CONSIDERATION
55 On 5 September 2018, Kaboko filed a further amended statement of claim which alleges that the first to fourth defendants, its former officers, breached their statutory, fiduciary and common law duties. While the underlying facts are fundamental to determination of the issue, it is also necessary to examine how the claim against the defendants by Kaboko is framed and, similarly, how it suffered the loss.
56 Kaboko claims that the first to fourth defendants contravened s 180 and s 181 of the Act, as well as breached their general law duties to act in good faith in the best interests of Kaboko, and for a proper purpose.
57 In particular, Kaboko claims that the first to fourth defendants failed in their duties by:
(a) allowing Kaboko to breach the Offtake Agreement and Prepayment Facility Agreement (Agreements) by failing to ensure that the funds provided pursuant to the Agreements were used in accordance with the 'Permitted Use Schedule';
(b) failing to ensure that Kaboko kept proper books and records;
(c) allowing Kaboko to breach the Agreements by failing to ensure that Kaboko or its subsidiaries held all the relevant mining licences that it had warranted that it held; and
(d) allowing Kaboko to breach the Agreements by allowing Kaboko to sell Product to third parties,
(together, the Alleged Breaches).
58 AIG's case that the Insolvency Exclusion is engaged is essentially based on the argument that the Alleged Breaches led to the demand for repayment of the Advances made under the Prepayment Facility Agreement which, in turn, ultimately led to Kaboko's insolvency. Accordingly, it is said the loss claimed in this proceeding 'arises out of' Kaboko's insolvency or its actual or alleged inability to pay its debts as and when they fell due because had Kaboko been able to meet Noble's demand for repayment there would never have been a claim under the Policy.
59 There is no doubt that the Alleged Breaches ultimately led to Kaboko's insolvency. Kaboko concedes this. However, in my view, the relevant loss does not 'arise out of' nor originate in, or spring from, or have its foundation in Kaboko's insolvency. Rather the relevant loss, not just as pleaded but as demonstrably established by the underlying facts (if proven), was the loss of Kaboko's opportunity to exploit a valuable commercial opportunity to develop the Mining Projects.
60 This view is reinforced by consideration of the Insolvency Exclusion in the context of the Policy as a whole and with particular regard to the commercial purpose of the Policy. The rationale behind providing directors' and officers' indemnity insurance is well established. In Australia, company directors and officers may be held personally liable for breaches of a broad range of statutory and common law duties arising from a wide number of complaints, including from their company, creditors, shareholders and ASIC. In the absence of insurance individuals would be unwilling to act as directors, or would become excessively risk-adverse in their role, to the detriment of the company. This point was reinforced in Oz Minerals Holdings Pty Ltd v AIG Australia Ltd [2015] VSCA 346, where Kyrou JA said (at [8]-[9] with whom Maxwell P agreed):
8 D & O [directors' and officers'] insurance is a specialist form of insurance with many unique features. Those features arise from the fact that the primary insureds are directors and officers (collectively 'directors') of companies who, in the performance of their functions, are subject to a wide range of onerous common law and statutory duties and face a large array of potential claims giving rise to civil and criminal liability for breaching those duties. Directors may incur civil liability for damages or civil penalties to a multiplicity of claimants, including their company, a fellow director, a shareholder, employee, creditor or customer of the company or a regulator. The liability can involve many millions of dollars.
9 Due to the broad scope of the liabilities to which directors are potentially subject, the wide range of potential claimants and the scale of the financial exposure, it is not surprising that D & O policies contain a large number of exclusions. The subject matter of the exclusions may be defined by reference to matters such as the type of liability incurred by a director, the cause of the liability, the time at which - or the place in which - the Wrongful Act giving rise to the liability occurred, or the identity of the claimant.
61 The general approach in such policies is to protect directors and officers from those customary risks borne by directors in performing their role. That approach is reflected in the terms of the Policy where it is provided that the Policy protects from, inter alia, 'Management Liability', which is defined, relevantly, as:
(i) any liability arising from any actual or alleged act, error or omission, breach of duty, breach of trust, misstatement, misleading statement or breach of warranty of authority of any Manager or arising solely because of any Person's status as a Manager ...
(Emphasis in original.)
The Policy also provides that AIG will pay the Statutory Liability of any Insured Person (which term is defined to include a 'Manager'). 'Statutory Liability' is defined in the Policy to include 'any fine or pecuniary penalty pursuant to any Statute', but does not include Statutory Liability for breaches of, inter alia, s 182 and s 183 of the Act.
62 In Kyriackou, the Victorian Supreme Court of Appeal expressed a view that an ancillary connection to insolvency was not sufficient to engage the wording 'arising out of or in any way connected with' in an insolvency exclusion clause (at [109]). In that case, Harper JA considered (in obiter) whether claims made by ASIC against an insured and his group of companies for contraventions of s 601ED of the Act (operating a managed investment scheme which required registration but was not registered) would fall within the ambit of an insolvency exclusion clause which provided that the insurer was not liable to make payment for 'Loss directly or indirectly caused by, arising out of or in any way connected with: ... the insolvency ... of any person or entity, including the Insured'. ASIC sought relief in its originating process in the form of orders for the appointment of a provisional liquidator and winding up of certain of the defendant companies. Ultimately, one of the defendant companies was wound up and a liquidator appointed to it. On the question of casual nexus, Harper JA said (at [109]-[110]):
109 The reason for the winding up is, however, irrelevant. The question here is whether the ASIC claim was based in whole or in part upon the 'the insolvency ... or liquidation of any ... entity, including an insured'. In my opinion, it was so based only in the most ancillary way. That it seems to me, is not enough.
110 In my opinion, exclusion clause 3. 27 would not therefore exclude the insurer from being liable for defence costs.
(Emphasis added.)
63 The approach adopted by Harper JA, which requires that the relevant claim be 'based in whole or in part' upon the insolvency of the company, appears to be consistent with the position adopted in the United Kingdom: see Timothy Crowden v QBE Insurance (Europe) Ltd [2017] EWHC 2597 (Comm) (at [84]).
64 Although AIG has expressly excluded liability for Statutory Liability arising from violations of s 182 and s 183 of the Act, it has not excluded Statutory Liability arising from violations of s 180 and s 181 of the Act.
65 The provisions not excluded from cover are in these terms:
180 Care and diligence - civil obligation only
Care and diligence - directors and other officers
(1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a) were a director or officer of a corporation in the corporation's circumstances; and
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
Note: This subsection is a civil penalty provision (see section 1317E).
Business judgment rule
(2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:
(a) make the judgment in good faith for a proper purpose; and
(b) do not have a material personal interest in the subject matter of the judgment; and
(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
(d) rationally believe that the judgment is in the best interests of the corporation.
The director's or officer's belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.
Note: This subsection only operates in relation to duties under this section and their equivalent duties at common law or in equity (including the duty of care that arises under the common law principles governing liability for negligence) - it does not operate in relation to duties under any other provision of this Act or under any other laws.
(3) In this section:
business judgment means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.
181 Good faith - civil obligations
Good faith - directors and other officers
(1) A director or other officer of a corporation must exercise their powers and discharge their duties:
(a) in good faith in the best interests of the corporation; and
(b) for a proper purpose.
Note 1: This subsection is a civil penalty provision (see section 1317E).
Note 2: Section 187 deals with the situation of directors of wholly-owned subsidiaries.
(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.
Note 1: Section 79 defines involved.
Note 2: This subsection is a civil penalty provision (see section 1317E).
66 The provisions excluded from cover are these:
182 Use of position - civil obligations
Use of position - directors, other officers and employees
(1) A director, secretary, other officer or employee of a corporation must not improperly use their position to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the corporation.
Note: This subsection is a civil penalty provision (see section 1317E).
(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.
Note 1: Section 79 defines involved.
Note 2: This subsection is a civil penalty provision (see section 1317E).
183 Use of information - civil obligations
Use of information - directors, other officers and employees
(1) A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the corporation.
Note 1: This duty continues after the person stops being an officer or employee of the corporation.
Note 2: This subsection is a civil penalty provision (see section 1317E).
(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.
Note 1: Section 79 defines involved.
Note 2: This subsection is a civil penalty provision (see section 1317E).
67 Of course the mere fact that a pleading has been carefully drawn would not lead to a conclusion as to whether or not an exclusion applies. But there is no challenge for present purposes to the contention that the Policy would respond but for the exclusion. Kaboko submits, correctly in my view, that the claims under s 180 and s 181 of the Act for breach of duties are the exact class of risk the Policy is intended to insure against in light of those provisions not being the subject of an express exclusion.
68 Factors that are relevant to the determination are the purpose of the Policy, the risks it is designed to insure against and the mischief sought to be excluded by the Insolvency Exclusion.
69 Importantly, to construe the reach of the words in the Insolvency Exclusion in the manner AIG proposes would result in the Insolvency Exclusion operating to exclude from cover under the Policy claims against directors of any nature whatsoever if the relevant conduct of the directors giving rise to the claim also played some part in the eventual or alleged insolvency of the company. This would be contrary to the objectively viewed commercial purpose of such a policy and the objectives of the parties in entering into it. It would, in the words of Barker J in Ashmere Cove, 'substantially defeat the indemnity granted by the policy and render the policy "practically illusory"'. It would result in a construction 'repugnant to the purpose of the insurance contract' of the type Lord Hodge in Impact Funding Solutions Ltd v Barrington Support Services Ltd [2017] AC 73 (at [7] with whom Lords Mance, Sumption and Toulson JJSC agreed) cautioned against.