DSHE Holdings Ltd (receivers and managers appointed) (in liq) v Abboud; National Australia Bank Limited v Abboud

In 2017/81927: J C Giles SC with J Arnott (Plaintiff) J A Redwood (Ninth Defendant) V E Whittaker (Tenth and Eleventh Defendants) E C Muston SC (Twelfth Defendant) G K J Rich SC with S A Lawrance (Thirteenth, Fourteenth, Fifteenth, Sixteenth and Eighteenth Defendants) A R Zahra (Seventeenth Defendant)

In 2017/81938: J C Giles SC with J Arnott (Plaintiffs) J A Redwood (Third Defendant) V E Whittaker (Fourth and Fifth Defendants) E C Muston SC (Sixth Defendant) G K J Rich SC with S A Lawrance (Seventh, Eighth, Ninth, Tenth and Twelfth Defendants) A R Zahra (Eleventh Defendant)

In 2017/81927: Norton Rose Fulbright (Plaintiff) Moray & Agnew (Ninth Defendant) Lander & Rogers (Tenth and Eleventh Defendants) Wotton & Kearney (Twelfth Defendant) HWL Ebsworth Lawyers (Thirteenth, Fourteenth, Fifteenth, Sixteenth and Eighteenth Defendants) Sparke Helmore (Seventeenth Defendant)

In 2017/81938: Norton Rose Fulbright (Plaintiffs) Moray & Agnew (Third Defendant) Lander & Rogers (Fourth and Fifth Defendants) Wotton & Kearney (Sixth Defendant) HWL Ebsworth Lawyers (Seventh, Eighth, Ninth, Tenth and Twelfth Defendants) Sparke Helmore (Eleventh Defendant) File Number(s): SC 2017/81927; SC 2017/81938

Judgment

1. These two proceedings were commenced on 16 March 2017.
2. The plaintiffs, DSHE Holdings Ltd (receivers and managers appointed) (in liq) (in the "Company Proceedings") and National Australian Bank Ltd and HSBC Bank Australia Ltd (in the "Bank Proceedings"), seek damages or compensation (and other relief) against former directors and officers of DSHE.
3. They also seek relief against 11 D&O insurers that provided the primary and various excess layers of insurance cover to those directors and officers.
4. Against each insurer, the plaintiffs seek: 1. leave under s 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (the "LRMP Act") to commence these proceedings; 2. a declaration of their entitlement, pursuant to s 6(1) of the LRMP Act, to a charge on all insurance moneys that become payable to the insured directors and officers; and 3. judgment, pursuant to s 6(4) of the LRMP Act, for any amounts ordered in favour of the plaintiffs against the directors and officers (up to the relevant policy limits).
5. On 31 March 2017, Hammerschlag J made an order, the effect of which was that the question of leave under s 6(4) of the LRMP Act be dealt with before any other issue in the proceedings.
6. I heard that question on 10 May 2017. In my opinion, leave should be refused.

The allegations against the directors and officers

1. In the Company Proceedings, DSHE alleges that a number of its former directors and officers (including its former chief executive officer, Mr Nicholas Abboud, and its former chief financial officer, Mr Michael Potts) breached their duties at general law and under s 180 of the Corporations Act 2001 (Cth) to exercise reasonable care and skill.
2. DSHE makes two claims against those directors and officers which, in his written submissions, Mr Giles SC, who appeared with Mr Arnott for the plaintiffs, described as the "Bad Stock Claim" (presently estimated to be approximately $60 million) and the "Dividend Claim" (presently estimated to be $28.3 million). Underlying the Bad Stock Claim is an allegation that DSHE engaged in what is described in the pleadings as the "Rebate Uplift Practice", the effect of which was (perhaps to oversimplify matters) artificially to inflate DSHE's reported profit.
3. The Bank Proceedings concern finance facilities provided to DSHE by NAB and by HSBC on or around 22 June 2015.
4. Before the facilities were provided, Mr Abboud and Mr Potts dealt with officers of NAB and HSBC and provided them with information to enable those institutions to consider whether to provide finance to DSHE and on what terms.
5. NAB and HSBC allege that, during that process, Mr Abboud and Mr Potts failed to disclose a number of matters, including the implementation of the Rebate Uplift Practice and its effect on purchasing practices and the quality of inventory.
6. NAB and HSBC also allege that Mr Abboud and Mr Potts made representations which are said to have been misleading or deceptive. NAB and HSBC claim that if those representations had not been made then the finance facilities would not have been granted.
7. NAB and HSBC seek to recover from Messrs Abboud and Potts the amounts owing under the finance facilities being some $75 million for NAB and some $50.4 million for HSBC.
8. The amount of the plaintiffs' claims exceeds the combined policy limits of the various policies ($150 million).

The LRMP Act

1. Sections 6(1) to (4) of the LRMP Act are in the following terms: "6 Amount of liability to be charge on insurance moneys payable against that liability (1) If any person (hereinafter in this Part referred to as the insured) has, whether before or after the commencement of this Act, entered into a contract of insurance by which the person is indemnified against liability to pay any damages or compensation, the amount of the person's liability shall on the happening of the event giving rise to the claim for damages or compensation, and notwithstanding that the amount of such liability may not then have been determined, be a charge on all insurance moneys that are or may become payable in respect of that liability. (2) If, on the happening of the event giving rise to any claim for damages or compensation as aforesaid, the insured (being a corporation) is being wound up, or if any subsequent winding-up of the insured (being a corporation) is deemed to have commenced not later than the happening of that event, the provisions of subsection (1) shall apply notwithstanding the winding-up. (3) Every charge created by this section shall have priority over all other charges affecting the said insurance moneys, and where the same insurance moneys are subject to two or more charges by virtue of this Part those charges shall have priority between themselves in the order of the dates of the events out of which the liability arose, or, if such charges arise out of events happening on the same date, they shall rank equally between themselves. (4) Every such charge as aforesaid shall be enforceable by way of an action against the insurer in the same way and in the same court as if the action were an action to recover damages or compensation from the insured; and in respect of any such action and of the judgment given therein the parties shall, to the extent of the charge, have the same rights and liabilities, and the court shall have the same powers, as if the action were against the insured: Provided that, except where the provisions of subsection (2) apply, no such action shall be commenced in any court except with the leave of that court. Leave shall not be granted in any case where the court is satisfied that the insurer is entitled under the terms of the contract of insurance to disclaim liability, and that any proceedings, including arbitration proceedings, necessary to establish that the insurer is so entitled to disclaim, have been taken."
2. Section 6 identifies only one consideration that the Court is required to consider when deciding whether to grant leave. That is, whether the relevant insurer is entitled to "disclaim liability" and whether proceedings necessary to establish that entitlement have been taken (in which event leave must not be granted). None of the insurers has purported to disclaim liability. Accordingly, that question does not arise.
3. Otherwise, it is common ground that in order to obtain leave under s 6(4), at least three things must be established; namely, that there is: 1. an arguable case against the insured defendants; 2. an arguable case that the policies in question respond to the claim; and 3. a real possibility that, if judgment is obtained, the insured defendants would not be able meet it (for example, Bede Polding College v Limit (No 3) Limited [2008] NSWSC 887 at [6] (Grove J)).
4. It is common ground, in this case, that each of those conditions is satisfied.
5. However, the authorities make clear that it does not follow that leave should be granted.
6. As Ward JA (as her Honour then was) recently said in Wayland v Bird [2017] NSWCA 26 (Macfarlan JA and Emmett AJA agreeing): "[W]hile those are matters which must be established before such an order [granting leave under s 6(4)] will be made, the establishment of each of those matters does not mandate the making of such an order. That question remains one within the discretion of the Court." [At [26]]
7. That discretion must be exercised for the purpose for which it was conferred; namely, to ensure that insurers are not exposed to unnecessary, unwarranted or inappropriate claims: Oswald v Bailey (1987) 11 NSWLR 715 at 717F-G, 725E; Tzaidas v Child (2004) 61 NSWLR 18 at [17], [107]; Opes Prime Stockbroking Ltd (in liq) (Scheme Administrators Appointed) v Stevens [2014] NSWSC 659 at [17]; Wayland v Bird at [20]-[26].
8. The question, in each case, is whether it is reasonable for the insurer to be joined.
9. One factor to be considered is the likely cost to the insurers of joinder. Mr Giles accepted that the proceedings are likely to take at least 20 hearing days (and possibly more). The solicitor for five of the excess layer insurers has estimated that the likely costs for his clients of the preparation and participation in a final hearing will be in the order of $350,000. It is by no means fanciful to suppose that the insurers will, each, incur costs in this order.
10. Another factor to be considered is the utility of joinder: Opes Prime at [20].
11. Argument before me focussed on that question.

The indemnity point

1. The directors are individuals who appear to be solvent. They are legally represented. Their legal costs are being funded by the primary insurer, Allianz Australia Insurance Ltd.
2. Each of the insurers has confirmed coverage for the directors in respect of the claims made by the plaintiffs. That confirmation is subject to certain reservations.
3. For example, Allianz, by its solicitors, wrote to the solicitors for the directors: "5. Based on the material currently available and the facts presently known, Allianz confirms coverage under Insuring Clause 1.1 of the D&O Policy to each of your clients in respect of the Proceeding including for their Defence Costs, subject to: (a) a specific reservation in relation to the possible operation of Exclusion 3.1 (Dishonest or Improper Conduct); (b) the repayment obligation in Condition 6.3 in the event that Exclusion 3.1 operates; and (c) a general reservation under the D&O Policy and at law. 6. In the event that there is any other reason to review Allianz's coverage determination including: (a) the plaintiffs amending the summon[s] and/or the commercial list statement filed in the Proceeding; or (b) new facts, evidence, documents, material and/or information coming to light: Allianz reserves its right to review the coverage position under the D&O Policy. 7. Exclusion 3.1 in the D&O Policy provides: 'The Insurer shall not be liable to make any payment for Loss in connection with any Claim, Inquiry or Self Report which involves, or is based on, arises out of or is attributable to an Insured Person or the Company: i. committing any deliberately fraudulent or deliberately dishonest or malicious act; or ii. gaining any personal profit or advantage to which the Insured Person or Company was not entitled; or iii. engaging in any conduct or contravention in respect of which a liability is the subject of a prohibition in section 199B(1) of the Corporations Act 2001. This exclusion will only apply where the conduct in question has been established by a formal written admission or final adjudication including all appeals.' Having regard to the nature of the allegations made in the Proceeding and without imputing any wrongdoing on the part of your clients, Allianz must reserve its position in relation to the possible operation of Exclusion 3.1 of the D&O Policy." [Emphasis in original]
4. The other insurers have written to the legal advisors of the directors in similar (often identical) terms.
5. Allianz made reference, in the last paragraph quoted at [28], to the "nature of the allegations made in the Proceeding".
6. One of those allegations is that the "DSE Group" (being DSHE and its trading subsidiaries) engaged in the so called Rebate Uplift Practice (see [8] above) which, according to the pleadings, involved: "(a) [I]n some cases, directing or requesting the supplier to cancel previously issued invoices that had been issued without rebates; (b) directing or requesting the supplier to issue invoices showing a rebate and an equivalent increase in the cost of the goods; (c) directing, requesting or accepting subsequent invoices from the supplier issued in a similar structure (that is, with a higher price for the goods combined with a rebate); (d) accounting for the rebate in accordance with paragraph 38 [i.e.in substance, being brought to account as profit]."
7. In the Bank Proceedings (although not in the Company Proceedings) it is alleged that the former directors and officers of DHSE knew of this practice.
8. In those circumstances, Mr Giles submitted that the insurers' reservation of position concerning the possible operation of Exclusion 3.1 ("the dishonestly exclusion") bespeaks an apprehension on the part of the insurers that the pleadings in each of the Company Proceedings and the Bank Proceedings raises the prospect of the dishonesty exclusion being enlivened; and this is a reason why leave should be given under s 6(4) of the LRMP Act.
9. I do not agree.
10. First, the reservation is stated to be "without imputing any wrongdoing on the part of your clients".
11. Second, as Mr Rich SC, who appeared with Mr Lawrance for a number of the excess insurers submitted, the reservations: "…are not only customary at this stage of proceedings, but are precautionary in nature, and not indicative of an extant or latent dispute about indemnity".
12. As Mr Rich submitted, there is presently no reason to suppose that the insurers will refuse indemnity to their insureds against any relevant liability they are found to have to the plaintiffs upon a determination of the Company and Bank Proceedings.
13. It is hard to see how much further the insurers could take the matter at the moment. It can hardly be supposed that the insurers would now undertake, no matter what emerged in the proceedings (or at all), unconditionally to meet any judgment that might be entered against their insured. Cover is, for the moment, "confirmed", albeit subject to those reservations.
14. I see the situation as being akin to that described by Ball J in Opes Prime at [20]; namely, that the insurers have admitted liability to indemnify the directors, subject to a qualification, but "not in a way that suggests that, for the purposes of determining its liabilities under the [policies], [the insurers] will not be bound by the outcome of the proceeding".
15. In his submissions, Mr Giles emphasised that the plaintiffs wish to avoid the multiplicity of proceedings and pointed to the possibility that, if leave were not granted, there may be two rounds of litigation; namely, the current claim by DSHE, NAB and HSBC against the directors and officers, then a later round of litigation between the directors and officers and the insurers.
16. But that is a matter of speculation. It may happen. It may not. There is no reason at the moment to conclude that it will. Currently, there is no insurance controversy for the Court to quell. And I do not think it appropriate to grant leave under s 6(4) "just in case" one arises.

The priority point

1. Mr Giles submitted that an independent reason to grant leave was to secure the priority of any entitlement that DSHE, NAB or HSBC might have to access the policies of insurance.
2. This submission was made in the context that it appears that a class action, to be brought on behalf of shareholders in DSHE (or its trading subsidiaries), will shortly commence against some or more of the former directors and officers of DSHE. These actions are evidently being explored by persons represented by Bannister Law and Johnson Winter & Slattery. The latest information that is available to the plaintiffs is that Bannister Law is "fairly close" to commencing such proceedings and that Bannister Law has been sharing resources in relation to the preparation of the class action with Johnson Winter & Slattery.
3. But I cannot see how joining the insurers to these proceedings will improve or clarify the priority of any charge that DSHE, NAB, or HSBC may have under s 6(1) of the LRMP Act to some or all of the insurance moneys under the various policies, over any charge that other claimants on the policies may have.
4. In this State, by reason of the decision of the Court of Appeal in Chubb Insurance Co of Australia Ltd v Moore [2013] NSWCA 212; 302 ALR 101, such priority is determined by reference to the date on which a determination is made that the relevant insured has a liability (whether by way of judgment, award or settlement).
5. Thus, Emmett JA and Ball J (with whom Bathurst CJ, Beazley P and Macfarlan JA agreed) said (at [118]): "The source of many of the difficulties with s 6 is that it provides that the charge comes into existence at a time, and by reference to events, different from the circumstances in which the moneys to which the charge attaches or on which it descends become determinate and payable. The charge comes into existence on the happening of an event giving rise to a liability to pay damages or compensation for which a claim may be made. The charge, however, only attaches to or descends on moneys that are or may become payable in respect of that liability to pay damages or compensation. There is nothing to which the charge can attach, or on to which it can descend, unless and until a liability to pay damages or compensation has been determined. The liability is not determined, so as to give rise to an entitlement to payment by the insurer, unless and until a determination has been made, by judgment, award or settlement, that the insured is liable."
6. Their Honours continued (at [126] and [127]): "Under the terms of the Primary Policy, an insured is entitled to be indemnified against any loss. Where the indemnity concerns an obligation to satisfy a judgment, award or settlement, the right to the indemnity arises at the time when the liability is established by that judgment, award or settlement (see Bradley v Eagle Star Insurance Co Ltd [1989] 1 AC 957 at 966; Distillers Co Biochemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd [1974] HCA 3; (1974) 130 CLR 1 at 2526). At that time, the insured is entitled to sue on the indemnity and, subject to exhaustion of the maximum liability under the relevant contract of insurance, is entitled to recover the amount of the judgment, award or settlement. The fact that other claims have been, or may be brought, against the insured, or any other insured indemnified by the same contract of insurance, does not alter the first insured's right to indemnity in respect of the liability that has been determined. If s 6 caught all moneys available at the time when the charge arises, and s 6(1) applied to a second claim, an insurer could not safely pay the first ascertained claim if the second claim might exceed the amount of the limit that would then remain, unless it could be satisfied that that first ascertained claim has priority under s 6(3). Again, on that approach, the effect of s 6 would be, by a side wind, to alter the rights of the contracting parties. The insurer would be entitled to refuse to pay a claim that it was obliged by the terms of the contract of insurance to pay, because it would run the risk of having to pay more than the maximum amount it contracted to pay."
7. Despite these statements, Mr Giles submitted that there was "continuing uncertainty as to the operation of priorities under s 6 of the LRMP Act" and pointed to the decision of the New Zealand Supreme Court in BFSL 2007 Ltd (in liq) v Steigrad; Houghton v AIG Insurance New Zealand Limited (2014) 1 NZLR 304 in which a different view was expressed concerning corresponding legislation.
8. In those circumstances, Mr Giles submitted that it is "far from clear whether Chubb represents the final position on this matter".
9. So far as I am concerned, it does; and my attention was not drawn to any decision in Australia doubting this aspect of the decision in Chubb.
10. In my opinion, the joinder of the insurers to these proceedings under s 6(4) of the LRMP Act will not improve the position of DSHE, NAB or HSBC in the event that there are competing claims for the fruits of these policies.
11. The first party to have its claim determined (whether by judgment, award or settlement) will prevail.

The Civil Liability (Third Party Claims Against Insurers) Bill 2017 point

1. The Civil Liability (Third Party Claims Against Insurers) Bill 2017 is presently before the NSW Parliament. I was informed that it has passed the Legislative Council and is presently before the Legislative Assembly.
2. The Bill, if it becomes an Act, will replace s 6 of the LRMP Act with a regime that allows a third party to bring proceedings directly against an insurer, rather than a proceeding to enforce the statutory charge created by s 6(1) of the LRMP Act.
3. If I were to refuse leave as sought by the plaintiffs, and were the Bill to become an Act, then by reason of cl 12 of the Bill, the plaintiffs would have to bring any claim against the insurers under s 4 of the new Act, rather than s 6 of the LRMP Act.
4. I do not see how this advances matters.
5. The Bill is not yet the law. It may never become the law. I must determine this application in accordance with the current law.
6. In any event, if I were otherwise inclined to grant the plaintiffs the leave they seek, I cannot see what the prospect of the law changing adds to their position. On the other hand, as I am not inclined to grant the leave sought, I cannot see how the Bill takes matters further.
7. In any event, as Mr Muston SC, who appeared for Chubb, pointed out, in view of the decision in Chubb, whether or not the plaintiffs are granted leave, they will suffer no disadvantage if s 6 of the LRMP Act is replaced by new legislation in the form contemplated by the Bill; the outcome for the plaintiffs (and any other claimant) so far as concerns their entitlement to insurance moneys will be, for all practical purposes, the same.

Conclusion

1. I decline to grant DSHE, NAB and HSBC the leave they seek under s 6(4) of the LRMP Act.
2. I invite the parties to bring in short minutes to give effect to these reasons and to provide for the future conduct of the proceedings.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 12 May 2017