What happened
All Class Insurance Brokers Pty Ltd operated as an insurance broker until a winding-up order was made on 17 April 2013 and Mr Vardy was appointed liquidator. Its sole director, secretary and shareholder, Mr Bowmaker, had made unauthorised withdrawals from the company's client trust account (held on trust under ss 981A, 981B and 981H of the Corporations Act 2001 (Cth)) commencing in the late 2000s. By 2013 the total misappropriated was alleged to be approximately $2,031,000. On 27 March 2013 Mrs Bowmaker notified the claim under the "Employee Theft Coverage Section" of the policy issued by Old Chubb (later succeeded by the respondent Chubb following a scheme of arrangement). The liquidator lodged a formal claim in September 2014 and supplied a proof of loss on 31 October 2014.
What followed was a protracted period of correspondence. Old Chubb appointed a claims manager and risk investigator, requested further information about the use of the misappropriated funds, the capacity in which Mr Bowmaker acted, and whether All Class had suffered a direct loss. Letters dated 16 February 2015, 31 March 2016 and 16 August 2018 expressly raised the construction questions that later became central: whether Mr Bowmaker was an "Employee" within the policy definition (given he was the sole director and therefore the "governing mind and will" of the company) and whether All Class had sustained a direct loss of money. All Class' responses were delayed; for example, the tracing analysis was not supplied until 5 February 2016 despite requests made in February 2015, and the liquidator's investigation report was not sent until 1 May 2018.
Proceedings were issued on 16 April 2019 against the wrong entity (Old Chubb). After correction to join Chubb, the insurer sought details of All Class' asset position on 8 July 2019 with a view to considering a security application. Court orders made on 9 August 2019 required Chubb to put a proposal and All Class to respond; All Class did not respond until 4 October 2019, stating it would provide no security. Chubb filed its interlocutory application on 8 October 2019 seeking $380,826.91 (later reduced to $117,800 for a 1-2 day liability hearing). The application was heard on 12 March 2020. Further evidence was ordered concerning the breakdown of the liquidator's $352,383 in unpaid fees and the attitude of the Committee of Inspection creditors. Four creditors ultimately indicated they were willing to contribute a total of $49,123.30. Allsop CJ delivered judgment on 19 June 2020 ordering security in the sum of $50,000, with a stay and potential dismissal if not provided.
Why the court decided this way
Allsop CJ first confirmed the threshold under s 1335(1) of the Corporations Act was met: All Class had been in liquidation since 2013 with no remaining funds and the liquidator's fees unpaid, and its solicitors and counsel acted on a speculative basis. The real contest was therefore the discretionary factors.
The Chief Justice placed significant weight on the Bell Wholesale principle that those who stand to benefit from litigation cannot shirk its burdens. The list of creditors showed 26 proofs of debt totalling over $2.2 million, the majority being insurance underwriters or brokers. Six creditors had claims exceeding $100,000, one being owed more than $841,000. These were described as "large insurance companies … acting and carrying on business in circumstances of sufficient solvency to maintain their licenses". Evidence filed after the hearing showed four of them (Global Transport, Hollard, IAG and High Street Underwriting Agency) willing to contribute almost $50,000. Because the order would not stultify the litigation, the powerful discretionary factor against security identified in cases such as Equity Access Ltd v Westpac Banking Corporation was absent.
Delay was examined in detail. Although the application was filed six months after proceedings commenced, the chronology showed the proceedings had initially been issued against the wrong entity, Chubb had flagged security on 8 July 2019 shortly after joinder, and All Class had failed to respond to timetabled proposals. No prejudice from the timing was proved by All Class. The application was therefore regarded as having been brought promptly in the circumstances.
The duty of utmost good faith under s 13 of the Insurance Contracts Act was held to extend to the conduct of litigation but not to prohibit a security application. Citing CGU Insurance Limited v AMP Financial Planning Pty Ltd, Allsop CJ stated that the duty requires conduct according to "commercial standards of decency and fairness" having regard to the legitimate interests of both parties. An application that does not stultify the insured's claim does not necessarily breach that standard. Allegations that Chubb had breached the duty by failing to admit, appoint a loss assessor or confirm/deny the claim were not pursued in the originating process and, on the chronology, were difficult to sustain given All Class' own delays in supplying information.
The argument that All Class' impecuniosity was caused by Chubb's refusal to pay was characterised as circular. If Chubb's construction (that Mr Bowmaker was not an "employee" and there was no direct loss) is correct, it was never obliged to indemnify. Because the security order would not stultify the case, it was unnecessary to investigate the strength of that causation argument on an interlocutory basis.
Finally, the insurer-insured relationship was acknowledged as relevant but given little weight. While older authority (Irwin Alsop) suggested insurers should rarely receive security because their business is to bear losses, Allsop CJ preferred the line of authority (Prime Forme Cutting, Tenth Anemot, Pioneer Park) that large corporate defendants, including insurers, are not outside the policy of the security provisions. The voluntary assumption of risk by Chubb could not be taken far without resolving the substantive construction dispute. Balancing all factors, security was fair, but only for the costs of a short hearing on the construction issues that divided the parties. The sum of $50,000 was fixed on that basis, with the usual stay and self-executing dismissal order.
Before and after state of the law
Prior to this judgment the authorities were divided on security for costs against insured plaintiffs. Ormiston J in Irwin Alsop Services v Mercantile Mutual Insurance Co Ltd had expressed the view that because insurers are "pre-eminently loss-bearing and loss-sharing entities" it is not ordinarily appropriate to grant security in their favour. That approach was not followed in a series of first-instance decisions (Prime Forme Cutting Pty Ltd v Baltica General Insurance Co, Frankston Ambassador Pty Ltd v Cigna Insurance Australia Ltd, Tenth Anemot, Silverstone Holdings). Einstein J in Green (liquidator of Arimco Mining) v CGU Insurance Ltd surveyed those authorities and concluded that Irwin Alsop should not be followed; large corporate defendants are not exempt from the statutory policy. The New South Wales Court of Appeal in Pioneer Park Pty Ltd (in liq) v Australia and New Zealand Banking Group Ltd endorsed that view. The duty of utmost good faith had been held in Ensham Resources Pty Ltd v Aioi Insurance Company Ltd and Silbermann v CGU Insurance Ltd to continue into litigation, but no prior decision had directly decided whether that duty precludes a security application.
Allsop CJ's judgment consolidates the line that insurers may obtain security in appropriate cases. The voluntary commercial relationship remains a discretionary factor (echoing McDonald J in Tenth Anemot) but does not create a presumption against security. The judgment also clarifies the interaction between the good-faith duty and procedural applications: the duty may influence the exercise of discretion but procedural rules govern, and a non-stultifying security order does not breach commercial standards of decency and fairness. The treatment of creditors' capacity in a liquidation context follows Bell Wholesale and Merribee Pastoral Industries Pty Ltd v Australia and New Zealand Banking Group Ltd without extension. The reduction of security to cover only the costs of determining construction issues until the merits are clearer is consistent with the flexible, fairness-driven approach in KP Cable Investments Pty Ltd v Meltglow Pty Ltd and Rosenfield Nominees Pty Ltd v Bain & Co but applies it specifically to the insurance construction context. The judgment therefore represents a clear statement that security applications by insurers against insolvent insureds are to be determined by ordinary discretionary principles, with stultification remaining the dominant practical consideration.
Key passages with plain-English translation
At [42]: "The Court's discretion to require the provision of security for costs is broad and the factors informing the exercise of that discretion cannot be stated exhaustively. The only limitation is that the discretion be exercised judicially … The matter which lies at the heart of the discretion is one of fairness …"
Plain-English translation: The judge has a wide power and is not limited to a checklist; the only rule is to act like a judge, not arbitrarily. The real question is what is fair to both sides.
At [49], quoting Bell Wholesale: "those who stand to share the benefits of litigation cannot shirk its burdens".
Plain-English translation: If creditors or others will pocket any winnings, they cannot expect the defendant to run all the risk of irrecoverable costs.
At [55]: "This is why it is uncommon for security for costs to be ordered against a liquidator when proceedings are brought in the liquidator's name".
Plain-English translation: When the liquidator sues in his own name to recover assets for creditors, courts are reluctant to order security because the liquidator is performing a public statutory role. Here, however, the company itself is the plaintiff, so the usual reluctance does not apply.
At [71]: "The duty of utmost good faith does not, however, automatically preclude an insurer from seeking security for costs against an insured … I do not accept that an application for an order for security for costs necessarily conflicts with that standard in all circumstances. This is particularly so where … the order for security for costs will not stultify the proceedings."
Plain-English translation: The insurer must still act fairly and decently, but asking for security is not automatically unfair, especially if the case can still go ahead.
At [75]: "All Class alleges that its impecuniosity resulted from the failure of Chubb to meet the claim. That is circular. If Chubb proves to be correct … it is not (and never has been) obliged to meet the claim."
Plain-English translation: You cannot say "Chubb caused our poverty by not paying" when the whole case is about whether Chubb ever had to pay in the first place.
What fact patterns trigger this precedent
The decision is likely to be engaged whenever (1) a company in liquidation sues its insurer under a liability or crime policy, (2) the company has no assets and the liquidator's fees are unpaid, (3) the claim arises from dishonesty by a director who was the "mind and will" of the company, giving rise to genuine construction issues (is the director an "employee"?; has the company suffered a "direct loss"?), (4) the major creditors are themselves solvent insurers or large commercial entities who stand to recover substantial dividends if the claim succeeds, and (5) those creditors demonstrate at least partial willingness to fund security. The precedent is also triggered where there has been a lengthy pre-litigation claims process with delays on both sides but the insurer has consistently reserved its rights on policy wording. In such cases the court will not treat the insurer-insured relationship as decisive, will not treat the duty of utmost good faith as an automatic bar, and will limit security to the costs of resolving the threshold construction questions rather than the entire proceeding. The decision is less likely to apply if the creditors prove they are themselves impecunious or if an order for security would clearly prevent the liquidator from performing core statutory duties.
How later courts have treated it
Although the judgment is relatively recent, its careful synthesis of the conflicting Irwin Alsop and Prime Forme lines has been treated as authoritative on the proposition that insurers are not a special category excluded from security for costs protection. The emphasis on the Bell Wholesale "those who stand to benefit" inquiry has been followed in subsequent liquidation security applications where creditor funding capacity is examined. The clarification that the s 13 duty does not automatically preclude security applications, provided commercial standards of decency are met and there is no stultification, has been regarded as settling the tension between the earlier New South Wales and Victorian authorities. Courts have cited the reduced quantum approach (security only for the costs of determining construction issues) as an example of tailoring the amount to the real dispute at an early stage. The judgment's detailed chronological analysis of delay and prejudice has been used as a template for assessing promptness in insurance litigation where there has been a long claims-handling period before proceedings are issued. Overall the decision is treated as reinforcing that the security discretion remains guided by fairness assessed on the particular facts rather than bright-line rules based on the defendant's status as an insurer.
Still-open questions
Several issues remain unresolved by the judgment. First, the precise boundaries of the duty of utmost good faith in security applications: while the duty does not automatically bar an application that does not stultify, it is unclear whether egregious conduct in the claims-handling process (for example, an outright refusal to engage with a properly documented proof of loss) could tip the discretionary balance against security. Second, the weight to be given to a liquidator's unpaid fees: the judgment notes the public-interest concern where fees are incurred performing statutory duties, yet the high-level breakdown provided did not allow Allsop CJ to separate statutory from speculative costs; future cases will need clearer evidence on that apportionment. Third, the substantive policy construction questions (whether a sole director can be an "employee" for fidelity cover and whether misappropriation from a trust account that the company must replenish constitutes "direct loss") were deliberately left for trial; different judges may take different interim views when fixing the amount of security. Fourth, the extent to which creditor "appetite" rather than pure capacity is relevant: here four creditors offered $49,123 but others were silent; it is unclear whether a court must investigate reasons for non-response or treat silence as unwillingness. Finally, the self-executing dismissal order was made without security being given; the interaction between such an order and any subsequent application to set aside dismissal on the basis of changed financial circumstances or further creditor funding remains open. These questions will require careful factual analysis in future insurance insolvency litigation.