The applicants have leave to join Employers Reinsurance Corporation (ARBN 072 715 738) and Suncorp Metway Insurance Limited (ACN 075 695 966) as further respondents to these proceedings and Employers Reinsurance Corporation and Suncorp Metway Insurance Limited be joined as sixth and seventh respondents respectively herein.
The applicants have leave to amend the substituted statement of claim in terms of the minute of proposed amended substituted statement of claim filed on 13 April 2007.
The minute of proposed amended substituted statement of claim filed on 13 April 2007 stand as the statement of claim, and filing and service thereof be dispensed with.
The applicants have leave to amend the originating process filed on 27 October 2006 in terms of the minute of proposed originating process filed on 13 April l2007.
The minute of proposed originating process filed on 13 April 2007 stand as the application and filing and service thereof be dispensed with.
That the Court header be amended and Suncorp Metway Insurance Limited (ACN 075 695 966) be named as the sixth respondent.
That the Court header be amended and Employers Reinsurance Corporation (ARBN 072 715 738) be named as the seventh respondent.
The sixth and seventh respondents file and serve their defences by 9 October 2007.
The applicants file and serve any reply by 23 October 2007.
The directions hearing be adjourned to 30 October 2007 at 11am (WST).
The costs of the directions hearing and the motion filed 13 April 2007 be in the cause.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
[2]
WESTERN AUSTRALIA DISTRICT REGISTRY WAD 305 OF 2006
[3]
GERALDINE GRAY IN HER CAPACITY AS EXECUTOR FOR THE LATE CONSTANCE PHYLLIS JAMES
[4]
GIOVANNI MAURIZIO CARRELLO (LIQUIDATOR) OF KNIGHTSBRIDGE MANAGED FUNDS LIMITED (IN LIQ)
[5]
REASONS FOR JUDGMENT ON APPLICANTS' MOTION TO JOIN FIFTH RESPONDENT'S INSURERS
Introduction
1 Investors in a registered management scheme commenced proceedings against the former directors of the company which was the responsible entity for the scheme. They also seek leave to proceed against the company which is now in liquidation. The company was covered by a Professional Indemnity Insurance Policy during the relevant period and gave notice to its insurers of the claims against it. The insurers have declined to provide indemnity relying upon an exclusion clause in the policy. The liquidator of the company is not prepared to contest the insurers' refusal to indemnify. The applicant investors now seek to join the insurers as respondents and to seek a declaration that they are liable to indemnify the company. That joinder is opposed largely on the basis that a declaration obtained by the applicant investors against the insurers would not legally prevent the insurers from contesting any claim for indemnity by the liquidator following a judgment against the company. For the reasons that follow, I propose to allow the insurers to be joined. As a consequence, I will also order in the related application in WAD 307 of 2006 that the applicants have leave to proceed against the company.
Factual and procedural background
2 Peter Cornelius Beekink, Hersh Solomon Majteles and Gregory Phillip Gaunt are former directors of Knightsbridge Managed Funds Ltd (KMF), formerly known as Australian Managed Funds Ltd. KMF is in liquidation. On 27 October 2006 former investors in a scheme said to have been managed by KMF commenced proceedings against the three former directors, KMF itself and the liquidator of KMF (subsequently discontinued as against the liquidator). Three days later, an application was filed in this Court seeking the leave of the Court under s 471B of the Corporations Act 2001 (Cth) (the Act) to begin and proceed with the action against KMF. Altogether there are eleven applicants, some of whom are corporations and some of whom are natural persons.
3 In a substituted statement of claim, filed 20 February 2007, it is alleged that from 22 December 1999 KMF was the responsible entity for the Clifton Partners Finance Mortgage Scheme (the Scheme), a registered management scheme under ch 5C of the former Corporations Law. The Scheme involved making loans secured by mortgages over property and otherwise on terms and conditions specified by KMF from time to time. It is alleged that KMF appointed Knightsbridge Pty Ltd, which was formerly Clifton Partners Pty Ltd, as the custodian of the assets of the Scheme within the meaning of a Constitution and Compliance Plan lodged by KMF with the Australian Securities and Investments Commission (ASIC) under Ch 5C. Knightsbridge Pty Ltd was to act as KMF's agent in the management of the Scheme, the origination of loans and in ensuring compliance with the terms of any prospectus issued by KMF. It was also required to comply with the lawful directions of KMF and ensure compliance with the requirements of the Corporations Law. Knightsbridge is still referred to in the pleading as Clifton Partners and will be so described in these reasons.
4 According to the substituted statement of claim, KMF had various duties. It was required to exercise the care and diligence of a reasonable person in KMF's position. It had to act in the best interests of members of the Scheme and to comply with the Compliance Plan. Duties of the directors were also pleaded. These are duties of care and diligence, to act in the best interests of the members of the Scheme and to take reasonable steps to ensure compliance with the Corporations Law and the Compliance Plan. Section 601FD of the Corporations Law is pleaded. The applicants also say that the directors had a common law duty of care to potential investors in the Scheme to ensure that they did not suffer economic loss.
5 The first to fifth applicants say that on 14 February 2000 they were owed sums amounting to $650,000, forming part of an overall sum of $850,000 advanced to Fieldmont Holdings Pty Ltd (Fieldmont). The remaining lender is not an applicant. The applicants say the original loan was to have been repaid on or about 30 November 2000 and secured by a second registered mortgage over land owned by Fieldmont. They say that Clifton Partners recommended in February 2000 that they roll the existing loan over into an increased loan of $1.1 million secured by a new second mortgage over the land in their favour and in favour of new investors providing the additional advance. This letter is said to have been an offer for subscription of securities of a corporation and, alternatively, an invitation to subscribe for securities within the meaning of s 1018 of the Corporations Law. KMF is said to have failed to lodge a prospectus in relation to the securities and to have contravened s 1018.
6 Various representations are said to have been conveyed by Clifton Partners in its letter of 14 February 2000 to the first to fifth applicants. The representations are said to have related to the value of the land to be secured, the amount secured under the first registered mortgage, the Loan to Valuation ratio, the amount that would continue to be owed under the first registered mortgage and the absence of any reason to believe that it would be greater than $2.2 million. They are said to have been false and the basis of that falsity is pleaded.
7 Clifton Partners also allegedly failed to inform the applicants that at the date of the offer, Fieldmont intended to increase the amount owing under the first registered mortgage to $2.7 million effective from the end of February 2000. Clifton Partners is said to have known that Fieldmont was, or had been, in default of its obligation to pay interest pursuant to a loan from the National Australia Bank. It allegedly failed to inform the applicants of those matters. The first to fifth applicants say that Clifton Partners engaged in conduct which was misleading or deceptive, contrary to s 995(2) of the Corporations Law and that they are entitled to recover loss or damage caused by that conduct. The remaining applicants plead misleading or deceptive conduct in respect of successive prospectuses issued on 11 February 2000, 13 March 2000, 11 May 2000 and 15 May 2000.
8 The substituted statement of claim also alleges breaches by the directors of duties imposed on them by s 601FD of the Corporations Law. These relate to failure to provide or cause KMF to provide adequate training to staff members of Clifton Partners to ensure that they understood the requirements of the Corporations Law and the Compliance Plan. They are also said to have failed to monitor or review or cause KMF to monitor or review Clifton Partners' compliance systems. They failed to check or failed to cause KMF to check compliance by Clifton Partners with the Corporations Law and the Compliance Plan. They allegedly authorised Clifton Partners to originate loans and make offers for subscriptions or invitations to subscribe for interests in the Scheme without reference to them and to have signed various prospectuses without reference to them. Other breaches of s 601FD are alleged, including particular breaches of that section by Mr Beekink, the first respondent. Each of the directors is also said to have been negligent in breach of his common law duties of care.
9 The first to fifth applicants say that each of the original investors, including themselves, discharged their existing second registered mortgage over the land and agreed to take an interest in the new registered mortgage securing $1.1 million. They say they did so in reliance upon the representations conveyed by the Clifton Partners' letter of 14 February 2000 and as a result of the breaches of the directors' duties. They say that by reason of those matters, they were not repaid their respective outstanding advances towards the original loan. They claim compensation under various provisions of the Corporations Law as it was in force prior to 1 March 2000 and, alternatively, under the corresponding provisions of the Act, they also claim damages and interest.
10 On 30 March 2007, I dismissed a motion filed by the first to third respondents seeking to strike out the substituted statement of claim in relation to causes of action pleaded by the first to fifth applicants.
11 On 16 April 2007, the applicants filed a motion seeking the joinder of KMF's insurers, Employers Reinsurance Corporation and Suncorp Metway Insurance Ltd (the Insurers). They also filed a minute of a proposed amended application and proposed amended substituted statement of claim naming the Insurers as sixth and seventh respondents respectively. The joinder is opposed by the Insurers. Written submissions were filed in relation to the motion and in the related application (in WAD 307/2006) for leave to proceed against KMF. Counsel for the applicants accepted that there was no point in seeking leave to proceed against KMF in the event that the joinder motion was dismissed and accepted that if that were the case the application for leave to proceed should be dismissed. Oral argument on the motion for joinder of the Insurers proceeded on 28 August 2007.
The position of KMF's insurers
12 Affidavit evidence was filed in the application for leave to proceed against KMF which was relevant to and relied upon by the applicants in the joinder motion.
13 On 21 November 2006, Dwyer Durack the solicitors for the applicants wrote to the solicitors for KMF's liquidator and asked for copies of documents indicating that KMF was insured. On 12 December 2006 the solicitors for KMF, Christensen Vaughan, wrote back advising that the liquidator had located records. It appeared that KMF held a professional indemnity policy which expired on 17 December 2000. Notice of a potential claim in respect of Fieldmont was given to the underwriter on 17 and 18 December 2000. The solicitors advised that there was no indication that indemnity was granted as a result of that notification. The liquidator had informed the underwriter of the existence of the current proceedings and requested the underwriter's advice as to indemnity. The solicitors indicated that the liquidator lacked funds to contest any denial of indemnity by the underwriter.
14 The liquidator, Giovanni Carrello, had been appointed administrator of KMF on 20 February 2001 and was appointed administrator of a Deed of Company Arrangement on 15 June 2001. Following the termination of that deed he became liquidator of KMF on 8 October 2002. He said, in an affidavit sworn on 16 January 2007, that there were no funds available in the liquidation of KMF to meet the costs of the application for leave to proceed or these substantive proceedings or to pay any award of damages which might eventually be made in favour of the applicants. He exhibited copies of statements of receipts and payments which he had lodged with ASIC in relation to KMF. He added that KMF has no assets. Its business was essentially the management of registered and unregistered managed investment schemes.
15 On 13 December 2006 Mr Carrello had received a copy of an email from the Claims Manager of the underwriter, Dexta Corporation Pty Ltd (Dexta). The Claims Manager said that she was aware that Dexta had received several years before numerous papers in relation to Knightsbridge managed funds. She was not aware whether any of them could support a notification of claim or circumstance under the 1999-2000 policy in relation to the current proceedings.
16 Mr Carrello said KMF lacked funds to contest any denial of indemnity on the part of Dexta. The insurers were identified as the proposed sixth and seventh respondents. Allens Arthur Robinson the solicitors for the underwriters, Dexta, wrote to the liquidator on 23 January 2007 saying:
Our client is considering whether the Insured is indemnified in respect of the above claim. We will contact you further as soon as possible in that regard. You should continue to act as a prudent uninsured unless advised to the contrary.
17 On 6 March 2007 the Insurers' solicitors wrote to the solicitors for the liquidator confirming that their clients were denying indemnity. They relied upon an exclusion clause in the policy relating to any claim made against the insured directly or indirectly arising out of the non-repayment of any loan which was originated or managed by the insured. They rejected submissions which had been made on behalf of the liquidator that the exclusion clause did not apply. It seems from the letter written by the Insurers' solicitors that the liquidator's solicitors had contended that the Insurers' interpretation of the exclusion clause deprived the policy of any effect.
18 The Insurers' solicitors also referred to cl 3.3(c) of the policy which contained an exclusion in respect of dishonest or reckless acts directly or indirectly arising from any actual or alleged conduct with a reckless disregard for the consequences thereof. They said that Mr Beekink of KMF had authorised Clifton Partners to sign documents that KMF had not reviewed and permitted documents to be sent to investors without them ever having been read by the insured. If the insured had acted in a similar manner in respect of the loan the subject of the claim the exclusion contained in cl 3.3(c) of the policy would apply. Further investigations would need to be made. The solicitors then said:
However, as indemnity is denied on other grounds, the Insurer is not currently relying on this clause, but reserves its rights to do so.
19 Following the hearing on 28 August 2007 the solicitors for the applicants communicated with the solicitors for the liquidator inquiring whether the liquidator would agree to cross-claim against the Insurers if the applicants gave him an unconditional undertaking to indemnify him as to any court ordered costs made against him or against KMF in the cross-claim. The offer of indemnity was rejected. I note that the offer did not extend to the liquidator's costs of bringing such an action.
The proposed claim against the sixth and seventh respondents
20 On 13 April 2007 the applicants filed minutes of a proposed amended application and a proposed amended substituted statement of claim setting out the pleading and relief claimed against the Insurers if they were to be joined. The additional pleading is contained in [152] to [157] inclusive of the proposed amended substituted statement of claim. The applicants would allege that by a policy of insurance in writing dated 18 February 2000 the Insurers by their agent, Dexta, agreed, in consideration of the payment of the premium of $12,500 per annum, to provide indemnity to KMF subject to the terms of the policy.
21 The proposed pleading would then set out relevant express terms of the policy. The applicants would say that the Insurers agreed to indemnify KMF up to a limit of $5 million in respect of claims first made against KMF during the period of insurance defined to mean "4pm on 17 December 1999 to 4pm on 17 December 2001" and notified to the Insurers during that period. The nature of the claims insured were claims "… arising from KMF's civil liability for breach of professional duty arising from any act, error or omission wherever or whenever committed or allegedly committed by KMF in the conduct of its business of responsible entity". Clause 1.1 of the policy was cited.
22 The applicants also allege that the insurance policy covered KMF's legal liability for any act, error or omission committed by KMF in the conduct of its business of responsible entity by reason of any unintentional breach of the Trade Practices Act 1974 (Cth) (the TPA), the Fair Trading Act 1987 (NSW), the Fair Trading Act 1985 (Victoria) or similar legislation enacted by any State or Territory of Australia (cl 1.2.3). Reference was also made to the notice requirements of the policy.
23 Paragraphs 154 to 157 of the proposed pleading would then read as follows:
154. The applicants' claims the subject of these proceedings are deemed, by virtue of clause 5.2 of the Policy, to be a Claim, or alternatively Claims, within the meaning of the Policy, made during the period of insurance.
…
155. The Applicants' claims herein arose from KMF's civil liability for breach of professional duty arising from acts, errors or omissions committed by KMF in the conduct of its business of responsible entity within the meaning of clause 1.1 of the Policy.
156. Further and in the alternative, the Applicants' claims herein arose from KMF's legal liability for acts, errors or omissions committed by KMF in the conduct of its business of responsible entity, being unintentional, misleading or deceptive conduct contrary to s 728(1)(a) and 995(2) of the former Corporations Law as pleaded in paragraphs 44, 45, 61(a), 76, 95 and 111 herein, such provisions being legislation enacted by any State or Territory of Australia similar to the Trade Practices Act, the Fair Trading Act 1987(NSW) or the Fair Trading Act 1985 (Victoria) within the meaning of clause 1.2.3 of the Policy.
157. In the premises, the Sixth and Seventh Respondents are liable to indemnify KMF against the "Claim Costs" (as defined in the Policy) with respect to the claims of the Applicants, up to the limit of $5 million.
24 The relief proposed to be claimed against the Insurers in the substituted application is a declaration in the following terms:
A declaration that the Sixth and Seventh Respondents are liable and obliged to indemnify the Fifth Respondent against the "Claim Costs" (as defined in the Policy) with respect to the claims of the Applicants herein up to the limit of $5 million in consequence of judgment being entered against the Fifth Respondent in these proceedings.
The insurance policy
25 The insurance policy names "Employers Reinsurance Corporation" and "Suncorp Metway Insurance Limited" as the Insurers. It is entitled "Miscellaneous Professional Indemnity Insurance Policy". The insured is identified in a schedule to the policy as "Australian Managed Funds Limited". It is now known as KMF. Its professional business is described as "Responsible entity". The period of insurance is "From 4pm 17th December 1999 To 4pm 17 December 2001". The limit of liability is $5 million. Employers Reinsurance carries 35% of the risk and Suncorp Metway carries 65%.
26 The insuring clauses appear in s 1 of the policy and include the following:
1.1 Breach of professional duty
We agree to indemnify You up to the Limit of Liability for the Claim Costs of a Claim first made against You during the Period of Insurance and notified to Us during the Period of Insurance arising from Your civil liability for breach of professional duty arising from any act, error or omission wherever or whenever committed or allegedly committed by You in the conduct of the Professional Business.
1.2 Additional insuring clauses
We agree to indemnify You for the Claim Costs of a Claim first made against You during the Period of Insurance and notified to Us during the Period of Insurance arising from Your legal liability for any act, error or omission wherever or whenever committed or allegedly committed by You in the conduct of the Professional Business by reason of any:
…
There are then set out the three heads of liability covered by the additional insuring clauses. The first relates to defamation (cl 1.2.1). The second relates to unintentional infringement of intellectual property rights (cl 1.2.2). The third relates to the TPA and covers:
1.2.3 Trade Practices Act
Unintentional breach of the Trade Practices Act 1974 (Commonwealth), the Fair Trading Act 1987 (NSW), the Fair Trading Act 1985 (Victoria), or similar legislation enacted by any state or territory of Australia PROVIDED THAT there is no indemnity under this clause for any Claim arising from any actual or alleged breach of the penal or criminal provisions of any of those statutes. Our aggregate liability for all Claims under this clause shall not exceed the Limit of Liability.
27 Exclusion clauses are set out in s 3 of the policy. Clause 3.3 is relevant. The relevant parts read:
There is no indemnity for any Claim made against You, or any claim by You for indemnity under this Policy:
…
3.3 Dishonest or reckless acts
directly or indirectly arising from any actual or alleged:
(a) dishonest, fraudulent, criminal or malicious act;
(b) wilful breach of any statute, contract or duty; or
(c) conduct with a reckless disregard for the consequences thereof;
28 Section 6 contains definitions. The term "Claim" is defined as follows:
6.2 Claim
"Claim" shall mean the receipt by You of a demand for compensation made by a third party against You. It may take the form of:
(a) any writ, statement of claim, summons, application or other originating legal or arbitral process, cross claim, counterclaim or third party or similar party notice;
(b) any other form of written notice; or
(c) verbal notice.
…
6.4 Claim Costs
"Claim Costs" shall mean the amount paid or payable to the party that has made the Claim against you, to dispose of the Claim. It includes any judgment or settlement amount, interest on that amount, and the claimant's costs.
29 There were a number of endorsements attached to the policy. These included personal injury and property damage exclusions. Under the heading "Other Exclusion" the following appeared:
There is no indemnity for any Claim made against You, or any claim by You for indemnity under this Policy directly or indirectly arising out of:
work performed for or on behalf of Philips Fox Solicitors,
2) the non repayment of any loan which was originated or managed by You.
The rules relating to joinder
30 The rules of Court invoked by the applicants in this case are O 6 rr 2, 4 and/or 8. They provide as follows:
2 Two or more persons may be joined as applicants or respondents in any proceeding -
(a) where -
(i) if a separate proceeding were brought by or against each of them, as the case may be, some common question of law or of fact would arise in all the proceedings; and
(ii) all rights to relief claimed in the proceeding (whether they are joint, several or alternative) are in respect of or arise out of the same transaction or series of transactions; or
(b) where the Court gives leave so to do.
…
4(1) The Court may grant leave under rule 2 before or after the joinder and may grant leave under sub-rule 3(2) before or after the non-joinder.
4(2) An applicant may apply for leave under rule 2 or sub-rule 3(2) either before or after the filing of his originating process and may apply without serving notice of the motion on any person on whom the application has not been served.
…
8(1) Where a person who is not a party -
(a) ought to have been joined as a party; or
(b) is a person whose joinder as a party is necessary to ensure that all matters in dispute in the proceeding may be effectually and completely determined and adjudicated upon,
The Court may order that the person be added as a party and make orders for the further conduct of the proceeding.
Statutory framework - priority of third parties to insurance monies in a winding up
31 The Corporations Act provides in s 562:
(1) Where a company is, under a contract of insurance (not being a contract of reinsurance) entered into before the relevant date, insured against liability to third parties, then, if such a liability is incurred by the company (whether before or after the relevant date) and an amount in respect of that liability has been or is received by the company or the liquidator from the insurer, the amount must, after deducting any expenses of or incidental to getting in that amount, be paid by the liquidator to the third party in respect of whom the liability was incurred to the extent necessary to discharge that liability, or any part of that liability remaining undischarged, in priority to all payments in respect of the debts mentioned in section 556.
(2) If the liability of the insurer to the company is less than the liability of the company to the third party, subsection (1) does not limit the rights of the third party in respect of the balance.
(3) This section has effect notwithstanding any agreement to the contrary.
Statutory framework - Federal Court of Australia Act 1976 (Cth)
32 Sections 21, 22 and 23 of the Federal Court of Australia Act 1976 (Cth) provide:
21(1) The Court may, in relation to a matter in which it has original jurisdiction, make binding declarations of right, whether or not any consequential relief is or could be claimed.
21(2) A suit is not open to objection on the ground that a declaratory order only is sought.
The Court shall, in every matter before the Court, grant, either absolutely or on such terms and conditions as the Court thinks just, all remedies to which any of the parties appears to be entitled in respect of a legal or equitable claim properly brought forward by him or her in the matter, so that, as far as possible, all matters in controversy between the parties may be completely and finally determined and all multiplicity of proceedings concerning any of those matters avoided.
The Court has power, in relation to matters in which it has jurisdiction, to make orders of such kinds, including interlocutory orders, and to issue, or direct the issue of, writs of such kinds, as the Court thinks appropriate.
Statutory framework - Insurance Contracts Act 1984 (Cth)
33 Section 51 of the Insurance Contracts Act 1984 (Cth) provides for the rights of third parties to recover against an insurer:
(1) Where:
(a) the insured under a contract of liability insurance is liable in damages to a person (in this section called the third party);
(b) the insured has died or cannot, after reasonable enquiry, be found; and
(c) the contract provides insurance cover in respect of the liability;
the third party may recover from the insurer an amount equal to the insurer's liability under the contract in respect of the insured's liability in damages.
(2) A payment under subsection (1) is a discharge, to the extent of the payment, in respect of:
(a) the insurer's liability under the contract; and
(b) the liability of the insured or of the insured's legal personal representative to the third party.
(3) This section does not affect any right that the third party has in respect of the insured's liability, being a right under some other law of the Commonwealth or under a law of a State or Territory.
Whether joinder should be ordered
34 The applicants assert causes of action against the insured company, KMF. It may be assumed that, subject to the grant of leave to proceed against the company, their causes of action would have a reasonable prospect of success. But KMF has no money. It may be assumed that it has a legal right to claim against the Insurers. That right may or may not be of any value as the Insurers may have a good defence to it. But it is only through a successful claim against the Insurers that KMF would be able to meet any judgment against it in favour of the applicants. KMF's liquidator has no interest in pursuing any claim against the Insurers even if indemnified against an adverse costs order by the applicants. Nor does he have the funds to defend the action against KMF if leave to bring such an action were to be granted.
35 It is not disputed that the applicants, if they obtained a judgment against KMF, could not recover directly against the Insurers under s 51 of the Insurance Contracts Act. Counsel for the Insurers accepts that this Court has power to join her clients for the purposes of the relief sought against them by the applicants. Her opposition to the joinder was on discretionary grounds. It is helpful to review some of the relevant case law.
36 The applicants assert no legal right or any cause of action against the Insurers. But the want of a legal right or a cause of action is not a bar to the grant of declaratory relief. It is, nevertheless, necessary that declaratory relief be sought in respect of a real question that is not abstract or hypothetical. It must be directed to the determination of a legal controversy. Moreover the party seeking the relief must have a real interest in raising it: Aussie Airlines Pty Ltd v Australian Airlines Ltd (1996) 139 ALR 663 per Lockhart J (Spender and Cooper JJ concurring) and authorities there cited.
37 The Full Court of the Supreme Court of South Australia took that general approach to a factual situation similar to the present in JN Taylor Holdings Ltd (In Liquidation) v Alan Bond (1993) 59 SASR 432. Plaintiff companies in liquidation sued three of their former directors alleging breaches of duty. The directors were insured in respect of any wrongful act committed in their capacity as directors. One of them was bankrupt and the other two had left the country. The trustee in bankruptcy had agreed to assign to the plaintiff companies the bankrupt defendant's right to indemnity under the policy subject to the consent of the insurer. The insurer denied liability to indemnify the directors. The plaintiffs sought leave to join the insurer as an additional defendant seeking a declaration that the insurer was obliged to indemnify the directors in respect of any judgment in favour of the plaintiff companies arising out of any wrongful act within the terms of the policy. On appeal the Full Court ordered the joinder of the insurers. Special leave to appeal against the decision was refused by the High Court.
38 Before referring to the judgment it should be noted that s 117 of the Bankruptcy Act 1966 (Cth) had some relevance to it. It is similar in its operation to s 562 of the Act. It provides:
(1) Where:
(a) a bankrupt is or was insured under a contract of insurance against liabilities to third parties; and
(b) a liability against which he is or was so insured has been incurred (whether before or after he became a bankrupt),
the right of the bankrupt to indemnity under the policy vests in the trustee and any amount received by the trustee from the insurer under the policy in respect of the liability shall, if the liability has not already been satisfied, be paid in full forthwith to the third party to whom it has been incurred.
(2) Subsection (1) does not limit the rights of the third party in respect of any balance due to him after the payment referred to in that subsection has been made.
(3) This section applies notwithstanding any agreement to the contrary, whether entered into before or after the commencement of this Act.
39 King CJ who wrote the principal judgment with which Prior and Perry JJ agreed, said of s 117 (at 437):
By virtue of that section, if the trustee in bankruptcy were to obtain payment of moneys from the insurer in consequence of a judgment against the defendant directors, those moneys would not be divisible among the creditors but would be payable to the plaintiffs. In order to obtain satisfaction in that way, it might be necessary for the plaintiffs to make the non-bankrupt directors bankrupt and, having provided a proper indemnity for costs to the trustee in bankruptcy, to institute and prosecute in the trustee's name an action against the insurer.
40 King CJ referred in his judgment to s 31 of the Supreme Court Act 1935, which is similar in form and the same in substance as s 21 of the Federal Court Act. He enunciated the following propositions about the grant of declaratory relief:
[6]
Associate:
Dated: 11 September 2007
Counsel for the Applicants: Mr MD Cuerden
Solicitor for the Applicants: Dwyer Durack
[7]
Counsel for the Fifth Respondent: Mr GD Cobby
Solicitor for the Fifth Respondent: Christensen Vaughan
Counsel for the Sixth and Seventh Respondents: Ms PE Cahill
Counsel for the Sixth and Seventh Respondents: Allens Arthur Robinson
[8]
Date of Hearing: 28 August 2007
Date of Judgment: 11 September 2007
That the jurisdiction to grant declaratory relief is very wide and judicial pronouncements appearing to restrict the circumstances in which such relief will be granted relate to the sound exercise of discretion rather than to jurisdiction.
It is not necessary that the plaintiff have a cause of action against the defendant.
There is no jurisdictional limit against the grant of declaratory relief. The Court's power to grant such relief "is only limited by its own discretion".
There may be circumstances which so contraindicate the exercise of the discretion in favour of the grant of declaratory relief that they would lead almost inevitably to the exercise of the discretion against the making of a declaration.
A declaration will not be made except in matters "which have a real legal context, and to the determination of which the Court's procedure is apt", citing Johnco Nominees Pty Ltd v Albury-Wodonga (NSW) Corporation [1977] 1 NSWLR 43 at 61 (Hutley JA).
There must be some person who has a true interest in opposing the declaration. The question must not be purely theoretical.
If the determination of the question could not affect the plaintiff's legal rights or commercial or personal interests now or in the future the declaration would almost certainly be refused: citing Gardner v Dairy Industry Authority (1977) 52 ALJR 180 at 188 (Mason J).
The principles so enunciated are, with respect, not contentious.
41 King CJ accepted that the plaintiffs would have to surmount certain obstacles before they could gain recourse to the proceeds of the indemnity but the first and most important of those obstacles was the determination of whether the insurer was liable to indemnify the directors under the policy in respect of any judgment the plaintiffs might recover. He said (at 438):
If that question is determined against the insurer concurrently with the determination of the defendant directors' liability to the plaintiffs, the plaintiffs will avoid the costs of a further trial of that issue. Moreover, armed with a declaration of the insurer's liability to indemnify the directors, the plaintiffs will be far better placed to secure the consent of the trustee in bankruptcy, or alternatively authority to sue in the trustee's name. It is true that the issue of the insurer's liability will cease to be a live issue if the plaintiffs fail in their action against the defendants, but, to my mind, their interest in obtaining a declaration of the insurer's liability concurrently with that of the liability of the defendants, is undeniable.
Having accepted that the claim to declaratory relief was within jurisdiction the joinder followed as of course.
42 Referring to discretionary considerations, King CJ noted that the trial of the action against the directors seemed likely to be very lengthy, very complex and very costly. The joinder of the insurer would make it a co-defendant with the defendant directors. The question which he then posed was whether res judicata would operate as between the co-defendants. He concluded that an actual lis in the sense of proceedings between the defendants concerned was not a requisite of res judicata and cited the judgment of Jacobs J in Re Multi-tech Services Pty Ltd (In liq); Heard v Commonwealth Trading Bank of Australasia (1982) 30 SASR 218. He said (at 441):
In my opinion, the insurer, if joined as a defendant, would be bound, in subsequent proceedings by the defendant directors or their trustee in bankruptcy, by a declaration of liability and also by any findings of fact made in the present proceedings.
King CJ accepted that joinder would involve "embroiling the insurer in these proceedings although, if it is not joined, the occasion for proceedings against it may never arise" (at 441). He recognised that that was an important factor in the exercise of the discretion. However, it could not prevail against other compelling considerations. If the insurer were to plead defences based on want of notification of claims or avoidance of the policy under s 237 of the Companies (South Australia) Code by reason of payment of the premiums by the plaintiffs or a related corporation, such defences could be determined, if appropriate, as preliminary issues. If determined in favour of the insurer, the insurer's involvement in a long and expensive trial would be avoided.
43 His Honour said that, in the exercise of its discretion, the Court must be guided by the overriding principle that a multiplicity of proceedings was to be avoided. He referred in that respect to s 27 of the Supreme Court Act which is in substance reflected in s 22 of the Federal Court Act. He was particularly concerned about the need to avoid the prospect of a second long and complex trial.
44 JN Taylor Holdings 59 SASR 432 was distinguished by the Court of Appeal in Victoria in CE Heath Casualty and General Insurance Ltd v Pyramid Building Society (In Liquidation) (1997) 2 VR 256. In that case a building society in liquidation sued its former auditors for breaches of retainer and duty of care. The insurers were conducting the defence. However upon inquiry from the plaintiff, they neither admitted nor denied liability to indemnify the auditors. They declined to commit themselves about the interpretation of the policies so far as they provided for maximum amounts of cover. The plaintiff sought leave to join them as defendants and to seek declarations against them as to the application of their policies. The Court of Appeal allowed an appeal against an order at first instance granting leave to join them. The Court held there was no basis for the joinder under the Supreme Court Rules. The issues raised against the insurers were additional to those between the building society and the auditors. They depended upon discrete facts. The Court also rejected the proposed joinder on discretionary considerations.
45 Ormiston JA, with whom Tadgell JA agreed, identified as a discretionary consideration the fact that joint representation could not be expected to continue for the insured and the insurers who would have conflicting interests at least with respect to the resolution of the claims for declaratory relief. That would give rise to great inconvenience and would cause the defendants considerable added expense in circumstances where the plaintiff building society was in liquidation and unable to bear the costs of two sets of representation throughout what was undoubtedly going to be a long and complex trial. It would also have the effect of denying the insurers their rights under the policies to take over and defend the claim in circumstances where control of the defence of the claim might be of the greatest practical importance.
46 Phillips JA identified as a discretionary consideration the fact that the insurance questions were hypothetical until the liability of the insured was determined. The insurers had not plainly denied liability and might never do so. He also regarded as very important the consideration that the plaintiff was not a party to the insurance contracts and in seeking to have determined the extent of the liability of the insurers to the auditors was seeking to initiate the determination of questions in which it had no direct legal interest although it might have some present commercial concern. Any right under s 117 of the Bankruptcy Act was doubly contingent. In those circumstances the Court had to be particularly careful to see that the joinder of the insurers was appropriate before permitting it and thereby embroiling them against their wishes and at the instance of a stranger to the policies in expensive litigation over those policies.
47 His Honour said that there was an absence of any current and identifiable dispute between insurer and insured. That stemmed not only from the absence of any plain denial of liability but also from the absence of any clearly articulated claim by the insured. He said (at 292):
Be that as it may, there is obvious uncertainty about just what insurance questions will be material. That makes it all the harder to conclude that the questions underlying the declarations now sought by the plaintiff do warrant determination, and that it is either just or convenient that those questions be determined in this proceeding between Pyramid and the auditors.
48 These discretionary considerations distinguished the case that faced the Victorian Court of Appeal from the case before the South Australian Full Court and the case before this Court. As to the decision in JN Taylor Holdings 59 SASR 432, Ormiston J observed (at 270):
… I should state that I do not think that the mere fact that the disputant is the liquidator of a possible creditor of the insured can prevent that liquidator from raising the issue and seeking declaratory relief. I say that largely because that question has been raised and resolved in the JN Taylor case, from which leave to appeal to the High Court was refused. If the matter were not free from authority I confess I would have had the gravest doubt whether it was ordinarily appropriate to permit an outsider to seek from the court declaratory relief as to the meaning and effect of a contract between two parties who had not themselves raised any issue as to its meaning and effect and at least one of whom objected to the court's interfering in its private affairs.
49 Phillips JA did not suggest that JN Taylor Holdings 59 SASR 432 was wrongly decided. He referred to the rejection by King CJ of the view expressed at first instance that the plaintiffs did not have an interest sufficient to maintain the action for declaratory relief unless and until they succeeded in the action against the defendants. King CJ had characterised that as too narrow a view of the interest of the plaintiffs required to render the issue real rather than theoretical. Phillips JA said:
That seems to me apt here, if I may say so. What is wanted in the plaintiff is a sufficient interest to render its claim to declaratory relief "real rather than theoretical" and if that be the test I think that it is probably satisfied.
50 The decision of the Court of Appeal of Victoria in CE Health [1997] 2 VR 256 was followed by the Full Court in South Australia in Beneficial Finance Corporation Ltd v Price Waterhouse (1996) 68 SASR 19. The critical point there was not only that indemnity had not been declined but there had been an acceptance of liability. In that case a firm of chartered accountants, formerly auditors to the State Bank of South Australia, were sued by a number of parties including a subsidiary of the Bank for $1 billion. The claims were based on breaches of duty on the part of the auditors. The trial of the action was estimated to last in excess of a year. Estimated costs of proceeding to trial, $13 million, would exceed the known assets of the auditors' partners. The plaintiffs had obtained orders from the trial judge requiring the auditors' insurer to discover and produce all applicable policies of professional indemnity insurance. The auditors were also ordered to discover and produce confidential correspondence between them and their insurer relating to notification of the claim and indemnification generally. The insurer appealed the production orders to the Full Court. They contended that they were dealing with the claim as if it attracted indemnity in a relevant policy year and had not declined the indemnity.
51 In allowing the appeal the Full Court held that the action did not bring into issue any question concerning the insurance arrangements as the insurers had not declined indemnity. There was no arguable case for joinder. Accordingly, documents evidencing the insurance arrangements were unrelated to any matter in question on the pleadings and were not a proper subject for discovery. The JN Taylor Holdings 59 SASR 432 decision was distinguished on that basis. Cox J, who dissented in the result, agreed with Perry J that no arguable case for joining the defendant's insurer had been advanced. He said (at 22):
The orders made in JN Taylor Holdings Ltd (In liq) v Bond (1993) 59 SASR 432 were exceptional, for the reasons that are explained in the judgment, and the case is clearly distinguishable.
52 Perry J described JN Taylor Holdings 59 SASR 432as unusual "in that there were overlapping questions of fact". He referred to the insurer's denial of liability on the basis that the conduct of the defendant directors was such as to disentitle them to indemnity. The same conduct would need to be scrutinised to determine whether the plaintiffs' claim against the directors should succeed (at 37). He said (at 37):
The decision in JN Taylor Holdings must be confined to its special facts, and in particular the fact that not only was there in that case a denial of liability on the part of the insurer, but the facts and circumstances relevant to the grounds upon which liability were denied were more or less co-extensive with the factual inquiry which would be necessary in order to dispose of the issues raided [sic] as between the parties in that case other than the insurer. That will not often be the case. More commonly, I would have thought any denial of liability on the part of the insurer will not involve the need to address questions of fact which are common to the questions arising in the context of the resolution of the claim against the insurer.
He observed that the question whether there were any common questions of fact would depend upon what stand was ultimately taken by the insurer and the ground upon which at some stage it might be prompted to deny liability.
53 The Queensland Court of Appeal in Interchase Corporation Ltd (in liq) v FAI General Insurance Co Ltd [1998] 2 Qd R 301 by majority, declined to follow JN Taylor Holdings 59 SASR 432. In that case Interchase Corporation commenced proceedings against valuers in connection with the development of a retail and commercial complex in Brisbane. It claimed to have lost about $60 million through a negligent valuation of the complex. FAI was the professional indemnity insurer of the valuers. FAI conducted the defence of the litigation for some time then declined indemnity. The valuers did not object to that decision and did not foreshadow any possibility of contesting it. Interchase then sought to join FAI as an additional defendant to obtain a declaration that it was liable to indemnify the valuers in respect of their liability to Interchase. A judge acceded to that application and an appeal from that decision was allowed by majority. The majority held in substance that convenience alone could not justify joinder of an additional defendant under the Rules of the Supreme Court. There was no controversy between the valuers and the insurer and therefore their rights inter se would not be determined in the action. The joinder would serve no useful purpose.
54 Byrne J referred to the judgment of King CJ in JN Taylor Holdings 59 SASR 432 and particularly his finding that the insurer if joined as a defendant would be bound in subsequent proceedings by the defendant directors or their trustee in bankruptcy by a declaration of liability and findings of fact. King CJ, as noted earlier, relied upon the decision of Jacobs J in Re Multi-Tech Services 30 SASR 218. However, according to Byrne J, Jacobs J, in the earlier case had assumed rather than decided that the additional party would be bound and did not consider whether the determination of an existing controversy between co-defendants was essential to a binding adjudication.
55 McPherson JA, who agreed with Byrne J, suggested that the more expansive Rules of Court relating to joinder of parties in South Australia might explain the decision in JN Taylor Holdings 59 SASR 432. He said (at 315):
Plainly, a rule enabling a court to determine a question because it is "related to or connected with" any relief claimed in the existing cause or matter may be capable of justifying a joinder like that sought in this instance. It is, however, difficult to see how it would effectively solve the problem discussed by Byrne J in his reasons on this appeal of the binding effect (or lack of it) of the declaration which the plaintiff now wishes to claim against FAI, which is a question that was not explored in JN Taylor Holdings v Bond.
56 In dissent, Davies JA said (at 309):
I accept that there would be no point in making the order for joinder if the declaration did not, in practice, effectively determine the issue of FAI's liability to the valuers as between those parties. But I do not think it is sufficient, for the joinder to lack utility, that it is not binding between those parties at law if, in its practical effect, it is.
He agreed with Byrne J that Interchase and the valuers were not privies for the purposes of res judicata and issue estoppel. He also agreed that neither doctrine would operate to bind FAI and the valuers inter se in respect of that question. His Honour went on however to refer to the wider concept of estoppel enunciated in Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589, a case in which admittedly there was mutuality. He said (at 310):
There was mutuality in Anshun and their Honours in the joint judgment to which I have referred did not find the abuse of process test, as elucidated in some of the English cases, of great utility. However, abuse of process is a similar mechanism designed "to protect against 'the scandal of conflicting decisions'," which can achieve that protection where mutuality is absent as it is here.
FAI and the valuers would have the full opportunity of contesting the question in respect of which the declaration was sought. Davies JA thought it would therefore be an abuse of process to permit either to litigate that question in subsequent proceedings. It followed that the declarations sought would effectively determine the question of FAI's liability to the valuers as between those parties.
57 His Honour rejected the contention that the question was hypothetical. Despite the contingencies that Interchase might not succeed against the valuers or that the valuers and FAI might resolve their differences or that the valuers might never go bankrupt or into liquidation and that if they did their trustee or liquidator might not proceed against FAI, it was unnecessary to consider the likelihood of those contingencies. His Honour said (at 311):
There can be no doubt that, notwithstanding contingencies of a similar kind, the valuers could obtain a declaration as to FAI's liability to them before they are held liable to Interchase.
He then said (at 311):
Moreover, the factors I have mentioned - the insolvency of the valuers, their failure to seek an indemnity from FAI and the ineffectuality of any judgment by Interchase against the valuers unless FAI is liable to indemnify them - together combine, in my view, to give Interchase a real interest in the relief which it seeks.
58 I respectfully agree with the view expressed by Byrne J that the decision of Jacobs J in Multi-tech Services 30 SASR 218 does not seem to be authority for the proposition that an insurer joined as a co-defendant at the suit of a claimant against the insured, would be bound as between itself and the insured, by a declaration that it was liable to provide indemnity to the insured. There was no exposition by Jacobs J of any principle that would support that proposition. It is not necessary for me to decide the general question here. In my opinion the approach taken in JN Taylor 59 SASR 432 is supportable on a wider basis without reliance on a res judicata or issue estoppel. That wider basis was enunciated by Davies JA. In this respect I refer also to my review of the authorities relating to the general concept of abuse of process by relitigation in Spalla v St George Motor Finance Ltd (No 6) [2004] FCA 1699 at [59] - [69]. I consider, as did Davies JA, that there is utility in a declaration against an insurer in circumstances such as the present. That factor however, while important, does not exhaust the discretionary considerations, particular to this case, to which I should have regard.
59 There is a dispute between KMF and its insurers in this case. KMF notified a claim and the Insurers denied liability. They had not offered to conduct any defence on behalf of KMF. The liquidator of KMF is unwilling to proceed against them. Although s 562 confers no legal right on the applicants as against the Insurers, it creates a priority right in the proceeds of any successful claim against the Insurers which gives them a very real interest in having the Insurers' obligations to KMF determined. The basis upon which the Insurers have denied liability raises a discrete issue about the application of an exclusion clause in the policy. On the face of it that question may be susceptible of resolution within a short compass. The question is whether the nature of the claim which the applicants seek to bring against KMF brings the liability which they would assert within the scope of the exclusion clause. That is a matter which should be capable of determination largely upon the pleadings, agreed facts and documents.
60 The Insurers reserve as a fallback position the possibility that they may rely upon an exclusion clause relating to reckless conduct on the part of the directors. In that event it is likely that the factual issues they raise will overlap with some of the issues raised in the pleading against the directors. Presumably the Insurers, if they wish to raise that exclusion, would plead it by way of defence to the declaratory relief that is sought against them. The overlap of factual issues in that event would militate in favour of, rather than against, joinder. At the moment, however, that is hypothetical. The Court is left with an issue raised by the Insurers which, on the face of it, seems capable of relatively expeditious determination without involving the Insurers in all issues at trial.
61 The joinder of the Insurers is sought primarily under O 6 r 2. Their refusal of indemnity is presently based upon the nature of the claim brought against KMF. They contend that a relevant exclusion clause applies. The correctness of that position necessarily involves a question common with that arising in the substantive proceedings and that question is the nature of the case made against KMF. In the event that the Insurers invoke the exclusion clause based upon reckless conduct on the part of KMF's directors, then there are likely to be overlapping questions of fact. Joinder is within the power of the Court under O 6 r 2(a).
62 For the reasons which I have already given, this is a case in which, in my opinion, it is convenient and useful to direct the joinder of the Insurers as respondents and I will so order. Depending on the pleadings which are filed, it may be convenient to make further directions for determination of a preliminary issue in relation to the Insurers' refusal of indemnity.
I certify that the preceding sixty-two (62) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French.