Australian case a warning for insolvency practitioners litigating against insurers

In the case between the liquidator of travel agency service provider Tempo Holidays Pty Ltd, and the sole Australian director of Tempo, the Court considered an application by the liquidator who asserted that the director’s insurer was liable for loss arising from alleged breaches of the director’s duties despite a settlement having already been reached between the liquidator and the director before the final hearing in the proceedings. Tempo’s insurer later joined as the second defendant to the proceedings.

The liquidator’s claims against the director

The liquidator brought a ‘breach of director’s duties’ claim against the director, arising from an alleged failure to monitor the inter-group transfer of funds by Tempo according to an informal debtor/creditor arrangement in the group known as ‘the global treasury arrangement’. This claim related to unsecured payments of nearly AU$6 million (US$3.9 million) which were paid to group companies by Tempo and became unrecoverable.

The liquidator also brought an insolvent trading claim against the director, of over AU$26 million for third party creditor debts incurred by Tempo.

The insurer had no obligation to compensate the director for the insolvent trading claim and this was not an issue in dispute during the proceedings.

The insurer declined to compensate the director for the breach of director’s duties claim. On this basis, the liquidator made a joinder application to seek declaratory relief to the effect that the insurer was liable to compensate the director under an insurance policy.

The settlement between the director and the liquidator

Shortly before the commencement of the trial, the liquidator and the director settled the proceedings. In line with the settlement deed, the director had agreed to judgment in the full amount of the director’s duties claim and a slightly reduced amount in respect of the insolvent trading claim.

In consideration of a security sum of AU$500,000 to be paid in instalments by the director, the liquidator agreed to enforce the judgment first against any insurance policy proceeds recovered from Tempo’s insurer and, once exhausted, only against the security sum. 

The liquidator asserted that the insurer was liable to compensate the director for the full amount of the breach of director’s duty claim because it represented a ‘reasonable compromise’ of the claim, for which the director was entitled to be compensated, and also as it had proven, by consent, the breach of director’s duty claim for which the insurer was liable as a ‘claim for a wrongful act’ within the meaning of the insurance policy.

The demand made by the liquidator under Tempo’s insurance policy

On the last day before Tempo’s insurance policy expired, the liquidator issued a demand for payment to the director in the amount of approximately AU$5 million.

While the liquidator was able to demonstrate that the demand amounted to a ‘claim’ within the meaning of Tempo’s insurance policy, the Court’s decision ultimately turned on whether a claim for ‘loss’ could be made out.

The Court’s decision

The Court found that a claim was made in the insurance policy period but also found that the liquidator had failed to establish a claim for loss within the meaning of the insurance policy.

This decision turned on whether the settlement deed was reasonable and whether the director breached his duties amounting to a ‘wrongful act’ that caused Tempo to suffer loss within the meaning of the insurance policy.

The Court critically observed that the form of the liquidator’s pleadings was problematic as it did not adequately separate the breach of the director’s duties claims from the insolvent trading claim. This meant that it was a ‘rolled-up plea’ which was then compounded when it came to the liquidator affecting a settlement against the director in the proceedings and concurrently proceeded against the insurer, where only the insurance policy could respond to the breach of director’s duties claim but not the insolvent trading claim.

Ultimately, the proceedings were dismissed because the liquidator had failed to establish the insurer’s liability under Tempo’s policy. The Court also stated, however, that even if it was wrong in that conclusion, the Court found that the insurer had successfully established that it was entitled to reduce its liability to zero, based on non-disclosure by Tempo.

Practical implications for insolvency practitioners

The ruling has made it clear that insolvency practitioners should exercise caution when they engage in litigation seeking to access insurance policies to meet liquidators’ claims.

There are a few considerations from the case which insolvency practitioners should note. Firstly, the liquidator should have obtained specific advice on the prospects of the insurance policy responding to the liquidator’s claims before the proceeding, as it appears from the judgment that there were threshold issues here with the viability of the liquidator’s attempt to access the insurance policy to respond to the director’s duties claim. This may have helped the liquidator in this case avoid the undesired result of pursuing the director without recourse to an insurance policy.

Secondly, insolvency practitioners should ensure that their lawyers precisely plead separate directors’ duties and separate elements required for directors’ duties claims to be successfully argued in proceedings. They should also allow for sufficient flexibility if settlement is achieved against one respondent to the litigation or an insurer is joined to the proceedings. 

Insolvency practitioners should also consider the requirement to establish the reasonableness of any settlement achieved with the director in relation to continuing the proceedings against the insurer to access the insurance policy, like the considerations relevant to ss 477(2A) and 477(2B) of the Corporations Act 2001 (Cth) and obtaining approval for settlement of claims.

Liquidators also need to offer sufficient evidence referrable to the reasons behind the settlement. In this instance, it was necessary for reasons to be provided as to why the director “capitulated” by consenting to a judgment – which was nearly the entirety of the liquidator’s claims – without any negotiated discount on the liquidator’s claims themselves rather than that settlement occurring in a vacuum without explanation.

Insolvency practitioners should also be aware of what could be constituted as evidence in support of a settlement being found reasonable. In this case, the Court identified that the evidence included material available to the director’s legal advisors at the time of any prospects’ advice being provided, how the prospects were weighed up with regard to the two separate claims, and whether any other commercial considerations had influenced a settlement with the liquidator. 

Co-written by Jemimah George of Pinsent Masons.