Austcorp Project No 20 Pty Ltd v LM Investment Management Ltd, in the matter... [2013] FCA 883 | Case summary

Federal Court of Australia|2013-11-08|Before: Jacobson J

Introduction and Background 1 These proceedings arise out of the settlement of certain litigation in the Supreme Court of New South Wales to which the first defendant (LM), the second defendant (PTAL), Bellpac Pty Ltd (Bellpac), the Receivers of which are the third defendants, and certain other companies were parties. 2 The settlement included a term which provided for the sale by Bellpac of certain land, known in these proceedings as the Bellambi Land, to a company known as Gujarat NRG Coking Coal Ltd (Gujarat), which was a party to the litigation, for $10 million. 3 The Bellambi Land was subject to a first mortgage to PTAL. The plaintiffs in the present proceeding, referred to individually where necessary as Austcorp and Compromise Creditors, were the holders of securities over the Bellambi Land ranking behind the mortgage held by PTAL. 4 The plaintiffs in these proceedings claim equitable compensation, damages and other relief against LM, PTAL and the Receivers by reason of what is said to be the sale of the Bellambi Land to Gujarat at a gross undervalue. 5 PTAL is said to have breached its equitable duties as a mortgagee as well as its duty of care in exercising its power of sale under s 420A of the Corporations Act 2001 (Cth) (the Corporations Act) and to have engaged in unconscionable conduct in contravention of s 12CB(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and related provisions of the Competition and Consumer Act 2010 (Cth) (CC Act). 6 Claims in similar terms are made against the Receivers of Bellpac. 7 LM is said to be liable by reason of its knowing involvement in the breaches of duty alleged against PTAL and the Receivers of Bellpac. 8 By a further amended interlocutory application filed in Court on 30 October 2013, the plaintiffs seek to amend the proceedings in two different ways. The first is to amend the originating process and the statement of claim by refining the allegations of material fact and the relief sought, as well as to add certain claims against LM's professional indemnity insurers. 9 The second is to join LM's professional indemnity insurers as defendants to the proceedings. It is that aspect of the interlocutory application which raises the issue of substance in the application. 10 The application to join the insurers is not made by the insured, that is to say by LM, but by the plaintiffs as third parties to the contracts of insurance. The plaintiffs rely upon r 9.02, or alternatively, r 9.05 of the Federal Court Rules 2011 (Cth) as the basis for joinder. They do not seek to invoke the provisions of s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) because, whilst formally submitting that the decision of the New South Wales Court of Appeal in Chubb Insurance Company of Australia Ltd v Moore [2013] NSWSC 212 was wrongly decided, they accept that the decision would prevent them from invoking the provision. 11 The effect of the plaintiffs' application for joinder is that leave should be granted to avoid a multiplicity of proceedings by resolving any question of indemnity between LM and its insurers in the event that LM is ultimately found to be liable to the plaintiffs. 12 There are three tranches of insurance cover. The primary layer insurer is Amlin Corporate Member Ltd (Amlin). The second layer insurer is the insurer of the Dual Excess Investment Managers Insurance policy (the First Excess Insurer). The third layer is held with Markel Capital Limited and a syndicate of insurers (the Second Excess Insurers) (collectively, the Insurers). 13 Mr Marshall SC and Mr D H Mitchell appeared for Amlin and the Second Excess Insurers. There was no appearance for the First Excess Insurer but it was common ground that there were no material differences for present purposes in the relevant terms of the policies. The policies are "claims made" policies, the policy period being 31 July 2012 to 31 October 2013. 14 Amlin and the Second Excess Insurers oppose the joinder application. The effect of their submissions is that joinder would be futile because the policies will not respond to a claim made by LM. They rely on the insuring clause which provides indemnity to LM against loss, costs and expenses: … arising from any Claim for any civil liability first made against You during the Period of Insurance and arising out of or in connection with a Wrongful Act. (Emphasis added in italics.) 15 Amlin and the Second Excess Insurers contend that the claim was not first made in the present proceedings. Rather, they submit, the claim was made on 13 December 2011 in a pleading called a "Commercial List Response" filed in proceedings in the Commercial List of the Supreme Court of New South Wales. Thus, they submit that the claim was first made prior to the period of cover under the policies. 16 The question of whether leave should be granted to join the Insurers therefore raises a question of construction of the insurance policies and the effect of the Response filed in the Commercial List. 17 The Commercial List proceedings were brought by LM and PTAL against Mr Alfred Wong claiming amounts said to be due by Mr Wong under guarantees given by him to LM and PTAL for debts of Bellpac. 18 The Response asserted that Mr Wong was discharged from the guarantees, or that his liabilities thereunder were reduced, by reason of PTAL's breaches of duty, and LM'S involvement in those breaches, arising from the sale of the Bellambi Land at an undervalue. 19 The allegations made in the Commercial List Response and in the Statement of Claim in the present proceeding are made in similar terms in each case. The plaintiffs accept that the allegations arise from the same factual substratum. However, they contend that the claim made in the Response is not a "claim" within the meaning of the policies issued by the Insurers. That is the substantial question raised in the present application. 20 The Insurers also point to certain discretionary considerations for refusing leave. In particular, they contend that they have other significant defences to any claim for indemnity under the policies including the failure of LM to disclose to the Insurers the existence of the terms of the Commercial List Response, prior to Amlin and the First Excess Insurer and the Second Excess Insurers going on risk for the 2012-2013 year.

The policies 21 It is sufficient for present purposes to refer to the relevant terms of the Amlin policy which provides cover for four types of investment management liability. The relevant cover in the present case is for fund and investment management professional civil liability. The insuring clause for that form of liability is as follows: In return for Your payment of the premium and subject to the Combined Aggregate Limit We shall indemnify You as follows: 1. Fund and Investment Manager Professional Civil Liability for any amount up to the Limit of Liability stated in Item 3 of the Schedule in respect of Loss and Defence Costs and Expenses arising from any Claim for any civil liability first made against You during the Period of Insurance and arising out or in connection with a Wrongful Act." The term "Claim" is defined as follows: Claim shall mean: (a) any written demand or civil, regulatory or arbitration proceedings (including proceedings before the Financial Ombudsman Service Limited) or Investigation made against You for compensation or damages alleging a Wrongful Act and/or; (b) any suit, civil or third party proceedings, counter-claim or arbitration proceeding brought against You alleging a Wrongful Act … The term "Wrongful Act" is defined as follows: Wrongful Act shall mean: (a) In respect of insuring Clause 1.1, any wrongful, actual or alleged act, error, omission, misstatement, misleading statement, breach of duty or trust by You or anyone for whom the Company or a Fund has a civil liability whilst performing or failure to perform [in] connection with Advisory Services and arising from the ordinary conduct of Your Professional Business. Wrongful Act shall not include any actual or alleged act, error, omission, misstatement, misleading statement, breach of duty or trust: (a) that occurred, or which is alleged to have occurred, before the Retroactive Date stated in the Schedule; (b) committed deliberately or recklessly by You or, in the event that it was so committed by anyone else, it was condoned by You. (Emphasis in original.)

The test for joinder 22 Rules 9.02 and 9.05 of the Federal Court Rules 2011 provide relevantly: 9.02 Joinder of parties - general An application may be made by 2 or more persons, or against 2 or more persons, if: (a) a separate proceeding could be made by or against each person in which the same question of law or fact might arise for decision; and (b) all rights to relief claimed in the proceeding (whether joint, several or alternative) arise out of the same transaction or event or series of transactions or events. 9.05 Joinder of parties by Court order (1) A party may apply to the Court for an order that a person be joined as a party to the proceeding if the person: (a) ought to have been joined as a party to the proceeding; or (b) is a person: (i) whose cooperation might be required to enforce a judgment; or (ii) whose joinder is necessary to ensure that each issue in dispute in the proceeding is able to be heard and finally determined; or (iii) who should be joined as a party in order to enable determination of a related dispute and, as a result, avoid multiplicity of proceedings. 23 Ordinarily, an applicant for joinder must show an arguable case against the parties proposed to be joined, at least to the standard of being able to resist an application for summary judgment: Bupa Australia Pty Ltd v iSelect (No 2) [2012] FCA 1277 (Dodds-Streeton J) at [23]; see also Sienkiewicz (As Trustee for the Sienkiewicz Superannuation Fund) v Salisbury Group Pty Ltd [2013] FCA 977 at [38] (Robertson J) and the authorities cited. 24 Other authorities may support a higher threshold for joinder than those applied in the cases cited by her Honour in Bupa: see Comcare v John Holland Rail Pty Ltd [2009] FCA 660 (Jessup J); Brisbane Slipways Operations Pty Ltd v Pantaloni (2010) 270 ALR 13 (Greenwood J). Those authorities are discussed by Dodds-Streeton J in Bupa at [26] ff. 25 Where an application is made to join an insurer, the principles have been stated in more detailed terms. The principles were summarised by Lindsay J in The Owners-Strata Plan 62658 v Mestrez Pty Ltd [2012] NSWSC 1259 at [54]. I respectfully adopt his Honour's summary. 26 The effect of the principles, in so far as they apply to an application by a third party to join the insurer as a co-defendant with an insured defendant is that the Court may authorise joinder where certain conditions are satisfied. There are six relevant conditions. 27 The first is that the insurer has denied liability to indemnify the insured against the plaintiff's claim. 28 The second is that there is a bona fide dispute as to the entitlement of the insurer to deny liability. 29 The third is that there is a substantial impediment (including insolvency on the part of the insured) standing in the way of the proceedings continuing with the insured defendant itself cross-claiming against the insurer. 30 The fourth is that the dispute as to the liability of the insurer can properly be made the subject of interlocutory relief. 31 The fifth is that there is a true legal controversy between the plaintiff and the insurer such as to ensure that those parties serve as a contradictor of each other. 32 The sixth is that joinder of the insurer as co-defendant may be relied upon to avoid a multiplicity of proceedings. 33 Lindsay J also observed in Mestrez at [54] that a true legal controversy between the plaintiff and the insurer may be taken to exist where, on the facts of the particular case, there is a realistic prospect that the priority provisions contained in s 562 of the Corporations Act will have scope for operation. 34 Importantly, his Honour pointed out that a decision to allow joinder of an insurer as a co-defendant with the insured is discretionary and fact based. It is not available as of right: Mestrez at 54. 35 The principles stated by Lindsay J in Mestrez are consistent with the approach that has been adopted in this Court. Full Court authority supports the proposition that where there is a controversy as to the liability of a professional indemnity insurer to the insured and the debate is one in which the third party has an interest, it is a proper exercise of the discretion for the Court to permit joinder: Genworth Financial Mortgage Insurance Pty Ltd v KCRAM Pty Ltd (in liq) (No 2) (2011) 284 ALR 72 per Perram J at [27] citing Employers Reinsurance Corporation v Ashmere Cove Pty Ltd (2008) 166 FCR 398 at [74].

The two sets of proceedings 36 The present proceeding differs from the Commercial List proceeding and the Response filed in it, both as to the nature of the proceeding and the parties. However, the allegations made by the plaintiffs in this proceeding, and by Mr Wong in the Commercial List Response arise from the same substratum of facts. 37 This is plain from a comparison of the pleadings which shows that each pleading has, as its foundation, the allegation that PTAL and/or the Receivers sold the Bellambi Land at a gross undervalue and that LM was knowingly involved in the breaches of duty committed by PTAL and the Receivers. 38 It is unnecessary to set out the pleadings in detail. The essential similarities and differences are set out below. 39 First, para 38 of the amended Statement of Claim in this proceeding (ASOC) and para 56 of the Commercial List Response allege that on or about 21 June 2011, LM, PTAL and the Receivers of Bellpac executed settlement and release deeds with Gujarat which included a term providing for the sale of the Bellambi Land for a price of $10 million. 40 The ASOC in para 40, and the Response in para 59, then go on to allege that on or about the same date, that is, 21 June 2011, PTAL exercised its power of sale as mortgagee and sold the Bellambi Land to Gujarat for $10 million. 41 Second, the ASOC in para 41 and the Response in para 60 allege that PTAL owed equitable duties to exercise its power of sale in good faith. 42 In the ASOC, PTAL is said to owe equitable duties to the plaintiffs as lower ranking mortgagees whereas in the Response the duties are said to be owed to Bellpac and Mr Wong. 43 An earlier iteration of the ASOC included an allegation that PTAL owed equitable duties to Bellpac and the plaintiffs but in the ASOC the reference to the duty to Bellpac has been deleted. 44 The terms of the duty stated in para 41 of the ASOC are expressed in slightly different terms from those stated in para 60 of the Response. In particular, the ASOC expresses PTAL's duty as comprising an equitable duty to take reasonable precautions to obtain the best price for the sale of the Bellambi Land. However, there is no difference in substance between the content of the duty alleged in para 41 of the ASOC and para 60 of the Response. 45 Third, the duty owed by PTAL under s 420A of the Corporations Act to obtain the market value of the Bellambi Land, or the best price reasonably obtainable, is pleaded in identical terms in para 42 of the ASOC and para 61 of the Response. The duty in each case is said to have been owed to Bellpac. 46 Fourth, the breaches of PTAL's equitable duties and its duty under s 420A are pleaded in virtually identical terms in para 43(vi) of the ASOC and para 62(vi) of the Response. 47 In each case the value of the Bellambi Land is said to have been based upon a valuation made by United Valuers Pty Ltd (UVPL) on the instructions of LM, in an amount of $52 million, and a value of certain other "Retained Land" of $30 million resulting in a combined market value of the relevant land of $82 million. 48 Fifth, LM's knowledge of the UVPL valuation is pleaded in para 42A, 42B and 42C of the ASOC. These paragraphs do not have a direct analogue in the Response but the allegation is sufficiently clear from para 62(vi)A of that document. 49 Sixth, the plaintiffs' allegation of loss, namely the shortfall between the $10 million sale price for the Bellambi Land and the sum of $82 million which ought to have been obtained, is pleaded in para 44 of the ASOC. 50 The material facts which give rise to this allegation are stated in similar terms in para 63 of the Response. Of course, that paragraph of the Response does not plead a claim for loss by Austcorp or the Compromise Creditors, but for present purposes, it is sufficient to note the identity of the underlying material facts in each of the pleadings. 51 Seventh, notably para 45 of the ASOC has been deleted, but as it stood in an earlier iteration, it alleged that if Bellpac, as mortgagor, had made a claim against PTAL for its breaches of duty, Bellpac would have been entitled to equitable compensation in an amount equal to the shortfall between the $10 million sale price and the market value of $82 million. 52 That allegation was made in identical terms in para 65 of the Response. 53 Eighth, in an earlier iteration of the ASOC, the allegations against the Receivers of Bellpac of duty and breach were pleaded in almost identical terms to the allegations in the Response. The relevant paragraphs are paras 59-61 of the ASOC and paras 86-88 of the Response. 54 In each case, the Receivers were said to have owed equitable duties of good faith to Bellpac and the corresponding statutory duty under s 420A of the Corporations Act as well as statutory duties under ss 180(1), 181(1) and 182(1) of the Corporations Act. 55 The allegations in the ASOC have now been amended so as to plead that the duties were owed to the plaintiffs as lower ranking mortgagees, and by deleting the allegations of breach of ss 180-182 of the Corporations Act. 56 Ninth, a new claim of unconscionable conduct under s 12CB(1) of the ASIC Act and ss 21 and 22 of Schedule 2 to the CC Act is made by the plaintiffs in paras 90A to 90C of the ASOC. The claim is made against PTAL and the Receivers of Bellpac. 57 It is alleged to be based upon the facts which are said to constitute the sale of the Bellambi Land at a gross undervalue. 58 Tenth, PTAL's involvement in the breaches of duty by the Receivers of Bellpac is pleaded in similar terms in paras 90D and 90E of the ASOC to the allegations in paras 89 and 90 of the Response. 59 The allegations are based upon what is said to be the sale of the Bellambi Land at undervalue and the participation of the receivers and PTAL in the settlement and release deeds which contained the term providing for the sale of the Bellambi Land for $10 million. 60 An allegation of knowing involvement by PTAL in what is said to amount to unconscionable conduct on the part of the Receivers of Bellpac is included in para 90E of the ASOC. That claim was not made in the Commercial List Response.

Whether the Insurers should be joined 61 It is clear from what I have already said that only two issues have been raised in opposition to the favourable exercise of the discretion to join the Insurers. 62 The first issue is the question of construction of the policies, namely whether the claim was first made during the period of insurance. The second is the possible existence of defences to a claim, in particular defences relating to the failure of LM to disclose the matters raised by Mr Wong in the Commercial List Response. 63 I do not consider it is appropriate to determine the second question on the evidence tendered in the present interlocutory application. It is true that Mr Marshall relies on the possibility of such defences only as a matter of discretion. However, that issue can only be determined after an exploration of the facts relating to the underwriting of the risk. So far, the only evidence put before me is the Proposal Form and a Briefing Paper. 64 More evidence is required to determine that issue which was only raised by Amlin and the Second Excess Insurers shortly before the interlocutory hearing. 65 The first issue is central. As Mr Marshall submitted, if decided adversely to the plaintiffs it is fatal to the application for joinder. 66 Reduced to its bare essentials, the issue is a very short one, namely whether the Commercial List Response is a "counter-claim" brought against LM alleging the same wrongful act as is the subject of the present proceeding. 67 I heard full argument on this question. It was ably debated by counsel. Plainly, as counsel for the plaintiffs conceded, the allegations in this proceeding and the allegations in the Commercial List Response are stated in similar language and arise out of the same factual matters. But that is not by itself sufficient to dispose of the question of construction. 68 That question is one of construction of the policy itself: see Thorman v New Hampshire Insurance Co (UK) Ltd and Home Insurance Co [1988] 1 Lloyd's Rep 7 at 16-17; Schipp v Cameron [1998] NSWSC 997 at [958]; see also CGU Insurance Ltd v AMP Financial Planning Pty Ltd (2007) 235 CLR 1 at [4]. 69 It seems to me to be arguable, notwithstanding the force of the arguments put by Mr Marshall, that the Commercial List Response is not a "counter-claim" within the meaning of the policies because it was defensive in nature. 70 The difficulty in the present context is analogous to one which sometimes arises in an application for an interlocutory injunction where the question to be tried is one of law and the Court must decide whether to resolve that question: see Meagher R, Heydon D and Leeming M, Meagher Gummow and Lehane's Equity Doctrines and Remedies (4th ed, LexisNexis Butterworths, 2002) at [21-390]. 71 Here, I cannot determine the strength of the plaintiffs' arguable case on the question of construction without determining it on a final basis. 72 I accept the submission of Mr Lazarus that it is not appropriate for me to finally resolve that question in this application. 73 Accordingly, the course I propose to adopt is to grant leave to join the Insurers but upon condition that there be determined as a separate question, on a final basis, the issue of construction and the underwriting issues raised by Amlin and the Second Excess Insurers in the present application.

Conclusion and Orders 74 The orders I will make are as follows: 1. To the extent necessary, leave is granted to the plaintiffs to amend the Originating Process and Statement of Claim in accordance with the amended version of those documents provided in Court on 30 October 2013; 2. Leave is granted to the plaintiffs pursuant to Rule 9.02 or alternatively Rule 9.05 of the Federal Court Rules 2011 to join as defendants, the professional indemnity insurers of LM Investment Management Ltd (in liq), being the fifth, sixth and seventh respondents in the Further Amended Interlocutory Application filed 30 October 2013; 3. The parties are to liaise with a view to formulating a separate question to determine all the insurance issues raised by the fifth, sixth and seventh respondents in answer to this application. I certify that the preceding seventy-four (74) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.

Federal Court Rules 2011(Cth)rr 9.02, 9.05

The Owners-Strata Plan 62658 v Mestrez Pty Ltd [2012] NSWSC 1259 Thorman v New Hampshire Insurance Co (UK) Ltd and Home Insurance Co [1988] 1 Lloyd's Rep 7 Meagher R, Heydon D and Leeming M, Meagher Gummow and Lehane's Equity Doctrines and Remedies (4th ed, LexisNexis Butterworths, 2002)

Austcorp Project No 20 Pty Ltd v LM Investment Management Ltd, in the matter of Bellpac Pty Ltd

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