In the Matter of Australian Coal Technology Pty Ltd (In Liq)

[2012] NSWSC 1214

Supreme Court

New South Wales

Medium Neutral Citation:	In the Matter of Australian Coal Technology Pty Ltd (In Liq) [2012] NSWSC 1214
Hearing dates:	26 September 2012
Decision date:	26 September 2012
Jurisdiction:	Equity Division - Corporations List
Before:	Brereton J
Decision:	Order that the Plaintiffs are justified in prosecuting proceedings to the completion of service of evidence and disclosure
Catchwords:	CORPORATIONS - external administration - application by liquidators for judicial advice - Corporations Act s 511 - whether liquidators justified in pursuing legal action on behalf of the company - where prosecution is not certain to improve position of company and creditors - where prosecution will assist in resolution of proceedings essential to completion of the winding up
Legislation Cited:	(Cth) Corporations Act 2001, s 511 (Cth) Insurance Contracts Act 1984, s 21
Category:	Interlocutory applications
Parties:	Sule Arnautovic & Roderick Mackay Sutherland (plaintiffs) Ex parte
Representation:	C N Bova Middletons (Plaintiff)
File Number(s):	12/ 301119

Judgment (ex tempore)

1. HIS HONOUR: By originating process filed in court today, the plaintiffs Sule Arnautovic and Roderick Mackay Sutherland, who are the liquidators of the company Australian Coal Technology Pty Ltd (In Liq), seek the advice of the Court pursuant to (Cth) Corporations Act 2001, s 511, as to whether they would be justified in prosecuting the hearing of separate questions ordered to be determined by Hammerschlag J on 9 August 2012 in proceedings in which the company is the defendant and cross-claimant, the plaintiff is Millennium Coal Pty Ltd ("Millennium"), and the cross-defendant is Liberty Mutual Insurance Company ("Liberty").

Background

1. The company contracted with Millennium to design, construct, supply and install a coal preparation plant and materials handling facility in January 2005. In December 2005, the company's chief executive officer made application to Liberty for professional indemnity insurance. At or about that time, the company advised Millennium that it was experiencing financial difficulty and would not be able to complete its contractual obligations, and subsequently it and Millennium entered into a deed of novation, which replaced the company with another company under the contract. It is now established, in other proceedings, and accepted, that by this time the company was insolvent.

1. With effect from 28 February 2006, Liberty issued a professional indemnity insurance policy to the company. The company went into voluntary administration, and the present plaintiffs were appointed its administrators on 3 March 2006. On 7 March, Millennium notified the company, its insurance broker, and Liberty, of a claim for alleged negligence in relation to the coal handling and preparation plant. On 9 March, Millennium submitted a proof of debt to the administrators. The insurance policy, to which I have referred, with effect from 28 February, was formally issued by Liberty on or about 23 March. After an initial request by the administrators to cancel the policy - a request that was later revoked - on 9 May 2006, Liberty confirmed to the company's solicitors that the policy was in force.

1. The company went into liquidation, presumably following the second creditors' meeting, on 26 May 2006.

1. On 17 January 2012, Millennium commenced proceedings in the Technology and Construction List of this Court (proceedings 2012/16708) on its negligence claims against the company. The company filed a cross-claim against Liberty, claiming indemnity. Liberty denies any obligation to indemnify the company, primarily on the basis of alleged non-disclosure by the company of its insolvency at the time of the application for the policy.

1. On 9 August 2012, Hammerschlag J made orders in the Technology and Construction List proceedings that the following questions be determined separately from and before the other issues in the proceedings:

(1)   to the extent that the cross-defendant Liberty would otherwise be liable to indemnify the defendant/cross-claimant company, is Liberty's liability in relation to the company's claim for indemnity under the policy reduced to nil by reason of matters pleaded in paras 14 to 27 of the cross-claim list response (which essentially relate to the non-disclosure of the company's financial position);

(2)   did Liberty elect to affirm a policy as alleged in paragraph 2 of the reply to cross-claim response (which essentially relates to the letter of 9 May 2006); and

(3)   is Liberty estopped as alleged in paragraph 3 of the reply to cross-claim response (which again relates essentially to the letter of 9 May 2006).

1. Excluding Millennium's claim, which is for about $25 million plus interest, the proofs of debt submitted in the liquidation total approximately $11.138 million. At present, once allowance is made for estimated legal costs and costs of the liquidation, a fund of about $2.2 million will be available for distribution to creditors. This would generate a dividend of roughly twenty cents in the dollar. If Millennium's claim were admitted in full, the dividend to creditors would be in the order of six cents in the dollar. If the company were entitled to indemnity in respect of Millennium's claims, then the sum insured is capped at $10 million, but this would have the effect of improving the position of creditors significantly, by reason that a fund of $10 million would be available to set off against Millennium's claim, such that if it were established in full, only $15 million as opposed to $25 million would compete with the other creditors, and, of course, the claim might succeed for significantly less than the full amount of $25 million.

Consideration

1. The defence of the Millennium claim is likely to be complex and costly. A substantial amount of the remaining divisible funds of $2.2 million would be expended in it. The liquidators are not in a position to form a judgment at this stage as to the prospects of successfully resisting that claim. The separate questions have been listed for hearing for three days in December this year, and the costs of litigating them will be significantly less, perhaps in the order of a couple of hundred thousand dollars.

1. Resolution of the separate questions would either conclusively determine that the company was not entitled to indemnity, which would clarify its position so far as its ability to litigate Millennium's claim is concerned, or would, though not conclusively, go some considerable way to establishing that it was entitled to indemnity, which would increase the prospects of resolving at least that aspect of the Technology and Construction List proceedings.

1. The company has obtained the advice of senior and junior counsel, to the effect that the liquidators would be justified in prosecuting the hearing of the separate questions. In reaching that conclusion, counsel have concluded that there is at least a basis for suggesting that the directors of the company did not know the true position so far as the company's financial condition was concerned, so that the obligation to disclose referred to in (Cth) Insurance Contracts Act 1984, s 21, was not triggered. At first sight, it seems to me a surprising proposition that the directors of a company collectively could succeed in a contention that they did not know the company's true financial position, and it is difficult to see how a company's true financial position is not something within the knowledge of the corporate mind of the company.

1. So far as the second question is concerned, counsel concluded that there is a very real question to be investigated as to whether Liberty's letter of 9 May 2006, confirming the existence of the policy and requesting payment of the premium, constitutes an election to affirm the policy. The conduct in question is unequivocal enough. The real issue is whether the insurer had knowledge of the relevant facts as to the company's insolvency at the time of the application for insurance, and as to the inaccuracy of the financial statements that it had been provided. While the very fact that the company was in administration might well have caused questions to be asked, the evidence before me does not go very far in this respect. The letter requesting cancellation of the policy was addressed, it would seem, to insurance brokers, requesting refund of the premium, and the letter of 9 May does not establish on its face that Liberty was aware that the company was in administration. It seems to me that, on the evidence as it stands, it may be difficult to make out a case of waiver, but it is conceivable that further evidence will emerge casting light on the state of knowledge of the insurers. Ultimately, counsel concluded that a definitive view on this could not be offered without careful examination of Liberty's state of knowledge in May 2006, but that the question was a live one that justified prosecution of the separate questions in order to ascertain the position.

1. The third question, which relates to estoppel, can be in no stronger position, and is probably in a weaker position, than that of waiver. In particular, it is not apparent what detrimental reliance can be asserted by the company.

1. It is far from clear that prosecution of the separate questions will result in an improvement in the company's position. Though, if successful, it may do so, it seems to me by about 2.4 cents in the dollar so far as dividend payable to creditors is concerned (assuming that Millennium is wholly successful). On the other hand, if unsuccessful, it would have an adverse impact on dividend, by in the order of half to one cent in the dollar, by reason of the adverse cost consequences. It will, however, facilitate the more expeditious resolution of issues in the Millennium proceeding, without which the winding up cannot be completed, and it will clarify the standing of the parties in respect of the professional indemnity insurance policy, and thus, at least to some extent, the viability and potential compromise of the Millennium proceedings.

1. As counsel has expressed the opinion that a clear view on the first two questions, at least, cannot be formed without further examination of the evidence, it seems to me that at this stage the liquidators would be justified in prosecuting the separate questions, but that the merits of their case in respect of the separate questions ought to be kept under review, since the emergence of further evidence might show that the prosecution of those questions is no longer justified.

1. It seems to me, therefore, that it would be wrong to give advice that effectively was a carte blanche approval of prosecution of the separate questions to finality. In my judgment, the liquidators would be justified in prosecuting the separate questions, at least up to the point of the completion of disclosure, the exchange of evidence, the completion of interlocutory processes and the preparation of the matter for hearing, but that justification to proceed to the hearing itself should be reviewed at that stage, once a view can be formed as to what the evidence may establish on the hearing.

Orders

1. I make the following orders:

(1)   Upon the undertaking of Brendan Wyhoon to pay the appropriate filing fees, grant leave to Sule Arnautovic and Roderick Mackay Sutherland to file in court an originating process in the form initialled by me, dated this day and placed with the papers.

(2)   Direct that the originating process be returnable instanter.

(3)   Order, pursuant to (Cth) Corporations Act 2001, s 511, that the plaintiffs are justified in prosecuting the determination of separate questions ordered by Hammerschlag J on 9 August 2012 in proceedings No. 2012/16708 up to and including the completion of disclosure, the exchange of evidence and preparation for hearing.

(4)   Order that the costs of the application be paid out of assets of Australian Coal and Technology Pty Limited (in Liq) on an indemnity basis.

(5) Grant liberty to apply for further directions under s 511.

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Decision last updated: 17 July 2014