//
[2017] VSCA 378
General information, not legal advice.
Court of Appeal (Vic)
2017-12-18
Mr P, Ferguson CJ, Whelan JA, Leish JA
Original judgment source is linked above.
INSURANCE - Construction of terms of professional indemnity policy - Management consultant insured liable for insolvent trading incurred as director of client - Whether liability incurred in conduct of insured's provision of 'professional services' as defined - applied.
INSURANCE - Non-disclosure and misrepresentation - Failure to disclose appointment of insured as director of client company - Insurance Contracts Act 1984 (Cth) ss 21, 26.
INSURANCE - Whether deed of settlement between insured and liquidators of client company had effect of limiting loss recoverable under policy - CGU Insurance Ltd v One.Tel Ltd (in liq) [2010] HCA 26; (2010) 242 CLR 174 applied.
CORPORATIONS - Whether management consulting company was 'shadow' or 'de facto' director - Corporations Act 2001 (Cth) s 9.
INSURANCE - Construction of exclusion in policy concerning liability for claim arising from any act, error or omission of director while acting in that capacity.
INSURANCE - Standing - Whether liquidators making insolvent trading claim against director have standing to seek declaration against director's insurer - CGU Insurance Ltd v Blakeley (2016) 259 CLR 339 applied.
1 The applicants, Messrs Blakeley, Ryan and Olde, are the liquidators of Akron Roads Pty Ltd ('Akron'). On 1 February 2010 they were appointed administrators of Akron. On 1 March 2010 the creditors of Akron resolved to wind up the company and they were appointed liquidators.
2 In this proceeding the liquidators and Akron brought an insolvent trading claim against Akron's three directors concerning debts incurred in the period from 1 August 2009 to 1 February 2010. Those directors were Trevor Crewe, Robert Sill and John Sill. For ease of reference when referring to the plaintiffs in the proceeding we will simply refer to the 'liquidators' notwithstanding that the claim was made by both the liquidators and Akron.
3 One of the directors, Trevor Crewe, was a management consultant and was, at all relevant times, the managing director of a company conducting business as a management consultant named Crewe Sharp Pty Ltd ('Crewe Sharp'). Crewe Sharp is now in liquidation. The liquidators also made the insolvent trading claim against Crewe Sharp alleging that it was a de facto or shadow director of Akron.
4 The debts the subject of the insolvent trading claim totalled $14,657,189.05.
5 Crewe Sharp had a professional indemnity insurance policy with CGU Insurance Limited ('CGU'). This policy was on foot when the liquidators first made demand in relation to the insolvent trading claim. Cover under the policy extended to Trevor Crewe as a director of Crewe Sharp. The limit of indemnity under the policy is $5,000,000.
6 The liquidators applied to join CGU as a defendant to the proceeding seeking a declaration as to CGU's liability to indemnify Crewe Sharp and Trevor Crewe under the professional indemnity insurance policy. CGU contested that joinder. Eventually, CGU's joinder was upheld in the High Court.[1]
7 The liquidators settled the claim with Robert and John Sill and, after the High Court decision, they also settled with Trevor Crewe. A deed of settlement was entered into between Trevor Crewe and the liquidators. On 4 April 2016 judgment was entered by consent against Mr Crewe in the sum of $12,992,880.05 pursuant to the terms of that deed. Under the terms of the deed the liquidators agreed to enforce the judgment only, first, against the proceeds of the CGU insurance policy, and then, once that was exhausted, against a security sum of $125,000 paid by Mr Crewe into a trust account.
8 When the matter came on for trial the liquidators only pressed the insolvent trading claim in relation to the two month period from 30 November 2009 to 1 February 2010. If that claim succeeded the amount recovered would exceed $5,000,000. Crewe Sharp was then in liquidation and the claim against it proceeded unopposed. The only party opposing the claim was CGU.
9 The factual basis for the insolvent trading claim against the directors for debts of no less than $6,000,000 during the period 30 November 2009 to 1 February 2010 was admitted by CGU.[2]
10 The matters in issue (so far as they are still relevant), and the relevant conclusions of the trial judge, were as follows:
(1) Whether the liquidators had standing to seek a declaration against CGU given the terms of the deed of settlement: The trial judge held that they did have standing to seek that declaration.
(2) Whether Crewe Sharp was a de facto or shadow director of Akron and accordingly liable on the insolvent trading claim: The trial judge held Crewe Sharp was not a de facto or shadow director and was accordingly not liable on the insolvent trading claim.
(3) Whether the policy responded to Trevor Crewe's liability under the judgment of 4 April 2016: This issue had two components. The first was whether the policy responded to Mr Crewe's liability in the sense that the coverage provided extended to the insolvent trading claim. The second was whether CGU's liability to indemnify Mr Crewe was, as a consequence of the terms of the deed of settlement, limited to $125,000. The trial judge held that the coverage provided by the policy did extend to Mr Crewe's liability but that that liability was limited to $125,000.
(4) Whether the coverage provided by the policy extended to Crewe Sharp's liability: The trial judge held that, if Crewe Sharp had been liable as a de facto or shadow director, the coverage provided by the policy would have extended to its liability.
(5) Whether exclusions in the policy, and in particular an exclusion in cl 6.9(c), applied: The trial judge held that the exclusions did not apply.
(6) Whether CGU's liability under the policy was reduced to zero by reason of non-disclosure and misrepresentation: The trial judge held that there had been non-disclosure and misrepresentation which reduced CGU's liability to zero.
11 Thus, the liquidators' claim failed before the trial judge. CGU's liability was held to be zero by reason of non-disclosure and misrepresentation.
12 The liquidators now seek leave to appeal against the trial judge's conclusion that Crewe Sharp was not a de facto or shadow director; his finding that the liability as to which CGU was to indemnify Mr Crewe was, as a consequence of the terms of the deed of settlement, limited to $125,000; and the finding that CGU's liability under the policy was reduced to zero by reason of non-disclosure and misrepresentation.
13 CGU seeks leave to cross-appeal. It does so because the judge ordered the liquidators to pay only 70 per cent of CGU's costs. CGU seeks leave to appeal that order and the proposed grounds seek to overturn the trial judge's conclusion that the liquidators did have standing to seek a declaration against CGU; the conclusion that the policy did respond to Mr Crewe's liability (and would have responded to Crewe Sharp's liability if it had been held to be a de facto or shadow director) in the sense that the coverage provided extended to the insolvent trading claim; and the conclusion that the exclusion in cl 6.9(c) of the policy did not apply.
14 The respective applications for leave to appeal were argued on the basis that if leave were granted the appeals were to be determined forthwith.
15 Before turning to the trial judge's reasons for judgment, the proposed grounds of appeal and cross-appeal, and the submissions made in support of them, it is necessary to set out the relevant terms of the CGU professional indemnity policy and the terms of some relevant provisions of the Insurance Contracts Act 1984 (Cth) ('ICA'). It is also necessary to briefly summarise relevant evidence given before the trial judge, and to set out the relevant terms of the deed of settlement.
Relevant provisions of the Professional Indemnity Policy
16 The CGU professional indemnity policy ('the policy') is constituted by terms and conditions set out in a brochure, a schedule signed on behalf of CGU, and a schedule endorsement replacing the earlier schedule effective from 10 December 2009.
17 Section 1 of the brochure provides that certain words appearing in bold have special meanings which are defined in s 12 of the policy. Section 2 provides that cover is provided upon payment of the premium and records the fact that before the policy came into effect CGU was provided with a proposal.
The Cover We Provide
We indemnify the Insured up to the Policy Limit (see Section 5) for any Civil Liability to any third party which is incurred by the Insured in the conduct of the Professional Services ... [provisions are then made concerning the timing of claims].
12.12 (an/the) Insured
Each of the following, individually and jointly:
(a) each person, firm or incorporated body identified in the Schedule as an (a) Insured and each current or Former Principal of any such firm or incorporated body; and
(b) any entity which is engaged in the Professional Services and which is created and controlled, while this Policy is in force, by anyone identified in the Schedule as an Insured; and
(c) anyone who becomes a Principal of the Insured while this Policy is in force (but only in respect of work undertaken for or on behalf of the Insured firm or incorporated body).
20 The term 'Principal' is defined by cl 12.19 as follows:
A sole practitioner, a partner of a firm, or a director of a company, which firm or company is Covered by this Policy.
21 The 'Policy Limit' is defined as the amount specified in the schedule as the 'Total Sum Insured' which in this case is, as indicated earlier, $5,000,000.
22 The expression 'Civil Liability' is defined in cl 12.2 as follows:
Liability for the compensatory damages, costs and expenses which a civil court orders the Insured to pay on a Claim (as opposed to criminal liability or penalties). It includes the legal costs of the person making the Claim, for which the Insured becomes liable.
23 Finally, 'Professional Services' is defined in cl 12.13 as follows:
12.13 Professional Services
The business of provision by the Insured of the Professional Services stated in the Schedule.
24 Item 3 of both the schedule and the endorsement reads as follows:
Professional Services Covered by this Policy: Personnel and HR Consultancy, Management Consultancy, Business Coaching, Training and Development Consultancy and debt recovery services.
25 Clause 3.2 of the brochure provides that the 'Civil Liability' covered includes cover for civil liability claims arising as a consequence of 'breach of duty' in the conduct of the professional services.
4.1 Insured
We Cover the Insured named in the Schedule (and as defined in Section 12 of the Policy) for Claims or losses and costs of the type and on the basis specified in Section 3, arising from the conduct of the Professional Services by or on behalf of the Insured.
The conduct of the Professional Services by or on behalf of the Insured includes, for the purpose of this Policy, acts, errors or omissions of agents or consultants of the Insured while undertaking work which is reasonably incidental to the conduct by the Insured of the Professional Services and for which the Insured is liable. Such agents and consultants, however, are not Covered by this Policy.
27 Clause 4.2 extends cover in certain circumstances to persons and entities outside the definition of 'the Insured'.
28 Section 6 of the brochure sets out a variety of matters which are not covered. Relevantly, it reads as follows:
We do not provide Cover for any of the following Claims ...
6.9 Employers, Liability, Directors' & Officers' Liability, Occupier's Liability, Motor, Marine, etc
Claims:
...
(c) (if an Insured is either an incorporated body or a director or officer of an incorporated body) arising from any act, error or omission of a director or officer of that incorporated body while acting in that capacity; ...
29 Section 21 of the ICA provides as follows:
21 The insured's duty of disclosure
(1) Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that:
(a) the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or
(b) a reasonable person in the circumstances could be expected to know to be a matter so relevant, having regard to factors including, but not limited to:
(i) the nature and extent of the insurance cover to be provided under the relevant contract of insurance; and
(ii) the class of persons who would ordinarily be expected to apply for insurance cover of that kind.
(2) The duty of disclosure does not require the disclosure of a matter:
(a) that diminishes the risk;
(b) that is of common knowledge;
(c) that the insurer knows or in the ordinary course of the insurer's business as an insurer ought to know; or
(d) as to which compliance with the duty of disclosure is waived by the insurer.
(3) Where a person:
(a) failed to answer; or
(b) gave an obviously incomplete or irrelevant answer to;
a question included in a proposal form about a matter, the insurer shall be deemed to have waived compliance with the duty of disclosure in relation to the matter.
30 Section 26 of the ICA relevantly provides:
26 Certain statements not misrepresentations
(1) Where a statement that was made by a person in connection with a proposed contract of insurance was in fact untrue but was made on the basis of a belief that the person held, being a belief that a reasonable person in the circumstances would have held, the statement shall not be taken to be a misrepresentation.
(2) A statement that was made by a person in connection with a proposed contract of insurance shall not be taken to be a misrepresentation unless the person who made the statement knew, or a reasonable person in the circumstances could be expected to have known, that the statement would have been relevant to the decision of the insurer whether to accept the risk and, if so, on what terms.
31 Section 28 of the ICA provides:
General insurance
(1) This section applies where the person who became the insured under a contract of general insurance upon the contract being entered into:
(a) failed to comply with the duty of disclosure; or
(b) made a misrepresentation to the insurer before the contract was entered into;
but does not apply where the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the insured had not failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into.
(2) If the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract.
(3) If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract (whether under subsection (2) or otherwise) has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred or the misrepresentation had not been made.
32 In brief summary, the issues raised in the proceeding under the provisions of the ICA were:
33 The uncontroversial factual basis of the liquidators' insolvent trading claim was established in an amended witness statement of one of the liquidators, Mr Blakeley. The evidence relevant to the controversial aspects of the claim was the evidence of Mr Crewe, the evidence of the underwriter at CGU who made the decision to issue the policy, Ivana Vuckova, and the evidence of the broker who arranged the policy, Gregory Hansen.
34 Trevor Crewe was called to give evidence on behalf of the liquidators. He adopted a witness statement dated 31 March 2016.[3]
35 In his witness statement Mr Crewe referred to the fact that he had held senior management positions in large publicly listed and private companies in Australia over a 40 year career.[4] He said he had been managing director of Crewe Sharp since 1991.[5] He had established a management consulting practice in Perth in 1991 with a person named Ken Sharp.[6] The practice was eventually incorporated and other companies within what he described as the 'Crewe Sharp group' were established.[7]
36 Mr Crewe described the way Crewe Sharp operated as follows:
Crewe Sharp focussed on providing practical, 'hands-on' experience to our clients in order to improve their business performance and profitability. Crewe Sharp provided management consulting services to clients by:
The terms of Crewe Sharp's engagement with an entity were normally documented in a mandate letter.[8]
Akron was however, the only company to which I was formally appointed as a director. For the companies to which I was not formally appointed a director, I worked closely with their directors in guiding and steering them and their companies towards better profitability, gave instructions that were adhered to by the company and frequently acted as chairman.[11]
38 Crewe Sharp was initially engaged in 2001 by a company named Standard Roads Pty Ltd. At that time Standard Roads Pty Ltd owned 51 per cent of the shares in Akron. Mr Crewe produced the relevant 'mandate' which was a letter dated 13 June 2001.[12] Relevantly, the letter reads:
[Crewe Sharp] is engaged by Standard Roads Group (Herein referred to as SRG) to provide advice and to act in the capacity as either Chairman/Director of nominated operating companies within SRG.
39 Mr Crewe in his witness statement said that he was formally appointed as an 'independent, non-executive director' of Akron on 19 July 2001.[13] He said that he was not 'paid personally' for acting as a director but that his time was billed by Crewe Sharp 'for the management consultancy services I rendered on its behalf to Akron' at a specified rate.[14]
40 In 2001 Standard Roads Pty Ltd sold its interest in Akron to Robert and John Sill. In his witness statement Mr Crewe said that he had negotiated the buyout price and after the buyout he remained a non-executive director. From July 2001 until 2004 he 'acted as chairman' of Akron. Robert Sill then became chairman. In April 2009 the chief executive officer of Akron was stood down and Mr Crewe was appointed chief executive officer.[15]
41 In relation to the work Crewe Sharp performed at Akron, Mr Crewe in his witness statement said:
From 2001 until early 2009, Crewe Sharp performed two main streams of work at Akron:
42 As to the period relevant to the claim, Mr Crewe's witness statement relevantly read as follows:
From at least 2009 until 1 February 2010, Crewe Sharp (through myself, Evan Sofronas and, to lesser extent, Alan Gardiner and others from Akron) performed various specific engagements relating to top level management functions, including:
b) dealing with debtors;
c) dealing with creditors; and
d) cash flow management.
...
From April until 1 February 2010, I acted in the position of CEO of Akron. At that time, I usually worked from Akron's head office in Seaford and was provided a desk.
Between 2009 and 1 February 2010, Crewe Sharp provided full time finance and administration assistance to Akron through the services of Mr Evan Sofronas, an employee of Crewe Sharp. Crewe Sharp invoiced Akron for Mr Sofronas' work as Treasurer and Commercial Services Manager of Akron and those invoices were paid by Akron. ...
Between at least 30 November 2009 and 1 February 2010, Crewe Sharp assisted Akron:
a) with obtaining financing by way of:
b) in relation to financial related matters through:
43 Mr Crewe in his witness statement said that Mr Sofronas had an office at Akron's premises and worked there full time from 30 November 2009 until 1 February 2010. He attended many of the informal meetings and discussions that Mr Crewe was having with Robert and John Sill.[18]
44 Mr Crewe's witness statement concluded by referring to the fact that he had been told that CGU alleged in its defence that Crewe Sharp had not disclosed that management consulting services may include directorships. Mr Crewe's witness statement said:
I did not know at any time that that was a matter relevant to the decision of CGU to accept the risk and, if so, on what terms to issue the policy.[19]
45 When Mr Crewe gave oral evidence in chief he was asked to expand upon the duties which he performed at Akron. He also described the circumstances in which the chief executive officer was stood down and he took over. When describing his relationship with the Sills he said:
I did have discussions with them that put it to them that we could only have one - one captain, one ship, and that they couldn't dabble and fiddle and meddle and cut across. That the forum for them to do that was with me or at the board meeting but in the day to day directions of the company it was not good practice for them to be cutting across what was going on, which they accepted.[20]
46 When asked who was the one captain he replied 'myself'.[21]
47 Mr Crewe described the attempts made to address financial problems that the company experienced in the months before administration. In substance, he described himself leading the Sills through attempts made to obtain further funding and to obtain a standstill agreement with creditors.[22]
48 He was asked about the statement in his witness statement that he had not known that CGU did not know that management consulting services might include director and officer type services and the following interchange occurred:
If you were asked whether you knew that that was a matter relevant to CGU's decision to accept the risk and on what terms to issue the policy, what would be your answer? - - - I didn't know that.
And the policy application form by Crewe Sharp described Crewe Sharp's activities as management consulting services? - - - Yes.
Do you consider that that description was accurate? - - - Yes.[23]
49 When cross-examined by counsel on behalf of CGU Mr Crewe said that he would never have understood Crewe Sharp as an entity to be a director of Akron.[24]
50 Mr Crewe was taken to minutes of a meeting of directors of Akron on 19 July 2001. The minutes recorded Mr Crewe as having reiterated to directors that their responsibilities were onerous. Mr Crewe accepted that he knew that the duties of directors were onerous and that they had statutory obligations including those arising out of the insolvent trading provisions.[25] The following interchange then occurred:
What I suggest to you, Mr Crewe, and perhaps we'll go back a step. You admit that you've known and always known the onerous nature of the duties that are imposed on company directors? - - - Correct.
Those onerous duties can mean that directors are exposed to pay, and I needn't remind you of this I know, large sums of money if they breach those duties? - - - Correct.
The duties that directors have of the sort [I've] described, to act in good faith and insolvent trading and so on - - - ? - - - Yes, yes.
Are not duties imposed upon management consultants are they? - - - No. They're imposed upon all directors.
Yes, but not upon a management consultant who isn't a director? - - - Ah, let me just think about that. Please put it to me again.
The duties that I've described, the director's duties to act in good faith and insolvent trading? - - - Yes, yes.
Are duties that apply to directors and not management consultants who aren't otherwise directors? - - - If the management consultant is not a director then that would be correct.[26]
Yes, and what I am putting to you is that if you assumed those onerous duties either because you were an actual director or a de facto director, that would have been relevant to any underwriting decision by an insurance company? - - - I'm sure it - I'm sure it is. But I don't know that it's that simple, is it. We're operating - - -
...
It would be a relevant matter to an insurance company to know that the insured had assumed risks as a de facto or validly appointed director? - - - Yes.
That the insured presumably intended the policy to cover? - - - My understanding would be that they knew that.
...
Because you are not suggesting, are you, that in this case, CGU knew before the policy was issued that you were a director of Akron Roads. You're not suggesting that, are you? - - - Well, in some respects I am, because I was never aware of the fact that they didn't know, given that I'd been a director since 2001 and an informal director on so many companies through the period, it didn't matter the number. So it never occurred to me that they weren't privy to it.
But you agree that it was a relevant matter? - - - Yes, I agree it's a relevant matter.[29]
53 Mr Crewe was then asked about proposal documents which had been submitted to CGU. He said that the handwriting on those documents was that of his son, Matthew.[30]
54 The underwriter at CGU who made the decision to issue the professional indemnity policy, Ivana Vuckova, also adopted a witness statement. She identified the proposal documents which had been forwarded to her. In relation to disclosure, in her witness statement she said:
At no stage did Crewe Sharp or Mr Hansen [the broker] disclose to me that Crewe Sharp and its director, Mr Trevor Crewe (who was also an insured under the P.I. Policy) provided director and officer services to the second plaintiff (Akron Roads). I had understood that Crewe Sharp provided management consultancy services to clients - that is, independent third party consultancy services to clients about management issues such as advising clients about how parts of the client's operations can be restructured to improve efficiency. Working as a director or officer of a company is not providing independent third party consultancy services. It is managing the company.[31]
55 In her witness statement she addressed what she would have done if she had been told that Crewe Sharp was providing director and officer services to Akron. She said that she would have contacted the broker to obtain information about what percentage of the income received by Crewe Sharp came from the provision of these services.[32] The statement went on:
If a large part of the income was from the provision of company director and officer services then I would have told Mr Hansen that it is not appropriate for me to offer the PI Policy to Crewe Sharp because it would not provide any cover in respect of most of the services provided by it, namely the director and officer services.[33]
56 She went on to say that she would have explained that director and officer services are not covered by professional indemnity policies. She referred to the fact that a director and officers policy quotation was also requested but that Crewe Sharp did not take up a director and officers policy with CGU.[34] Ms Vuckova's witness statement stated:
If I had been told by Mr Hansen that only a small proportion of the income received by Crewe Sharp related to the provision of director and officer services to Akron Roads then I would have been prepared to offer the P.I. Policy to Crewe Sharp but only on the basis that it contained an endorsement to the following effect: 'this policy does not cover any Claim or Claims arising directly or indirectly from, out of, in connection with or in respect to, any services provided by, or on behalf of, the Insured to Akron Roads Pty Ltd'.[35]
58 The relevant aspects of the extract from the underwriting manual that were put to her were the fact that there was nothing in the manual's description of management consulting which excluded the provision of director and officer type services, and the fact that the extract indicated that 'consultancy activities can vary widely'.[38]
59 In relation to the proposal documents, it was put to her that amongst the documents sent to her by Mr Hansen (the broker) there was a 'Recruitment Services Addendum'.
60 CGU in its defence[39] relied upon this 'Recruitment Services Addendum', which it defined as the '2009/2010 Proposal', and upon a declaration within it which, amongst other things, acknowledged the insured's disclosure obligation (on page 8 of the document). The defence pleaded that the representations made in the 2009/2010 Proposal, and in the email which accompanied it, were false and constituted a breach of the duty of disclosure.
61 The 'Recruitment Services Addendum' listed 'occupations' and fees earnt for 'placements' in those occupations, one of which was 'Others'. The projected annual fees for 'Others' was $200,000. Ms Vuckova was asked whether she knew what 'Others' meant and she said she did not. She said she did not recall whether she had asked what it meant. She was also referred to an item which required a full description of business activities. The handwritten response read 'see Attached Overview'. When asked where the attached overview was, she said that she did not know. She said she did not know whether she had ever received it.[40]
62 Ms Vuckova rejected a proposition put to her that if the proposal had indicated that director and officer type services were provided she would still have issued the policy on the same terms.[41]
63 Ms Vuckova was cross-examined about the fact that she did not consider that the policy covered director and officer liability in any event. The following interchange occurred:
If in June 2009 you'd been advised of a potential future insolvent trading claim, would you have considered that that would alter the risk of the policy? - - - Substantially, yeah.
I suggest to you that that's not right because your view is that the policy didn't respond in any event? Your view is that these types of risks are not covered by this policy? Is that right? - - - That's right, yeah.
Yes, and so regardless of whether there would be an insolvent trading liability or not your view is that on any view the policy doesn't cover it? - - - The policy doesn't cover it but the risk has changed.[42]
64 Ms Vuckova was cross-examined about the statement in her witness statement that she would have included an exclusion of liability in relation to services provided to Akron had she known that Mr Crewe was a director. In relation to the issue of why she would have done that she said:
We wouldn't cover it because if we found out that he was a director, then it's a - the relationship is no longer independent, so any - any services provided to Akron Roads would be excluded.[43]
65 In re-examination, when asked why she considered that director and officer services were not covered by the professional indemnity policy, she said that she considered the exclusion in cl 6.9 applied.[44]
66 The broker, Mr Hansen, in his evidence adopted a statement entitled 'Summary of Evidence of Gregory Mark Hansen' dated 7 March 2016. In relation to the circumstances in which the policy was procured that statement read as follows:
In June 2009, in my role as a director of Austbrokers Countrywide, I came to meet Mr Matthew Crewe. Mr Crewe asked me to obtain a quotation for a Professional Indemnity insurance policy (P.I Policy) to cover four entities, including the fourth defendant (Crewe Sharp). I understood that the four entities already had a P.I Policy in place with another insurer but that Mr Crewe wanted an alternative quotation.
Mr Crewe provided to me the following documents:
(a) a Professional Indemnity Insurance Proposal for Crewe Sharp Career Bridge Pty Ltd dated 28 May 2009;
(b) a Recruitment Services Addendum for Crewe Sharp and two other entities dated 29 May 2009;
(c) part of a proposal for Crewe Sharp Career Bridge Pty Ltd dated 29 May 2009.[45]
67 Mr Hansen indicated that the above documents were forms produced by an entity named 'ProRisk' which he said was an underwriting agency. Mr Hansen said that his understanding was that the forms had been provided to another insurance broker and that Matthew Crewe was providing them to him (Mr Hansen) so that he could obtain an alternative quotation.[46]
68 The email under cover of which Mr Hansen sent the proposal forms to Ms Vuckova was dated 10 June 2009. That covering email read in part:
Crewe Sharp Pty Ltd - a Management Consultancy services company. None of the risks stuff you do not like (capital raising, bus valuations, M&a etc). It's all strategic management consulting centered around HR services.
69 In Mr Hansen's witness statement he stated that he understood Crewe Sharp to be: 'a management consultancy services company. That is, it was an independent third party providing advice to clients on management issues.' He said that he did not know Crewe Sharp and its director, Mr Crewe, provided director and officers services to Akron, and he said that if he had known that he would have told Matthew Crewe that the PI Policy did not cover such services and that he should make sure that Akron had a director and officers policy in place.[47]
70 In cross-examination Mr Hansen was taken to CGU's underwriting manual. Mr Hansen had at one time been employed by CGU. He was taken to the section where there was a description of the profession 'management consultant'. He agreed that there was no reference there to an independent third party providing advice. He also agreed that the underwriting manual referred to the fact that consultancy activities can vary widely.[48] The following interchange then occurred:
Do you accept that a management consultant may sometimes be performing director or officer type services? - - - That a management consultant - yes, I accept that they can do that.[49]
71 By a settlement deed entered into on 23 March 2016 the liquidators (including Akron), Trevor Crewe and Crewe Sharp agreed to resolve the liquidators' claim. Under cl 2 of the deed Mr Crewe and Crewe Sharp agreed to consent to judgment against them for the full amount claimed but without interest or costs. Clause 2.2 of the deed then provided as follows:
In consideration of the deposit of the Security Sum by Trevor Crewe in accordance with clause 2.2(c) below:
(a) Effective from the time of the provision of the Security Sum as required by clause 2.2(c) below, the Liquidators agree to enforce the judgment in the Proceeding only as follows:
(i) first, against any proceeds of the Policy; and
(ii) as against Trevor Crewe, once the claim on the Policy has been exhausted, only against the Security Sum of $125,000.
72 Clause 2.2 went on to provide that Trevor Crewe assigned to the liquidators any and all amounts recovered under the policy and agreed to assist the liquidators in the conduct of the proceeding. Sub-clause (c) provided that as security for Mr Crewe's liability under cl 2.2(a)(ii) he would deposit the Security Sum into the liquidators' solicitors' trust account.
73 On 4 April 2016 Judd J made the following order by consent:
Under section 588M(2) of the Corporations Act 2001 (Cth), the First Defendant pays to the First Plaintiffs, as a debt due to the Second Plaintiff, the amount of $12,992,880.05 being the amount of the loss and damage suffered by the Creditors in relation to the debts owed to them by the Second Plaintiff, because of the insolvency of the Second Plaintiff.
74 The first defendant is Mr Crewe. The first plaintiffs are Messrs Blakeley, Ryan and Olde and the second plaintiff is Akron.
75 The trial of the proceeding was heard in April and May 2016 and on 11 November 2016 the trial judge published detailed reasons for his conclusion that the application by the liquidators for declarations against CGU should be dismissed and that the claim by the liquidators against Crewe Sharp should also be dismissed.[50]
76 On 7 December 2016 the trial judge heard argument on the question of costs. He concluded that the liquidators should pay 70 per cent of CGU's costs and he published reasons for that conclusion.[51] On that day he made orders dismissing the claim against Crewe Sharp and the claim for a declaration against CGU and ordering the liquidators to pay 70 per cent of CGU's costs.
77 The trial judge set out the relevant history of the claims in detail and set out a very detailed review of the facts. For the purposes of these applications it is unnecessary to repeat that detail.
78 The trial judge then turned to the issue of whether the liquidators had standing to seek a declaration against CGU. That issue had already been the subject of an appeal to the High Court in CGU v Blakeley (as referred to earlier). The trial judge set out the respective submissions of the parties. CGU's position was that the issue of standing had been altered since the High Court decision by reason of the settlement deed. Its submission was that the High Court decision in CGU v Blakeley had been premised upon the operation or potential operation of s 117 of the Bankruptcy Act 1966 (Cth) ('Bankruptcy Act') and that the provisions of the settlement deed had rendered that consideration irrelevant. The liquidators argued the High Court analysis remained operative.
79 After setting out the respective submissions of the parties, his Honour addressed the High Court's decision in CGU v Blakeley in detail, quoting extensively from it. His relevant conclusion was expressed as follows:
The terms of settlement have avoided the likely plight of Mr Crewe of being bankrupted. There is no suggestion he could have met an order for some $12 million. His agreement with the liquidators seeks to achieve the same result as that which may have been achieved under s 117 of the Bankruptcy Act if he went bankrupt. That is, the receipt by the liquidators of the insurance coverage available to Mr Crewe by reason of his breaches of the Corporations Act as alleged by the plaintiffs.
In my opinion, the High Court gave weight to the commercial considerations facing the liquidators in carrying out the winding up of Akron. The plurality said that it would be distinctly to ignore reality if the liquidators' interest in the rights of Mr Crewe and Crewe Sharp under the CGU Policy could be defeated by reason of inaction on their part given that the statutory provisions themselves deprived Crewe Sharp and Mr Crewe of all incentive to pursue a claim under the Policy.
In the current situation, the liquidators of Crewe Sharp have said that they cannot afford to dispute the denial of liability by CGU and Mr Crewe has no financial incentive to dispute the denial at his own expense in view of the terms of settlement.
If Mr Crewe and Crewe Sharp had joined CGU as a third party and pursued their rights under the CGU Policy, the dilemma facing the liquidators would not have arisen.
After taking all these matters into account, in my opinion, recognising that the liquidators have standing to seek declaratory relief against CGU in respect of Mr Crewe is consistent with, and supported by, the High Court's decision in CGU v Blakeley.
Accordingly, I reject CGU's standing objection to the liquidators' claim against CGU. Of course, such a rejection says nothing about the defences raised by CGU to the claim.[52]
80 The trial judge then addressed what effect the settlement deed had had upon CGU's potential liability. In substance, CGU maintained that the effect of the settlement deed was to limit any claim for indemnity which Mr Crewe might have to the sum of $125,000. The trial judge agreed with CGU's submission in this respect. He observed that CGU's obligation was to indemnify the insured for the 'actual loss' suffered[53] and then continued:
The deed of settlement is persuasive evidence of the quantum of liability of the insured. I find that it is this loss for which CGU must indemnify the insured (Mr Crewe), (subject to the claim being otherwise compliant with the Policy, as discussed further below).[54]
81 The judge referred to authorities establishing the principle that an insured cannot recover any more than its actual loss in the case of an indemnity policy. He also referred to authorities and texts in the insurance context concerning the relevance of settlements. As to the effect of the settlement deed in this case the trial judge said:
The settlement deed has the effect of limiting the liability of the insured. Ordinarily, an insured will be entitled to an indemnity for the settlement amount if the settlement of the liability was reasonable.[55]
In my opinion, the justiciable issue between the liquidators and CGU relating to Mr Crewe, is not a claim that CGU owes Mr Crewe the maximum amount owing under the Policy. Because of the settlement deed, Mr Crewe's financial loss is limited to $125,000. That is the only matter that is justiciable between the liquidators and CGU relating to Mr Crewe.[56]
83 The trial judge concluded that the maximum amount CGU may owe Mr Crewe, if the policy is enlivened, is $125,000.[57]
84 The next issue addressed by the trial judge was whether Crewe Sharp was a de facto or shadow director of Akron. The judge quoted the relevant provision of the Corporations Act 2001 (Cth) ('Corporations Act'), being the extended definition of 'director' in s 9, and set out the relevant legal principles, referring in detail to the authorities. He then summarised those principles.[58] Before us it was accepted that the trial judge's recitation of the applicable legal principles was correct. The trial judge set out the matters relied upon by the liquidators in support of their contention that Crewe Sharp was a de facto or shadow director. The trial judge canvassed many factual matters in relation to this issue, but his critical factual conclusion was, it seems to us, the following:
Crewe Sharp agreed to provide the services of Mr Crewe as a director of Akron. There was no suggestion that Crewe Sharp would act as a director. Mr Crewe was elected a director, not Crewe Sharp. Mr Crewe carried out the duties of a director in attending and preparing for meetings. The only connection that Crewe Sharp had was that it was paid for providing Mr Crewe's services and Mr Crewe was the managing director of Crewe Sharp.[59]
85 The trial judge went on to address in some detail the activities of Mr Crewe during the relevant period (30 November 2009 to 1 February 2010) and then observed:
None of these activities involve a board decision or fall within the responsibilities of the directors. The directors, as directors, do not carry out managerial tasks. Save for some exceptions, directors as directors only have powers in meeting. Save for some exceptions, a director, as a director, has no power to conduct any aspect of the management of the company. The board, as a board, may resolve that certain management activities should or should not be pursued. It is then up to management to comply with the decisions of the board. The board may, as a board, resolve to approve or cause the company to enter into a contract or a loan agreement with the bank. Usually, the contract will have been negotiated by management and then presented to the board for approval.
It has been long established that directors can only exercise their powers collectively at board meetings unless the constitution of the company otherwise provides. Meetings of directors are not required where a company has a sole director or where the constitution authorises board resolutions to be made by a circular resolution signed by the directors. Nevertheless, usually a board of directors (and thus a director) only has authority as directors when acting in a meeting.[60]
I am not satisfied that through the actions of Mr Crewe, Crewe Sharp became or was deemed to be a 'shadow director' or a 'de facto director' during the relevant period, or at all.[63]
88 The trial judge next addressed the issue of whether the policy responded to Mr Crewe's liability as a director for insolvent trading (or Crewe Sharp's liability if it was a de facto or shadow director).
89 The judge set out the competing contentions. As to CGU's contentions, the judge recorded CGU as submitting that the liability covered could only be a liability owed 'towards those who employ their services'.[64] The judge also recorded CGU as having submitted that the insolvent trading claim 'is, and can only be, a liability incurred by Mr Crewe or Crewe Sharp qua directors, not "in the conduct of management consultancy services"',[65] and that, in any event, the evidence did not establish that 'the management consulting business which Crewe Sharp and Mr Crewe provided to ... Akron, included a role which consisted of, or approximated, the role of a director'.[66]
90 In relation to these propositions the trial judge's conclusions were as follows:
91 The respective written cases on the applications for leave to appeal differed on the interpretation of this passage. The liquidators interpret it as constituting a general finding that the conduct of 'Professional Services', which include 'Management Consultancy,' as those expressions are used in the policy, 'covers the provision of services of an officer or director to act as such to assist a client.'[68] CGU, in its written response, contends that no such finding was made and that the passage quoted was a finding about Crewe Sharp's management consultancy services.[69] CGU says further that, if the trial judge did make the finding the liquidators contend was made, they seek to challenge that finding in their cross-appeal.[70]
92 The trial judge next turned to an issue concerning a trading debts exclusion. This is not a matter which is the subject of any proposed ground of appeal or cross-appeal. But in that context his Honour addressed a contention by CGU that 'management consultancy' is limited to providing advice, and perhaps performing tasks relevant to the implementation of that advice. His Honour said:
The underwriting manual for professional indemnity insurance tendered by CGU listed a description of activities that management consultants may perform. The activities go beyond providing advice; for example, 'assist in the implementation of new systems', 'appraising, selecting, and determining the remuneration structure for executives', 'introducing new or better management techniques including leadership training', 'increasing cost effectiveness through the development of improvement programs in specific functional areas of the client's business.' The manual said that 'consultancy activities can vary widely.'
Mr Crewe said in his evidence in chief:
Crewe Sharp focused on providing practical, hands on experience to our client in order to improve their business and profitability. Crewe Sharp provided management consulting services to clients by:
(a) preparing a business performance valuation ...
(b) implementing the recommendations made in that report.
He said that he saw that as Crewe Sharp's point of difference with other management consultants in that Crewe Sharp and he actively participated in the implementation of those recommendations. Mr Crewe said that depending on the nature of the engagement, this involved the direct placement of a director or staff within the company.[71]
93 In the same context (the trading debts exclusion issue), his Honour observed that the fact that directors and officers insurance policies were available was not a valid reason for reading down the terms of this policy.[72] His Honour found that the trading debt exclusion did not apply,[73] and that conclusion is not challenged.
94 The trial judge then turned to another exclusion relied upon at trial by CGU, which is the subject of a proposed ground of cross-appeal before us, being that contained in cl 6.9(c) of the policy.
95 The trial judge quoted the provisions of cl 6.9 in full. The relevant sub-paragraph (being sub-para (c)) has been quoted earlier. The claims excluded are those arising 'from any act, error or omission of a director or officer of that incorporated body while acting in that capacity'. The issue of contention between the liquidators and CGU before the trial judge was: to what entity does the term 'that incorporated body' refer? The introductory words of the exclusion, which appear in parentheses, are 'if an Insured is either an incorporated body or a director or officer of an incorporated body'.
96 The liquidators contended that 'that incorporated body' was a reference to the insured, being Crewe Sharp. Thus, the exclusion did not apply because no claim was made based on the act, error or omission of a director of Crewe Sharp while acting in his capacity as a director of Crewe Sharp.
97 CGU, on the other hand, submitted that Akron was an applicable 'incorporated body' and that the liquidators' claim arose from an act, error or omission of Mr Crewe acting in his capacity as a director of Akron.
Under the Policy, Crewe Sharp was listed as an Insured. Mr Crewe was also treated as an Insured - clause 12.12 provided that each current or former principal of Crewe Sharp was an insured. Principal was defined to include a director of a company covered by the Policy. There is no dispute that Mr Crewe and Crewe Sharp fell within the description of the Insured.
On its proper construction, the words in parenthesis identify the Insured. Thus, Mr Crewe was identified as an Insured, as he was a director of Crewe Sharp as provided in clauses 12.12. He was not identified as an Insured because he was a director of Akron. Akron was not named as an Insured in the Policy.
Thus the reference to 'that incorporated body' in the exclusion clause is a reference to Crewe Sharp (and the companies identified in the Policy as an Insured). In my opinion, 'that incorporated body' does not refer to a company other than the insureds.
Accordingly, clause 6.9(c) is not enlivened.[74]
99 The trial judge then dealt with the issue of whether CGU could deny indemnity as a result of non-disclosure or misrepresentation, an issue which the judge addressed in considerable detail.
100 The judge set out the competing contentions of the parties and the relevant provisions of the ICA. He then turned to the evidence. In relation to Mr Crewe's evidence he said:
Mr Crewe gave evidence as to his knowledge of the relevance of Crewe Sharp providing director and officer services to Crewe Sharp's insurance. Mr Crewe conceded that he knew that directors and officers had additional onerous duties and statutory obligations. Mr Crewe admitted that directors were exposed to pay large sums of money if they breached those duties.
Mr Crewe admitted that he knew that these duties were not otherwise imposed on management consultants who are not otherwise directors and officers of a company.
Mr Crewe said that he believed he was covered for directors and officers liability under a directors and officers liability policy held by Akron. I infer from this evidence that Mr Crewe knew that directors and officers liability was usually covered by a specific directors and officers liability policy.
Mr Crewe was asked whether he was suggesting that CGU knew before the Policy was issued that Mr Crewe was a director of Akron. Mr Crewe said that he was, because he was never aware of the fact that they did not know, given that he had been a director since 2001 and an informal director of many companies during the period. He said that it never occurred to him that CGU was not privy to the fact that he was a director.
It was put to Mr Crewe that he knew that it was relevant to an underwriting decision by an insurance company that he assumed onerous duties as an actual director or de facto director. Mr Crewe said that he was sure it was relevant but he did not think it was that simple.
Mr Crewe agreed that it would be a relevant matter to an insurance company to know that the insured had assumed risks as a de facto or validly appointed director if the insured wanted to cover the risks faced by directors under the policy. Mr Crewe added that he understood that CGU knew that the insured had assumed such risks.[75]
101 On the issue of whether the fact that the insured, Crewe Sharp, was providing director services to Akron was a relevant matter for the purposes of s 21 of the ICA his Honour accepted the evidence of Ms Vuckova. His Honour said:
Turning to the facts of this case, the evidence establishes that the fact that the insured Crewe Sharp was providing officer and director services to clients was a relevant matter to the insurer CGU whether to accept the risk, and if so, on what terms.
I accept the evidence of Ms Vuckova, which is set out above ... I reject the submissions of the liquidators that her evidence was rehearsed. In my opinion, the evidence of Ms Vuckova made rational sense. Clearly the risks entailed in becoming an officer of a client are onerous, as accepted by Mr Crewe.
Ms Vuckova also said that CGU would not have covered director-related services to Akron. Ms Vuckova said that if CGU found out that Mr Crewe was a director then the relationship of Mr Crewe (and Crewe Sharp) to Akron was no longer independent as he was now an officer of Akron, so any services to Akron would be excluded from the policy.[76]
102 As to whether CGU knew or ought to have known of the relevant matter, his Honour again accepted Ms Vuckova's evidence.
I accept the evidence of Ms Vuckova that CGU did not know that Crewe Sharp provided director and officer services. The liquidators contended, however, that in the ordinary course of business CGU ought to have known that management consultancy could include the provision of director and officer services.[77]
104 In this respect the liquidators had relied upon the CGU underwriting manual, which did not exclude the provision of officer and director services and which stated that such services 'can vary widely', and had also relied upon the reference to 'Others' in the proposal document where different categories of occupation for which fees were earned had been listed.
105 His Honour referred to the fact that Ms Vuckova had agreed that 'Others' could mean directors and persons acting as directors,[78] and to the fact that Ms Vuckova had said she relied on the email she had received from Mr Hansen.[79] The trial judge said this email had purported to describe the services provided by the insured and it did not include reference to officer and director services. He found that Ms Vuckova was entitled to infer, as she did, that that information had been provided by Crewe Sharp.[80] His Honour concluded:
Although it might be arguable that director and officer services may have fallen within 'other' as referred to in the 2009/2010 Proposal, the email and the information contained in it does not support the finding that in the ordinary course of the insurer's business it ought to have known that Crewe Sharp provided officer and director services. As discussed above, 'known' is a strong word that involves more than believes or suspects or even strongly suspects.
Accordingly, the exclusion of the duty of disclosure was not enlivened by s 21(2)(c).[81]
Turning to the duty of disclosure in s 21(1)(a), it is clear that Crewe Sharp knew that the fact that it was providing officer and director services was a relevant matter to the decision of the insurer. Mr Crewe said, however, that he believed that the matter was already known by the insurer and thus was not a matter that was relevant to the decision to accept the risk and, if so, on what terms.
In my view, that obligation to disclose was not avoided by Mr Crewe's belief. As discussed, under s 21(2)(c) actual knowledge of the insurer is required of the relevant matter, or that the insurer, in the ordinary course of business, ought to know of the relevant matter.[82]
107 The trial judge referred again to the information provided to CGU by Mr Hansen and to his covering email which had stated that Crewe Sharp's business was 'all strategic management consulting centered around HR services'.[83] His Honour concluded:
In this case, the fact that management consulting included the provision of director and officer services was expressly excluded by the information provided to the underwriter by Crewe Sharp's agent.
Accordingly, I find that Crewe Sharp did not satisfy its duty of disclosure of a matter relevant to the decision of CGU whether to accept the risk, and, if so, on what terms.[84]
108 Having concluded that the insured had failed to disclose a matter which it knew to be relevant, in contravention of the duty provided for by s 21(1)(a) of the ICA, the trial judge then turned to s 21(1)(b) concerning disclosure of a matter which a reasonable person in the circumstances could be expected to know was relevant on the supposition that he was wrong concerning s 21(1)(a). His Honour referred to relevant authorities and then concluded as follows:
Applying these principles, in my opinion, the extrinsic factors in this case includes the information conveyed to CGU in the email from the insurance broker to CGU, as well as those matters disclosed in the 2009/2010 proposal.
Further, based on the evidence of Mr Crewe, a reasonable person's state of mind would not have assumed or believed that CGU knew that Mr Crewe was acting as a director of Akron. Relevantly, Mr Hansen gave evidence that he did not know that Mr Crewe was acting as a director of Akron.
A reasonable person would have known of the onerous duties imposed on officers and directors. A reasonable person would have known that the insured had not disclosed that it provided officer and director services when it informed the insurer of its business activities. A reasonable person would know, as Crewe Sharp did, that directors and officers insurance was usually the subject of a separate policy.
Accordingly, I am satisfied paragraph (b) has been met in that a reasonable person in the circumstances would have known of the fact that Crewe Sharp provided officer and director services was a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms.
I am satisfied that a reasonable person would know that fact to be relevant, having regard the matters [sic] set out in s 21(1)(b)(i) and (ii).[85]
109 His Honour then considered whether CGU had waived compliance with the duty of disclosure, as provided for by s 21(2)(d) and s 21(3). The answers which were said to be obviously incomplete were the responses given in the Recruitment Services Addendum, particularly the reference to 'Others', to which reference has already been made, and the answer 'see Attached Overview' in response to the request for a full description of the business activities.[86] Mr Hansen's email description of the business was also said to constitute an incomplete answer.[87]
In considering whether CGU waived the requirement of compliance with the disclosure requirement by failing to inquire further, the alleged 'obviously incomplete' answer should be viewed in the context of the other information known to the insurer and when so considered, to enliven the waiver, it must have the effect of putting the insurer on inquiry of the existence of undisclosed matters. Dew v Suncorp Life Superannuation Ltd made a distinction between answers which lack detail and answers which are 'obviously incomplete.'[88]
111 His Honour said that he had formed the view that the proposal submitted to CGU had been completed 'with some care'.[89] After reviewing the relevant material his Honour referred to Ms Vuckova's evidence about the material she had received, which he clearly accepted, and he concluded:
I find that Ms Vuckova would not have been put on notice to inquire further and that the answers provided by the insureds were not 'obviously incomplete.' I find that CGU did not waive the requirement of compliance with the duty of disclosure.
I am not satisfied that there has been waiver of the duty to disclose as provided in ss 21(2)(d) and 21(3).[90]
112 His Honour said that s 21(2)(a) and (b) of the ICA would not apply,[91] and he observed that CGU's contention that s 22 of the ICA did not apply by reason of the operation of s 71(1) was not disputed by the liquidators.[92]
113 His Honour then addressed the issue of misrepresentation dealt with in s 26 of the ICA. His Honour found that the representations made in the proposal documents were false 'in the sense that the proposal did not inform the underwriter of the fact that Crewe Sharp provided director and officer services and created the false impression that the business of Crewe Sharp was limited to "all strategic management consulting centered around HR services"'.[93]
114 His Honour concluded that, based on Ms Vuckova's evidence, CGU had been misled by the documents CGU had been provided (the '2009/2010 Representations').[94]
I accept the evidence of Ms Vuckova that she relied on the 2009/2010 Representations in assessing the risk of insuring Crewe Sharp and that she would not have issued the policy without excluding losses arising from the provision of director services, if the 2009/2010 Representations had not been made, or the relevant matter was fully disclosed. And that the decision as underwriter is the decision of the insurer.
That Crewe Sharp believed the disclosure was sufficient to invite the insurer to enquire further does not prevent the statements and non-disclosure from being misrepresentation for the purposes of s 26.
As discussed in relation to non-disclosure, Mr Crewe (or a reasonable person) knew that it was relevant to the insurer's decision whether to accept the risk and, if so on what terms, the business activities of Crewe Sharp.[95]
116 His Honour then dealt with the consequences of non-disclosure and misrepresentation as provided for in s 28 of the ICA. The liquidators argued that CGU could not say that the non-disclosure or misrepresentation was in any way 'causative' of it agreeing to cover Crewe Sharp because CGU would have issued the policy in any event given that CGU was of the 'entrenched view' that on a proper interpretation of the policy the relevant liability was not covered. The trial judge rejected this approach. He said:
As stated above, I accept the evidence of Ms Vuckova that if the matters that ought to have been disclosed were known, CGU would not have issued the Policy. If matters were disclosed, CGU would have informed Crewe Sharp that the Policy would not cover the relevant business activities and therefore it would be inappropriate to issue the Policy.
For the above reasons, I find that the liability of CGU is reduced to zero.[96]
117 The judge rejected a submission on behalf of the liquidators that the relevant declaration signed by Mr Matthew Crewe was not applicable to the policy.[97] The judge referred to the fact that it was accepted that CGU had not been under a duty to inform the insured of the duty of disclosure. The judge found that, in any event, the evidence showed that Matthew Crewe had declared that all material information had been disclosed, and that the 'Recruitment Services Addendum' signed by him had included Crewe Sharp and had specified the business activities for which Crewe Sharp required cover. The judge found that the inference was open that Matthew Crewe had provided the documents sent to CGU by Mr Hansen intending that they should be relied upon by CGU and that Matthew Crewe had not given evidence to rebut that inference.
119 The liquidators' application has three proposed grounds of appeal.
120 The first proposed ground is that the judge erred in holding that CGU could avoid liability under the policy on the basis of non-disclosure or misrepresentation: [5.1]. The application then specifies seven asserted errors, being:
121 It is important to note that in relation to the second [5.1.2], third [5.1.3], and fifth [5.1.5] asserted errors, reliance is placed upon what is contended to be a finding that management consultancy covers the provision of services of an officer or director to act as such to assist a client. It is contended that that conclusion renders the three specific findings referred to erroneous.
122 The second proposed ground is that the judge erred in holding that the effect of the deed of settlement was that CGU's liability to indemnify Mr Crewe was limited to $125,000: [5.2].
123 The third proposed ground is that the judge erred in holding that Crewe Sharp was neither a de facto director nor a shadow director of Akron: [5.3].
124 CGU also raises three proposed grounds in its application for leave to cross-appeal.
125 The first is that the judge erred in finding that the liability was incurred by Mr Crewe 'in the conduct of the Professional Services' within the meaning of the policy: [6.1.1.].
126 The second is that the judge erred in finding that the exclusion in cl 6.9(c) of the policy was not enlivened: [6.1.2].
127 The third is that the judge erred in holding that the liquidators had standing to seek declaratory relief in respect of CGU's liability to indemnify Mr Crewe under the policy: [6.2].
128 The issues raised by the liquidators' first proposed ground of appeal and CGU's first proposed ground of cross-appeal overlap. Three of the seven specified errors on the liquidators' first proposed ground rely upon a finding which CGU says was not made, and which CGU contends in its first proposed ground of cross-appeal was erroneous if it was made. These proposed grounds must be dealt with together. We will deal with them first.
129 We will then deal with the other proposed grounds sequentially as follows:
(i) Effect of the deed of settlement (proposed appeal ground [5.2]).
(ii) Crewe Sharp as de facto or shadow director (proposed appeal ground [5.3]).
(iii) Exclusion in clause 6.9(c) (proposed cross-appeal ground [6.1.2]).
(iv) Standing (proposed cross-appeal ground [6.2]).
'Management consultancy', non-disclosure and misrepresentation (proposed appeal ground [5.1] and proposed cross-appeal ground [6.1.1]) - submissions
130 In their written case the liquidators submitted that there were a number of errors in the trial judge's reasoning which led him to conclude that CGU could avoid liability on the basis of non-disclosure and misrepresentation.
131 The first error was said to be that reliance placed upon the declaration signed by Matthew Crewe, contained in the 'Recruitment Services Addendum' forwarded to CGU by Mr Hansen, was misplaced as that declaration was for a different policy sought for a different company.
132 The second error was said to be that his Honour had not had proper regard to Mr Crewe's evidence that he did not know at any time that the Fact (as defined and referred to earlier) was a matter relevant to the decision of CGU. Reference was made to the evidence that Mr Crewe had assumed that CGU was aware of his role and to what was said to be his evidence that Mr Crewe 'regarded such appointments as an ordinary incident of management consultancy'.
133 The third error was said to be the judge's failure to hold that the Fact had been adequately disclosed. There had been disclosure of the fact that Crewe Sharp carried on business as a management consultant. It was submitted that the trial judge 'found that management consultancy covers the provision of services of an officer or director to act as such to assist a client'. The liquidators' written case continued:
In finding that management consultancy includes the provision of director services, the trial judge accepted the evidence of Mr Crewe - the only management consultant who testified and whose evidence was not challenged. Accordingly, the trial judge erred in finding that a reasonable person in the circumstances could be expected to know that the Fact was a matter requiring specific disclosure ... '.[100]
134 The fourth error was said to be that the judge 'having found that management consultancy covers the provision of services of an officer or director' ought to have found that this was a matter which CGU in the ordinary course of business of an insurer ought to have known.
135 Fifthly, and alternatively to the second, third and fourth errors, the statements made in the relevant documents provided to CGU concerning 'management consulting' constituted obviously incomplete answers and the judge had erred in failing to find that the duty of disclosure had thereby been waived.
136 The sixth error was said to be the judge's finding that there was a misrepresentation and in this respect the second, third and fourth asserted errors were relied upon.
137 Finally, it was said that the judge erred in holding that CGU was entitled to reduce its liability to nil in circumstances where he ought to have found that CGU would have issued the policy on the same terms had the Fact been disclosed because of the evidence that CGU had been 'keen to issue' the policy and the fact that CGU categorically denied that the policy responded to a liability arising from a directorship appointment. It was suggested that CGU would not have been concerned to know whether any directorship appointments were involved as it did not believe the policy would respond to such liability.
138 In its written response, CGU submitted that the first asserted error (whether the declaration Matthew Crewe had signed applied to Crewe Sharp) was unfounded for two reasons. First, it had been undisputed at trial that CGU was not under an obligation to inform the insured about its duty of disclosure by virtue of ss 22 and 71(1) of the ICA, and, accordingly, whether the formal declaration signed by Matthew Crewe in the document forwarded to CGU by Mr Hansen applied to Crewe Sharp was irrelevant. Secondly, in any event, the evidence of Mr Hansen made it clear that he had been asked to obtain a quotation for professional indemnity insurance covering Crewe Sharp and that Matthew Crewe had provided to him the documents which he forwarded on to CGU for that purpose. Those documents included the relevant declaration signed by Matthew Crewe and it was clear that that declaration was referable to Crewe Sharp's request for professional indemnity cover.
139 As to the second error contended for by the liquidators (Mr Crewe's knowledge of the relevance of the Fact), it was submitted that it was clear on the evidence that Mr Crewe did know that the Fact was relevant to CGU's underwriting decision. He had accepted in cross-examination that the assumption of the risks of being a de facto or validly appointed director was a relevant matter to an insurance company. The relevant evidence he gave was not that he never knew that that was a relevant matter but rather that he had assumed that CGU did know that he was acting in that role. CGU submitted that Mr Crewe's evidence was that directorship appointments were not an ordinary incident of management consultancy and that Crewe Sharp's expanded role in the implementation of their advice was indeed, according to Mr Crewe, a 'point of difference' with other management consultants. Reliance was also placed upon Mr Crewe's evidence that Akron was the only client company to which Mr Crewe was formally appointed as a director.
140 In relation to the third asserted error (CGU's knowledge), CGU maintained that the trial judge 'did not find that, properly construed, "management consultancy" covers the provision of services of an officer or a director to act as such to assist a client'. CGU submitted that the trial judge had 'noted' the evidence of Mr Crewe that his company's management consultancy services included the provision of director and officer services. CGU submitted that the trial judge had found that 'there was no reason why Crewe Sharp's management consultancy services may not extend to the provision of director and officer services'. CGU submitted that the judge did not make a finding as to services generally performed by management consultants.
141 As to the fourth asserted error (CGU ought to have known), CGU submitted that the trial judge correctly rejected the submission that CGU ought to have known that Crewe Sharp provided director and officer services. They again referred to Mr Crewe's evidence that Crewe Sharp's role in implementation was a point of difference with other management consultants.
142 As to the fifth asserted error (waiver due to incomplete answers), CGU submitted that the trial judge had been correct in finding that there was no obviously incomplete answer. The broker had provided detail about the services Crewe Sharp did and did not provide in the email which he had sent to CGU enclosing the relevant documents. Ms Vuckova's evidence was that there was nothing in the material she received which concerned her and that she understood from what she was told that Crewe Sharp provided independent third party consultancy services about management issues.
143 CGU submitted that the sixth error relied upon (misrepresentation) was founded on the other errors asserted.
144 Finally, CGU contended that the trial judge had properly accepted Ms Vuckova's evidence about what CGU would have done had the Fact been disclosed to it.
145 In CGU's written case in response to the liquidators' application CGU foreshadowed in a footnote that, if the reasons of the trial judge are read as making a finding that 'management consultancy' covers the provision of the services of an officer or a director, that finding was to be the subject of a challenge in the application for leave to cross-appeal.[101]
146 CGU's written case in support of its application for leave to cross-appeal does challenge the finding (if made) that 'management consultancy' covers the provision of director and officer services.
If (which is disputed) the reasons of the trial judge at [336] should be understood as finding that Mr Crewe gave evidence that management consultancy services per se cover the provision of services of an officer or director to act as such to assist a client, CGU submits that such a finding was erroneous.[102]
148 Further, CGU submitted in its written case on the application for leave to cross-appeal that what the judge had said at paragraph [338], being, that 'the provision of an individual by a management consultancy firm to act as a director of a client falls within the business of provision by the insured of the Professional Services as provided in the PI Policy', was erroneous.
149 CGU submitted that a consultant and a director are two entirely different things. It was submitted that Mr Crewe was provided to Akron not to perform the role of a consultant but to perform the role of a director. It was submitted that the words 'in the conduct of' in cl 3.1 of the policy brochure were critical. Mr Crewe's liability for insolvent trading was not incurred 'in the conduct' of management consultancy, it was incurred 'in the conduct' of his role as a director of Akron. It was submitted that whilst Crewe Sharp may have been a management consultancy firm, and may have provided Mr Crewe to Akron as part of its management consultancy services (which CGU said it did not accept), any liability he had for insolvent trading had not been incurred 'in the conduct of' management consultancy work. It was submitted that this analysis was fortified by an analysis of the commercial purpose of the policy, in that the purpose of professional indemnity insurance is to cover the responsibilities of insureds towards those who employ them. CGU also relied upon what it described as the 'accepted dichotomy' between professional indemnity insurance and directors and officers liability insurance.
150 In its written case in reply on the cross-appeal the liquidators submitted that there was no 'factual foundation for the fine distinction' which CGU seeks to draw between 'management consultancy' and 'directorship'. It was submitted that the expression 'in the conduct of' ought to be construed expansively. The liquidators submitted:
The only question is whether or not the role of director, assumed by Crewe Sharp and Mr Crewe in this case, was a function of the generic descriptions (predominantly 'Management Consultancy') provided by the insured. CGU properly concedes ... that Mr Crewe's evidence was to the effect that Crewe Sharp's management consultancy included the provision of director services.[103]
151 The liquidators submitted that Crewe Sharp provided those services and that '[a]ll this was done "in the conduct" of the management consultancy, such that the insuring clause of the Policy was engaged'.[104]
152 The liquidators submitted that reference to 'CGU's labels', and the asserted dichotomy between professional indemnity insurance and directors and officers liability insurance, were irrelevant to the proper construction of the terms of the policy.
153 In the oral submissions senior counsel for the liquidators emphasised that there could be no 'bright line' between the role of a consultant and the role of a director. It was submitted that Crewe Sharp's relevant activities had been disclosed when CGU was advised that it undertook 'strategic management consultancy'. It was submitted that the judge had made a finding in paragraphs [336] to [339] to that effect, and that that finding was entirely inconsistent with the conclusions he had then reached in relation to non-disclosure and misrepresentation.
154 In oral submissions on behalf of CGU senior counsel appeared to accept that there was tension between his Honour's conclusions as to the ambit of cover under the policy and his conclusions concerning non-disclosure and misrepresentation, but it was submitted that if there was any inconsistency that was a result of the trial judge reaching an erroneous conclusion as to what was encompassed within 'management consultancy'.
'Management consultancy', non-disclosure and misrepresentation - interpreting the trial judge's conclusions
155 The trial judge's reasons must, as always, be read in the light of the issues he was asked to decide and the submissions made to him. By the time the matter reached this Court, in substance, CGU was maintaining that the term 'management consultancy' necessarily excluded a directorship role, whether de facto or validly appointed; whereas the liquidators, on the other hand, were maintaining that the term 'management consultancy' necessarily included a directorship role, such that disclosure of a management consultancy would, if that consultancy involved a directorship role, also disclose that role. It is not clear that the position was that stark before the trial judge.
156 The critical passage of the judgment in this context is the passage at [335] to [338]. We have earlier set it out in full. It is important to read the passage in context.
157 In that passage the judge was clearly addressing two of the submissions made by CGU. The two submissions he was clearly addressing were that the policy only covered liabilities to clients[105] and that in any event the evidence at trial did not establish that the management consulting business, that is Crewe Sharp's own business, did provide to Akron a role which 'consisted of, or approximated', the role of director.[106] The judge dealt with these two submissions expressly, and he rejected them.
158 CGU had also submitted that Mr Crewe and Crewe Sharp's liability (if any) was liability incurred 'qua directors' not 'in the conduct of' management consultancy services.[107] The judge did not give that contention separate explicit treatment. It seems to us that he implicitly rejected it.
159 In the passage at [335]-[338], the primary matter which the judge addressed was CGU's contention that cover under the policy should be confined to liability 'towards' clients. The critical paragraph at [336] is between two paragraphs, [335] and [337], which expressly address this 'liability to the clients' argument. He rejected that argument and no submission was made before us that he was wrong to do so.
160 The implicit rejection of CGU's submission that any liability was a liability incurred 'qua directors' not 'in the conduct of' management consultancy is also to be found in paragraph [336]. For ease of reference the paragraph reads:
The starting point is to ascertain whether the insured incurred a civil liability in carrying on the management consultancy business. There was no evidence called by CGU as to what activities and services management consultancy does or does not cover. Mr Crewe gave evidence that management consultancy covered the provision of services of an officer or director to act as such to assist a client. I can see no reason why management consultancy may not extend to the provision of such services to the client.
161 The judge relied upon Mr Crewe's evidence on the issue of whether the relevant activities fell within management consultancy and he specifically commented upon CGU's failure to call evidence on the issue. A little later, when dealing with the trading debts exclusion, he rejected an argument by CGU that management consulting was confined to providing advice, relying upon the description of management consulting in CGU's underwriting manual.[108]
162 The apparently broader conclusions in [338] and [339] are introduced with the words: 'On that basis', which must refer to his analysis of CGU's contentions in paragraphs [335]-[337].
163 It becomes clear, as the judge goes on to deal with the issues of non-disclosure and misrepresentation, that he had not concluded that disclosing that a business provided management consultancy services thereby disclosed the provision of services by way of acting as a director. But what he says at [338] and [339] does, in our view, confirm, what is also said at [336], that the judge did find that the provision of a person to act as a director might, or could, be part of the professional services of a management consultancy.
164 It seems to us, reading the judgment as a whole, that what the judge found was the following:
(1) There was 'no reason', on the evidence before the judge, why management consultancy might not, or could not, extend to the provision of the services of a consultant to act as an officer or director of the client.
(2) The professional services offered by Crewe Sharp's management consultancy did extend to the provision of such officer or director services.
(3) Crewe Sharp provided such services to Akron, and, in particular, it provided the services of Mr Crewe to act as a formally appointed director of Akron.
(4) Civil liability which Crewe Sharp or Mr Crewe might incur by reason of Mr Crewe's role as a director of Akron was liability incurred 'in the conduct of' the insured's 'Professional Services', being Crewe Sharp's 'Management Consultancy', within the meaning of cl 3.1 of the policy brochure and the schedule and endorsement.
(5) Mr Crewe knew that the position of a management consultant who is not a director is very different from the position of a management consultant who is a director. He knew, as is the fact, that the potential liability of the management consultant who is a director is much greater.
(6) Mr Crewe knew that this difference was relevant to CGU's decision to assume the risk. He assumed CGU knew of it. If Mr Crewe did not know that the directorship was a matter relevant to CGU's decision to assume the risk, a reasonable person would have known that fact, and a reasonable person would not have assumed that CGU did know of it.
(7) Ms Vuckova was to be accepted when she said that she did not know that Mr Crewe was a director of Akron and that, if she had known, she would either have not offered the policy at all (if the revenue earned from the directorship was a significant part of the management consultancy revenue) or would have excluded liability arising from the Akron directorship (if the revenue earned was not significant).
(8) There had not only been a non-disclosure of the fact that Crewe Sharp provided director and officer services, but, in the circumstances, what Crewe Sharp had told CGU about its business amounted to a misrepresentation because the directorship was not disclosed.
'Management Consultancy' - the issue of construction
165 It has to be said that the trial judge never expressly articulated an issue of contractual construction in relation to the term 'Management Consultancy' in the policy schedule. The matter does not seem to have been addressed in those terms at the trial. The issue is raised in the application for leave to cross-appeal. For the reasons which follow, that issue is likely to distract from the proper approach to construction of cl 3.1 of the policy.
166 The question of construction of cl 3.1 is to be determined by applying the usual principles of contractual construction, which were recently summarised by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd:
The rights and liabilities of parties under a provision of a contract are determined objectively , by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.
In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean . That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding 'of the genesis of the transaction, the background, the context [and] the market in which the parties are operating'. It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.
Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations.
Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption 'that the parties ... intended to produce a commercial result'. Put another way, a commercial contract should be construed so as to avoid it 'making commercial nonsense or working commercial inconvenience'. [109]
167 It is important to note that the definition of 'Professional Services' in cl 12.13 of the policy refers to the business of provision 'by the Insured' of the Professional Services stated in the Schedule, not the business of provision of the Professional Services as the description of that term in the Schedule might be understood in the abstract. If the definition of 'Professional Services' and the relevant part of the Schedule are inserted into cl 3.1, that clause would read:
We indemnify the Insured up to the Policy Limit (see Section 5) for any Civil Liability to any third party which is incurred by the Insured in the conduct of the business of provision by the Insured of the Professional Services Covered by this Policy**:** Management Consultancy.[110]
169 The answer to the first question is clearly yes.
170 The second question requires consideration of the meaning of the words 'in the conduct of'. CGU rightly emphasised these as the critical words in its submissions to the trial judge,[111] and before us.[112] Understood in this way, the construction question does not centre on the meaning of 'management consultancy' and whether, in general, 'management consultancy' would extend to the discrete activities of a director. This more general question is likely to distract from the proper approach to interpretation of cl 3.1 which we have identified.
171 The purpose of the policy is to provide insurance cover for liability arising out of the management consultancy business conducted by Crewe Sharp. That is the context in which the policy was entered into by the parties. Understood in that context and with that purpose in mind, the words 'in the conduct of' ought not to be given a narrow meaning.
172 On the evidence, it is clear that it was part of Crewe Sharp's management consultancy business to provide Mr Crewe's services as a director. His services were not provided separately from the management consultancy business; they formed part of it. Crewe Sharp was engaged 'to provide advice and to act in the capacity as either Chairman/Director.'[113] Crewe Sharp billed Mr Crewe's time for acting as a director.[114]
173 The liability for insolvent trading was incurred in the conduct of Crewe Sharp's management consultancy business. It follows, in our view, that the policy responded to the claim.
174 Equally, it was inherent in the provision by Crewe Sharp of Mr Crewe's services as a director that it was within the scope of the services provided by Crewe Sharp that it might itself act as a de facto or shadow director. If so, that would also occur 'in the conduct of' Crewe Sharp's management consultancy business.
175 In any event, whether these conclusions on the construction of cl 3.1 are right or not does not alter the outcome. If we are wrong and the cover does not respond, then that is the end of the matter. On the other hand, if the cover does extend to liability incurred as a result of Mr Crewe's directorship (and Crewe Sharp acting as a de facto or shadow director), for the reasons set out below there was a duty to disclose at least that Mr Crewe was a formally appointed director of Akron. That affected the risk that CGU was taking on. There being non-disclosure, the judge was correct to find that CGU's liability should be reduced to nil.
Non-disclosure and misrepresentation - analysis
176 The evidence was that Mr Crewe knew that the fact that he was a director of Akron was a matter relevant to the risk to be undertaken by CGU. His belief that CGU knew of it had no reasonable foundation and was contrary to the evidence of Ms Vuckova, which the judge accepted, correctly in our view. As the judge found, even if Mr Crewe had not appreciated that that matter was relevant to the risk, he certainly ought to have. CGU not only did not know of the matter but there was no reason why it ought to have known of it.
177 The judge accepted Ms Vuckova's evidence, not only about what she knew and how she understood the material that was provided to her, but also in relation to what she would have done had the true position been revealed. The judge was entitled to accept her evidence on those issues, and, in our opinion, he was correct to do so. She explained, in terms which were both credible and compelling, that the significance of Mr Crewe's directorship was such that if the revenue from that activity had been a significant part of the management consultancy revenue she would not have offered the policy at all, her view being that the exclusion in cl 6.9(c) would entirely preclude cover in that circumstance, and that if the revenue had not been significant she would have specifically excluded liability arising from the Akron directorship.
178 In our opinion the judge's conclusions in relation to non-disclosure were unimpeachable, given our conclusion that he was right in determining that Mr Crewe's role as a director did, in this case, fall within the ambit of the 'Professional Services' which Crewe Sharp provided and which were covered by the policy.
179 In our view the judge was also correct in relation to his conclusion on misrepresentation. On Mr Crewe's own evidence, his formal appointment as a director of Akron was an exceptional event. On his own evidence, the directorship significantly increased the risk, as any reasonable person would have appreciated. To describe Crewe Sharp's activities in the way in which Mr Hansen did, acting on instructions from Matthew Crewe, was misleading. It is, of course, strictly speaking unnecessary to go that far as non-disclosure would, in the circumstances of this case, be sufficient.
180 The liquidators' submissions concerning the applicability of the declaration by Matthew Crewe are to be rejected for the reasons the trial judge gave.
'Management consultancy', non-disclosure and misrepresentation - conclusion
181 The liquidators should have leave to appeal on the proposed first ground of appeal ([5.1]) in their application, and CGU should have leave to appeal on the first proposed ground of cross-appeal in its application ([6.1.1]). The respective contentions made by the liquidators and CGU on those proposed grounds were arguable. For the reasons given, however, both the appeal and the cross-appeal on those grounds will be dismissed.
182 These conclusions are sufficient to dispose of the appeal. It is nevertheless necessary to address the other proposed grounds, albeit in less detail than might otherwise have been the case.
Effect of the deed of settlement (proposed appeal ground [5.2])
183 We have already set out the relevant provisions of the deed of settlement and the judge's conclusion in relation to their effect. The submissions made on appeal, both in the written cases and in the oral submissions, reflected the submissions that had been made to the trial judge.
184 The submissions made to the trial judge, in the respective written cases, and in the oral submissions before us, overlooked what is, in our view, a critically important authority, being the High Court's decision in CGU Insurance Ltd v One.Tel Ltd (in liq).[115] The parties filed supplementary written submissions in September 2017 addressing this authority.
185 CGU v One.Tel concerned a directors and officers liability policy. The director in question, Mr Greaves, consented to a judgment for the sum of $20,000,000 in proceedings brought against him by the Australian Securities & Investments Commission ('ASIC'). After the consent judgment, Mr Greaves entered into a deed of arrangement under Part X of the Bankruptcy Act. The provisions of the deed assigned the benefit of Mr Greaves' insurance policy to the trustee. The deed then made further provisions concerning Mr Greaves' directors and officers liability policy and the judgment against him in favour of ASIC for the sum of $20,000,000. The deed provided that upon the trustee either completing or settling the claim, or deciding not to pursue the claim, the trustee would issue a certificate (cl 9). The deed provided that upon the issue of that certificate Mr Greaves would be released from all liability in relation to ASIC's judgment (cl 10). The deed provided further (cl 11):
Prior to the execution of the certificate referred to in clause 9, neither the Trustee nor any creditor will take any steps to enforce against [Mr Greaves] the compensation order and the costs order made on 6 September 2004 in the ASIC Proceedings other than to seek recovery pursuant to the arrangement constituted by this Deed.[116]
186 The trustee commenced proceedings against CGU, Mr Greaves' insurer. CGU defended the proceedings on a number of grounds. During the currency of the proceeding the deed of arrangement terminated because of the elapse of time. Nine questions for separate determination in the proceeding which the trustee had brought against CGU were ordered to be determined prior to the resolution of other issues. At first instance the questions were answered in such a way as to result in a judgment in favour of CGU. An appeal to the Court of Appeal of the Supreme Court of New South Wales was allowed. CGU then appealed to the High Court.
187 Before the High Court, CGU advanced two central contentions. The first was that the trustee had no power to continue the proceeding once the deed had terminated. The second contention was the following:
The second central contention of CGU was that Mr Greaves had suffered no 'Loss' to which the Policy responded.[117]
188 In a single unanimous judgment (French CJ, Heydon, Crennan, Kiefel and Bell JJ) the High Court, after dealing with and rejecting other contentions made by CGU, addressed the issue of whether Mr Greaves had suffered a loss to which the policy responded. That issue had to be addressed in two contexts, and the High Court addressed each of them separately. The first context was upon the assumption that the provision of the deed precluding execution, as quoted earlier, continued in force after the deed terminated. The second context was if that provision had not continued in force after the deed terminated.
189 The High Court commenced consideration of the issue upon the assumption that the provision did continue in force after the deed terminated by setting out the relevant terms of the policy. The policy defined 'Loss' as: 'the amount payable in respect of a Claim made against the Directors and Officers for a Wrongful Act and shall include damages, judgements, settlements, interest, costs and Defence Costs'.[118]
190 The High Court summarised CGU's argument as being that the relevant clause prevented the trustee and the creditors from taking any steps to enforce the judgment for $20,000,000 so that there was no 'amount payable' in respect of the claim against Mr Greaves. In that regard CGU called in aid the fact that the policy was one of indemnity.
191 The High Court rejected these arguments. Its reasons for doing so are, in our view, so directly relevant to the position here that it is necessary to quote them in full.
The Court of Appeal rejected that argument by saying that cl 11 'does not discharge or release [Mr Greaves] from the judgment debts'. It said: 'That occurs only on the execution of the certificate by the Trustee in accordance with cl 10 of the Deed'.
The Court of Appeal's reasoning is correct. Its conclusion may also be supported for the following additional reasons.
First, 'Loss' is defined to include 'judgments' and 'settlements'. The judgment of 6 September 2004, which was consented to as part of a settlement, remains on foot.
Secondly, the $20 million compensation order is an order which was made in respect of a claim made against Mr Greaves in the ASIC proceedings. It created a judgment debt. That debt remains an 'amount payable' even though, on the assumption in favour of CGU that cl 11 survives the termination of the Deed, the Trustee and the creditors are debarred from taking any steps to enforce the $20 million compensation order against Mr Greaves. An 'amount payable in respect of a Claim made against' Mr Greaves includes an amount which Mr Greaves is legally liable to pay. The $20 million compensation order created in him a legal liability to pay $20 million. If by some happy chance Mr Greaves became sufficiently wealthy to pay the $20 million, and chose to do so, it could not validly be contended that the Policy did not respond. Mr Greaves would have paid an amount which he was liable to pay under a judgment debt. That demonstrates that the status of the $20 million as an 'amount payable', which rests on Mr Greaves's legal liability to pay it, is not affected by any bars which may prevent particular people from enforcing the judgment debt, because the creation of those bars does not affect his legal liability. There is a distinction between Mr Greaves's duty to pay, and the capacity of others to enforce that duty.
Thirdly, at least during the lifetime of the Deed, cl 11 did not prevent an assignee of Mr Greaves, namely the Trustee, from enforcing the Policy. The assigned rights of Mr Greaves against CGU arose because of a judgment debt that came into existence against him. Clause 11 did not set aside the judgment. It did not extinguish the judgment debt. It did not release Mr Greaves from the duty to pay that debt.[119]
193 There was a fourth additional reason for the High Court's rejection of CGU's submissions which was founded upon the interaction of the particular terms of the deed in that case.
194 The High Court then turned to address the position which would apply if the provision of the deed concerning enforcement did not survive termination. If the relevant provision did not survive termination, then CGU's contentions had to be rejected, whatever view one formed as to the position if the provision had survived termination. The High Court held that the relevant provision had not survived termination and CGU's appeal was dismissed accordingly.
195 In the supplementary written submissions filed on behalf of the liquidators it was submitted that the decision in CGU v One.Tel was precisely on point and determined the issue in their favour.
196 CGU sought to distinguish CGU v One.Tel on the basis that the facts in that case were 'entirely different' to the facts here. CGU's submissions referred to the fact that the consent judgment in that case was entered into prior to entry into the deed of arrangement and that, unlike this case, the director in that case had not settled for one amount and agreed to judgment being entered against him for another, higher, amount. It was submitted that, unlike Mr Crewe, Mr Greaves had been liable for the judgment from the moment that it was entered. It was submitted that the deed of settlement in this case had been designed to 'try to create' a liability to which the policy responded and that this was an 'artificial liability'. It was submitted that the policy was one of indemnity and that Mr Crewe's 'actual obligation' is confined to that found in the settlement deed being to pay the sum of $125,000.
197 In our opinion the grounds upon which it is said that CGU v One.Tel must be distinguished are unfounded. The position here is relevantly the same as the position there. The sequence of events makes no difference to the analysis. There is nothing 'artificial' about Mr Crewe's liability under the consent judgment. The liquidators proved in this proceeding that Mr Crewe was liable for insolvent trading. It was never contended by CGU at the trial that there was anything 'artificial' about that liability. The High Court's reasoning in CGU v One.Tel is inconsistent with CGU's position that Mr Crewe's 'actual obligation' is confined to the provision of the security sum of $125,000 provided for in the deed. The decision in CGU v One.Tel requires a conclusion in favour of the liquidators on this issue.
198 It is unfortunate that the decision in CGU v One.Tel was not brought to the trial judge's attention. In our view, if it had been, he would have reached a different conclusion in relation to the effect of the deed of settlement.
199 We will grant leave to appeal on proposed ground 5.2, but the appeal must be dismissed for other reasons.
Crewe Sharp as a de facto or shadow director (proposed appeal ground [5.3])
200 The liquidators contend that the trial judge erred in holding that Crewe Sharp was neither a de facto nor a shadow director of Akron.
201 The expressions 'de facto' and 'shadow' director are shorthand descriptions for sub-paragraphs of the definition of 'director' in s 9 of the Corporations Act. The expression 'de facto' director refers to a position where a person who is not validly appointed as a director is nevertheless a director within the meaning of the Corporations Act if 'they act in the position of a director'. A person not validly appointed as a director is a 'shadow' director if 'the directors of the company or body are accustomed to act in accordance with the person's instructions or wishes.'
202 The liquidators criticised the judge's analysis of the respective roles of directors and managers. They submitted that the 'uncontroverted' evidence was that Crewe Sharp 'through Mr Crewe and Mr Sofronas' took steps which went far beyond a merely advisory role. Those steps were said to include:
(a) pursuant to the mandate letter dated 13 June 2001, Crewe Sharp was to be a director without a formal appointment;
(b) representing Akron at meetings with financiers;
(c) forcing the CEO of Akron, Mr Pollock, to stand down;
(d) actively participating in the strategic decision-making process of Akron in relation to important matters; and
203 In oral submissions senior counsel for the liquidators emphasised that the letter of engagement was the key consideration. The passage in the letter relied upon reads as follows:
Crewe Sharp ... is engaged ... to provide advice and to act in the capacity as either Chairman/Director of nominated operating companies ... .
204 In our opinion the judge's conclusion was correct. As CGU submitted, the flaw in the liquidators' case is that all, or almost all, of the activities relied upon by the liquidators in support of their contention that Crewe Sharp itself was acting as a de facto or shadow director were activities undertaken by Mr Crewe. Mr Crewe was a formally appointed director. Further, during the period in relation to which the liquidators 'pressed' their insolvent trading claim, Mr Crewe was also the chief executive officer. Apart from Mr Crewe's conduct, the liquidators had very little to rely upon in support of their contention that Crewe Sharp, the corporate entity, was acting as a de facto or shadow director. Mr Crewe's activities are explicable by reason of his formal directorship and his management position within Akron. Further, the whole tenor of Mr Crewe's evidence was that he was at all times acting to further the interests of Akron and by reference to no consideration other than the best interests of Akron.[120] There was no evidence of any occasion where Mr Crewe sought to advance, or it was suggested that he sought to advance, some separate interest of Crewe Sharp.
205 The engagement letter is expressed in terms which suggest Crewe Sharp would be 'Chairman/Director' but, in our view, that is just infelicitous language. Mr Crewe was himself appointed as a director shortly after the letter and it is clear that that was an appointment which was made pursuant to the engagement letter.
206 In our view, the judge's conclusion in relation to this proposed ground of appeal was clearly correct, and we will not grant leave to appeal on this proposed ground.
Exclusion in cl 6.9(c) (proposed cross-appeal ground [6.1.2])
207 The exclusion in cl 6.9(c) of the policy brochure excludes CGU's liability for a claim of the following character:
(if an Insured is either an incorporated body or a director or officer of an incorporated body) arising from any act, error or omission of a director or officer of that incorporated body while acting in that capacity.
The judge found that the reference to 'that incorporated body' was a reference to Crewe Sharp as the Insured (or any other incorporated Insured). The judge found that the purpose of the words in parenthesis was to identify the fact that the exclusion applied to claims arising out of a directorship of an incorporated Insured, in this case Crewe Sharp. Accordingly, as the liquidators' claim does not arise out of Mr Crewe's conduct as a director of Crewe Sharp, the exclusion does not apply.
208 CGU contends that the judge's construction is erroneous. CGU contends that the exclusion is to be interpreted as follows:
209 It will be immediately apparent that CGU's analysis of the exclusion operates in exactly the same way as the exclusion would operate if the words in parenthesis were deleted and the words 'that incorporated body' were replaced with 'any incorporated body'.
210 The liquidators submit that the judge's construction was correct and that the exclusion is directed at precluding claims by insureds, who are insureds because they are directors of insured entities, arising out of their directorships of those insured entities.
211 The issue of construction is a difficult one but, with some hesitation, our conclusion is that the judge's analysis is correct. The alternative construction gives the words in parenthesis no work to do. There must be some reason why the exclusion is referrable to 'that' incorporated body rather than 'any' incorporated body. The draftsman must be seeking to identify a subset of incorporated bodies to which the exclusion applies. The judge's conclusion that that subset of incorporated bodies is incorporated bodies which are within the definition of 'Insured' seems to be the only construction open which gives effect to that manifest intention.
212 We will grant leave to CGU to cross-appeal on this proposed ground but dismiss the cross-appeal on that ground.
Standing (proposed cross-appeal ground [6.2])
213 CGU contends that the trial judge was wrong to conclude that the liquidators had standing to seek the declaration they sought against CGU. CGU had contested its joinder, prior to execution of the deed of settlement between the liquidators and Mr Crewe. The High Court upheld that joinder in CGU v Blakeley. The issue before the trial judge was whether the High Court's reasoning remained applicable after execution of the deed of settlement.
214 In CGU v Blakeley, the High Court unanimously concluded that CGU's joinder to the proceeding was valid. There were two separate judgments, one of French CJ, Kiefel, Bell and Keane JJ, and one of Nettle J, reaching that unanimous conclusion.
215 The plurality judgment referred to the statutory framework, and in particular to s 562 of the Corporations Act and s 117 of the Bankruptcy Act.
216 Section 562 of the Corporations Act was relevant to the claim made against Crewe Sharp. The section provides that if a liquidator receives an amount in respect of an insured liability, the liquidator must pass on that amount, after relevant deductions, to the party to whom the liability was incurred. Section 117 of the Bankruptcy Act imposes a similar obligation on the trustee in bankruptcy. In this particular case s 562 of the Corporations Act was clearly applicable in relation to the claim against Crewe Sharp, as it was in liquidation. Section 117 of the Bankruptcy Act was potentially applicable to the claim against Mr Crewe, depending upon whether he would become bankrupt should the claim against him succeed.
217 The issue before the High Court was whether the claim for a declaration which the liquidators sought to make against CGU was within federal jurisdiction, the Corporations Act being a law of the Commonwealth. There was no issue as to the existence of a 'matter' within federal jurisdiction in the relevant sense. As the plurality observed: 'What was in issue was the existence of a justiciable controversy between the Akron liquidators and CGU.'[121]
218 The plurality analysed a number of earlier decisions of intermediate appellate courts in analogous situations observing that only one of the preceding decisions had held, in analogous circumstances, that relief was not to be available.[122]
219 The plurality's conclusion on the issue of whether there was a relevant justiciable controversy was as follows:
As the Akron liquidators have submitted, their claim does not depend upon any incursion upon principles of contract law or privity of contract. They are not claiming as a party to the insurance contract nor as persons otherwise entitled to the benefit of that contract. Their claim is based upon the legal consequence created by s 562 of the Act in the event that CGU is liable to indemnify Crewe Sharp and, more contingently, s 117 of the Bankruptcy Act in the event that CGU is liable to indemnify Mr Crewe and he becomes a bankrupt. That legal consequence would be the bringing into existence, in favour of the Akron liquidators, of a right to the proceeds of the insurance policy payable to Crewe Sharp in respect of its liability to Akron. The interest upon which the claim for declaratory relief is based and CGU's denial of liability under the policy are sufficient to constitute a justiciable controversy between the Akron liquidators and CGU involving a question arising under a law of the Commonwealth. Because of these statutory provisions, it is the Akron liquidators who stand to benefit (to the exclusion of Crewe Sharp and Mr Crewe) from the making of the declaration sought. It would be distinctly to ignore this reality if the liquidators' interest in this regard could be defeated by reason of inaction on the part of Crewe Sharp and Mr Crewe against CGU given that the statutory provisions themselves deprive Crewe Sharp and Mr Crewe of all incentive to pursue a claim under the policy.[123]
220 In his separate judgment Nettle J addressed, at a general level, CGU's contention that a fundamental objection to the course which had been taken was that the liquidators, who are not parties to the insurance contract, were seeking to obtain a declaration as to its meaning and effect notwithstanding that the parties to the contract themselves were not in dispute. In that context, Nettle J said:
Generally speaking it may be correct to say that an outsider has no standing to seek a declaration about the meaning and effect of a contract to which the outsider is not party. But that depends on what is meant by an 'outsider' and upon the circumstances in which the parties to the contract have chosen, or been influenced, not to raise an issue. A plaintiff to whom s 562 of the Corporations Act or s 117 of the Bankruptcy Act gives a right to be paid in priority out of the proceeds of a policy of insurance against an insolvent defendant's liability to the plaintiff is not an 'outsider' in any rational sense of the word.[124]
221 A little later, Nettle J referred to observations of Byrne J in Interchase Corp Ltd (in liq) v FAI General Insurance Co Ltd,[125] which reflected CGU's arguments concerning the absence of controversy between the insurer and the insured themselves, and said:
That reasoning should also be rejected. It overlooks that while the directors are joined as defendants to the proceeding, in effect they stand in relation to the liquidators' claim for a declaration against CGU as co-plaintiffs with the liquidators. Their position is akin to that of a recalcitrant joint promisee that refuses to join with another joint promisee as plaintiffs in a proceeding against the promisor to enforce the promise. In such a case, the recalcitrant joint promisee may be joined as a defendant to the proceeding to ensure that he or she is bound by the determination. The same may occur where an equitable assignor of a legal chose in action refuses to join with the equitable assignee as a plaintiff in a proceeding against the obligor to enforce the chose in action. The assignor may be joined as a defendant in order to ensure that the assignor is bound vis-a-vis the obligor.
...
Of course, there are differences between joint promisees, the parties to an equitable assignment and the liquidators in a case like this. In the case of joint promisees, each joint promisee has rights directly against the promisor and, in the case of an equitable assignment of a legal chose in action, the assignee's claim against the obligor derives from the assignor's legal rights against the obligor. The liquidators do not have that kind of claim. But, for present purposes, such differences are immaterial. The liquidators have a legal, albeit contingent, right to priority in relation to any amount found to be owed by CGU to the directors under the policy. And, in order to exercise their right of priority, it is necessary for them to obtain a determination which is binding as between CGU and the directors that CGU is liable to indemnify the directors.[126]
222 CGU contends that the settlement deed has the effect of eliminating the possibility that Mr Crewe will ever become bankrupt by reason of the liquidators' claim. It is submitted that the effect of s 117 of the Bankruptcy Act, or its potential effect, was critical to the High Court's reasoning in CGU v Blakeley and that, absent the potential application of s 117, a different conclusion as to standing should be reached.
223 The liquidators submitted that the reasoning which led the High Court to conclude that there was a justiciable controversy is unaffected by the fact that the potential operation of s 117 of the Bankruptcy Act has been removed by the settlement deed. It submitted that the 'flow through' effect of s 117 has, by virtue of the settlement deed, become a certainty rather than a contingent possibility, and, to that extent, the liquidator's position as to the existence of a justiciable controversy is stronger under the settlement deed than it was when CGU v Blakeley was decided.
224 In our opinion the judge's conclusion was correct. The reasoning in CGU v Blakeley continues to apply. The settlement deed preserves and, indeed, enhances the liquidators' interest in the declaration which it seeks, and the existence of a 'justiciable controversy'. CGU's arguments before the trial judge and before us are, upon analysis, reliant on reasoning rejected by the High Court in CGU v Blakeley. We will not grant leave to appeal on this proposed ground.
225 We will grant leave to appeal on the proposed grounds of appeal designated as [5.1] and [5.2] but, for the reasons given, we will dismiss the appeal. We will not grant leave on the proposed ground designated [5.3]. We will grant leave to cross-appeal on proposed grounds designated as [6.1.1] and [6.1.2], refuse leave on proposed ground [6.2]. We will hear further submissions from the parties on the question of costs, given our conclusions and their effect (if any) on the Costs Reasons, and upon the disposition of the cross-appeal.
ROSS BLAKELEY, MICHAEL RYAN & QUENTIN OLDE(AS JOINT AND SEVERAL LIQUIDATORS OF AKRON ROADS PTY LTD (IN LIQUIDATION)(ACN 004 769 895)
AKRON ROADS PTY LTD (IN LIQUIDATION) (ACN 004 769 895)
CREWE SHARP PTY LTD (IN LIQUIDATION) (ACN 066 670 013)
ROSS BLAKELEY, MICHAEL RYAN & QUENTIN OLDE(AS JOINT AND SEVERAL LIQUIDATORS OF AKRON ROADS PTY LTD (IN LIQUIDATION)(ACN 004 769 895)
AKRON ROADS PTY LTD (IN LIQUIDATION) (ACN 004 769 895)
CREWE SHARP PTY LTD (IN LIQUIDATION) (ACN 066 670 013)
[1] CGU Insurance Ltd v Blakeley (2016) 259 CLR 339 ('CGU v Blakeley').
[2] See Plaintiffs' Notice to Admit, 21 Mach 2016 and Fifth Defendant's Notice of Dispute, 30 March 2016.
[3] Witness Statement of Trevor Paul Crewe, 31 March 2016.
[17] Ibid [20]-[24]. Struck out passages in the relevant extract have been retained to avoid creating the misleading impression Mr Crewe undertook the tasks referred to alone.
[20] Transcript of Proceedings (2 May 2016) 131_._
[31] Witness Statement of Ivana Vuckova, 4 March 2016, 4 [16].
[36] Transcript of Proceedings (2 May 2016) 191.
[39] Fifth Defendant, 'Defence of the Fifth Defendant to the Fourth Further Amended Points of Claim', 2 May 2016.
[40] Transcript of Proceedings (2 May 2016) 199.
[45] Summary of Evidence of Gregory Mark Hansen, 7 March 2016, 2 [4]-[5].
[48] Transcript of Proceedings (2 May 2016) 227-229.
[50] Re Akron Roads Pty Ltd (ACN 004 769 895) (in liq) (No 3) [2016] VSC 657; (2016) 348 ALR 704 ('Reasons').
[51] Re Akron Roads Pty Ltd (in liq) (No 4) [2016] VSC 778 ('Costs Reasons').
[60] Reasons [307]-[308] (citations omitted).
[67] This passage was critical to the issues raised on the applications for leave to appeal and, as the submissions refer to the passage by the paragraph numbers in the judgment, the numbers have been retained in this instance.
[68] Applicants, 'Written Case for the Applicants/Appellants', 19 December 2016, 3[6].
[69] First Respondent, 'Written Case of the First Respondent (CGU)', 17 February 2017 4-5 [2.14]-[2.15].
[71] Reasons [347]-[349] (citations omitted).
[74] Reasons [362]-[365] (citations omitted).
[75] Reasons [396]-[401] (citations omitted).
[76] Reasons [415]-[417] (citations omitted).
[86] Reasons [445] incorporating [388]-[395].
[88] Reasons [447] (citations omitted).
[93] Reasons [465] (citations omitted).
[100] Applicants, 'Written Case for the Applicants/Appellants', 19 December 2016, 3 [6] (citations omitted).
[101] First Respondent, 'Written Case of the First Respondent (CGU)', 17 February 2017, 4 [2.14] n 13.
[102] Cross Applicant, 'Written Case of the Cross-Applicant/Appellant', 17 February 2017, 3 [2.5].
[103] Cross Respondents, 'Written Case for the Cross-Respondents', 10 March 2017, 4 [12].
[109] (2015) 256 CLR 104, 116-17 [46]-[51] (citations omitted).
[110] The words introduced by provisions outside cl 3.1 itself are in italics.
[115] [2010] HCA 26; (2010) 242 CLR 174 ('CGU v One.Tel').
[119] Ibid 184-5 [42]-[46] (citations omitted).
[120] See for example, the evidence of Mr Crewe: Transcript of Proceedings (2 May 2016) 131-132.
[121] CGU v Blakeley (2016) 259 CLR 339, 351 [27]. See also 354 [34].
[124] Ibid 371 [96] (citations omitted).
[126] CGU v Blakeley (2016) 259 CLR 339, 375 [107], 376 [109].
Blakeley, Ryan & Olde
CGU Insurance Ltd [2017] VSCA 378
(2010) 242 CLR 174
(2016) 348 ALR 704
(2015) 256 CLR 104
(2016) 259 CLR 339