long been the case that in an application under s 6 of 1946 Act it was necessary to establish an arguable case that there was a policy which responded to the claim and a real possibility that if judgment were obtained the insured defendant would not be able to meet it: see Guild Insurance Ltd v Hepburn [2014] NSWCA 400 at [44] and the authorities there cited. It is common ground today before me that these prerequisites are satisfied.

Mr Reed’s inability to meet any substantial judgment arises from the facts established before me that in January 2014 he executed a personal insolvency agreement under Part X of the Bankruptcy Act 1966 (Cth). In 2015 the trustee purported to terminate it. However, orders made by consent in the Federal Court binding Mr Reed, the former liquidator and Chubb declared that the purported termination was void and provided that:

So far as I can see, all that presently matters of this history is that by consent order made in the Federal Court, the liquidators’ predecessor obtained leave to bring the insolvent trading claim, subject to a condition that subject to obtaining further leave of the Federal Court, they could only execute against the proceeds of Mr Reed's insurance. No party made any submission that the history was otherwise relevant.

It is also common ground that an application for leave, whether it be under s 6 of the 1946 Act or s 5 of the 2017 Act, remains subject to the exercise of a discretion. That common ground accords with a line of authority binding me, most recently Wayland v Bird [2017] NSWCA 26 at [26]:

In Energize Fitness Pty Ltd v Vero Insurance Ltd [2012] NSWCA 213 at [59], Campbell JA said:

Of greatest significance for present purposes are four first instance decisions. The first two are decisions of this Division. In Opes Prime Stockbroking Ltd (in liq) (Scheme Administrators apptd) v Stevens [2014] NSWSC 659 and DSHE Holdings Ltd (Recs and Mgrs Apptd) (In Liq) v Abboud; National Australia Bank Ltd v Abboud [2017] NSWSC 579, a policy responded to a claim against a defendant. The defendant was actively defending the claim but would likely be unable to meet a judgment. The insurers had not admitted liability in unequivocal terms, but had done so pursuant to a qualification which preserved their rights to deny liability if facts emerged during the litigation which engaged an exclusion. In both cases leave was refused.

In the former Ball J said at [20]:

In the third case, Rushleigh v Forge, the defendant insured was in liquidation and an earlier decision had refused leave to proceed against the company. In those circumstances leave was sought and obtained against the insurer. Markovic J distinguished Opes Prime and DHSE Holdings on the basis that “it could not be said there was no utility, because the claimant was unable to proceed against the insured”: see at [80]-[81].

The fourth case is a decision of McCallum J in Damm v Coastwide Site Services Pty Ltd [2018] NSWSC 611. The facts were unusual. The decision was an ex tempore grant of leave, by consent, in circumstances where one of the defendants had somewhat unexpectedly become deregistered (“without the knowledge of the lawyers or the insurers”). In those circumstances, her Honour granted leave to join the insurers to the litigation. It is no criticism of her Honour’s consent judgment, but there was no analysis of the judgments to which I have referred above in that decision.

The liquidators, as I understand it, accept that, if they succeed against Mr Reed after trial, they have bound themselves, by reason of the Federal Court orders made on 19 May 2016, from seeking to recover any unpaid balance from Mr Reed which cannot be recovered from the proceeds of the policy. They also accept, as I understand the position, that they cannot recover from Chubb any more than the total policy limit in respect of a judgment that they might obtain. No submissions were made to me as to the circumstances in which leave might be granted to alter the present effect of the Federal Court order.

There was a change in emphasis between the written submissions exchanged before the application and the oral submissions I have heard this morning. The liquidators’ written submissions correctly anticipated that the gravamen of their application would turn not so much on the statutory prerequisites but on the acknowledged residual discretion to the grant of leave under s 5. Dealing with the discretionary basis for their application, the written submissions provided as follows:

In oral submissions, Mr Ashhurst SC who appeared with Ms Shepard for the liquidators, candidly acknowledged that there might be a benefit obtained by joinder, as anticipated in their written submissions obviating the need to seek a third party costs order against the insurer, but stated that that was merely a collateral benefit. At the forefront of the oral submissions was an attempt to distinguish the insurer’s responses in Opes Prime and DSHE, and to focus upon the qualifications in Chubb’s response to Mr Reed's claim. It was put that Chubb had not to date made a determination to grant indemnity, and that there continued to be a risk that a dispute might arise. A smaller point was to contrast some aspects of the language of Chubb's letter to Mr Reed with what had been said in its response to Mr Hill’s notification. I shall deal with that immediately.

I do not think anything turns upon those differences in wording which are, on any view, minor. The counterpart second paragraph of the letter to Mr Hill was as follows:

Although emphasis was given to the adverb, and there were other minor differences in the otherwise comparable response written two days later by the same officer of Chubb, I do not consider that anything material today turns upon that difference in language.

The liquidators emphasised that joining the insurers to the litigation now would avoid the risk, and consequent disadvantages to them, of any later dispute, which might involve not only delay but separate proceedings between insurer and insured, which might in due course impact upon their rights to indemnity. They pointed to Chubb’s solicitor’s affidavit, on information and belief, to the effect that Chubb would “make a determination on coverage under the Policy for any liability found against Mr Reed if and when such loss crystallises”, as confirming the fact that no determination had been made.

I agree with the stance evinced in the liquidators’ oral submissions tending to minimise the “collateral” advantage that they might obtain, if orders were made on their application joining Chubb, in relation to what presently would be a third party costs order. The premise of the analysis is that the liquidators ultimately succeed and obtain judgment, whether after trial or by compromise. In those circumstances, it is likely that they will also obtain a favourable costs order.

As presently advised, although I have heard no submissions upon it, it would seem that attempting to enforce any such favourable costs order arising out of the underlying proceedings would also fall within the Federal Court order (it would be taking steps “to enforce any judgment or settlement in respect of the Insolvent Trading Claim obtained by them against Reed”).

If the insurers are not joined to the proceedings, it might be possible for the liquidators to seek and obtain a costs order against Chubb, which in those circumstances will have been funding Mr Reed’s unsuccessful defence: see Selig v Wealthsure Pty Ltd (2015) 255 CLR 661; [2015] HCA 18 at [39]-[48]. I do not express any view as to the merits of such a claim.

If, however, Chubb were joined as a defendant, as is adumbrated in the liquidators' written submissions, it might be possible to obtain a costs order directly against Chubb, for either the whole or perhaps part of the costs of the proceedings. Further, because Chubb’s obligations under that costs order would be directly owed to the liquidators, it would at least arguably - again, I am not expressing any view about this - fall outside the policy limits.

I accept the submission of Mr Darke SC, who with Ms Campbell appeared for Chubb, that such a result is a purpose which would be foreign to the 2017 statute. True it is that the 2017 Act does not speak in terms of the separate liability for costs following an order made under s 98 of the Civil Procedure Act 2005 (NSW). However, “liability” is defined in s 3(1) to mean “a liability to pay damages, compensation or costs” (my emphasis) and s 4(3) provides that, subject to the balance of the statute, “the parties have the same rights and liabilities, and the Court has the same powers, as if the proceedings were proceedings brought against the insured person”. That provision seems to me to be inconsistent with an outcome where the liquidators, if this application be granted and they succeed at trial and obtain a judgment which exhausts the policy, can then recover a favourable costs order directly against the insurer, so as to obtain benefits exceeding those available under the policy limits. That result would seem to place the liquidators in a materially improved position than they would otherwise have been, contrary to s 4(3).

On one view, s 4(3) may have the effect of circumscribing the discretion as to costs in s 98 of the Civil Procedure Act and Uniform Civil Procedure Rules 2005 (NSW), r 42.1. That is not a question that arises today. It would arise if, as the liquidators emphasised in their oral submissions before me today, there was some other, proper, basis for proceeding under the 2017 Act, and the consequences which I have outlined above would flow collaterally.

I turn then to the primary basis which was advanced orally. I do not regard there to be a material distinction between Chubb’s response to the claim on its policy by Mr Reed, and the responses of the insurers in Opes Prime and DSHE. Indeed, insofar as the responses by the insurers in those cases are reproduced in the reasons for judgment, they seem to me to be on all fours with Chubb’s response in this case. In DSHE the response of the insurer is partially reproduced at [28], and it made plain that the insurer will make provision for defence costs, subject to (a) a specific preservation in relation to the possible operation and exclusion, (b), the repayment obligation of defence costs if the exclusion operates and (c) a general reservation under the D&O policy and at law. That is precisely what Chubb has done in the present case. Further, the letter by the insurer in DSHE referred in terms to the dishonesty exclusion and an exclusion arising under s 199B of the Corporations Act and then stated:

Less as to the specifics of the insurer's response in Opes Prime is included in the judgment, but nothing which has been reproduced at [9]-[10] suggests that any materially different stance was presented by that insurer.

Still further, the liquidators’ submission to me bears a close resemblance to the unsuccessful submission recorded at [33] of DSHE, and rejected by Stevenson J:

I respectfully agree with what Stevenson J there wrote, and in my view it is applicable to the present circumstances. Here, no differently from DSHE, it is difficult to see how much further Chubb could take the matter at the moment.

Mr Ashhurst realistically accepted that the insurer could not be expected at this stage irrevocably to confirm cover. In other words, he accepted, and in my view he was completely right to accept, that the insurer could not preclude itself from taking advantage of an exclusion or limitation of liability depending upon facts which might emerge and findings which might be made in the litigation in October of this year. When that is borne in mind, it seems to me that the qualifications in Chubb's letter go as far as an insurer could be expected to go in the present circumstances. The fact that Chubb’s solicitor has deposed to Chubb’s intention only to determine coverage if and when a liability crystallises may strictly speaking be accurate, but it does not detract from the force of what it has said in its correspondence to its insured.

It follows that in my view, the situation is on all fours with the result which was reached in Opes Prime and confirmed in DSHE. I do not think it is appropriate to grant leave under the 2017 Act in circumstances where there has not been demonstrated to be any controversy between insured and insurer. It is not necessary to address the further prejudice, in the form of costs, to which Chubb pointed.

There are two final matters. The first is that on the view I have reached it is not necessary to say anything about a point raised on behalf of Mr Reed, concerning the proposition that s 6(2), which deals with the time within which such application must be made, cannot defeat the six years provided for in s 588M of the Corporations Act. I mean no disrespect to anyone but that is not a submission as to which full submissions have been made and it strikes me as one which is not free from complexity.

The second and final observation is that nothing in this determination on this notice of motion would preclude the liquidators from making a further application, in the event that there is a material change of circumstances (most obviously, evidence of a real dispute between insured and insurer).

For those reasons, I shall dismiss the notice of motion filed 11 June 2019.

[Argument concerning costs].

Following a constructive discussion as to costs, the unsuccessful liquidators accept that they should pay Chubb’s costs of the application, and that as a third party to litigation, that order will be enforceable forthwith.

The larger issue concerns whether the liquidators should, as they seek, only have to pay Chubb’s costs leaving Mr Reed to bear his own costs, or whether they should also bear Mr Reed’s costs.

The parties have accepted that detailed reasons are not required (nor indeed sought) in relation to the exercise of discretion as to costs. I shall not seek to summarise the submissions that have been made. There was on any view overlap in the written submissions made by Mr Reed and his insurer. I fully accept that he had an entitlement to be here and to choose to be represented separately, by senior counsel. However, the ultimate question in the exercise of discretion in a case such as this where a plaintiff is unsuccessful but there are more than one set of costs of the successful parties is whether it is fair for the plaintiff to bear the entirety of those costs. The authorities are collected in Local Democracy Matters Inc v Infrastructure NSW (No 2) [2019] NSWCA 118 at [20]-[22], including the “general principle” that “the court will not normally allow two sets of costs to defendants where there is no possible conflict of intent between them in the presentation of their cases”. In my view this an appropriate case to confine the costs order only to the sole respondent to the notice of motion, namely, Chubb.

The orders of the Court therefore as to costs will be: