J N Taylor Holdings Limited (in Liquidation) and J N Taylor Finance Pty Ltd (in Liquidation) v Alan Bond; Peter Alexander Mitchell and Antony Gordon Oates (No. 11) No. SCGRG2704 of 1990 Judgment No. 3692 Number of..

[1992] SASC 3692

COURT IN THE SUPREME COURT OF SOUTH AUSTRALIA DEBELLE J

CWDS
Practice and procedure - parties - Application to join insurer of a defendant as defendant - Insurer denied liability to insured - Application refused - Supreme Court Rules 27.05.

HRNG ADELAIDE, 16 September, 28 October 1992 #DATE 5:11:1992
Counsel for plaintiffs:            Mr T Gray QC with
   Mr M Blue
Solicitors for plaintiffs:         Fisher Jeffries
Counsel for defendant Bond:        Mr P V Slattery
Solicitors for defendant :         Baker O'Loughlin
Counsel for defendant Mitchell:    Mr D P Rydon
Solicitors for defendant :         Finlaysons
Counsel for defendant Oates:     Mr Corkery
Solicitors for defendant :         Piper Alderman
Counsel for respondent AHA :     Mr D Bleby QC with
   Mr Connell
Solicitors for respondent :        Thomson Simmons and Co
Counsel for intervener ASC :     Mr O'Halloran
Solicitors for intervener :        Australian Government
   Solicitor

ORDER
Application refused.

JUDGE1 DEBELLE J In this action, the plaintiff companies, which are in liquidation, sue three of their former directors seeking inter alia damages for alleged breaches by the directors of their common law, fiduciary and statutory duties as directors. The plaintiffs now apply to join American Home Assurance Company ("AHA") as an additional defendant. The application is grounded on the following facts. 2. On 20 July 1988, AHA issued what is called a "Directors and Officers Liability Policy" insuring the directors of Dallhold Investments Pty Ltd ("Dallhold") and of all of Dallhold's subsidiary companies. J N Taylor Holdings Limited was not then a subsidiary of Dallhold. It became a subsidiary in August 1988. On 19 December 1988, AHA agreed to extend the policy to provide an indemnity to each of the defendant directors in this action and to a Mr Peter Beckwith in their capacity as directors of the plaintiff J N Taylor Holdings Limited and its subsidiaries. By the policy AHA indemnified the directors or officers of those companies against loss arising from any claims made against them jointly or severally during the period of insurance by reason of any wrongful act (as defined in the policy) committed by them in their capacity as directors or officers of the relevant company. The insurer's total liability under the policy is limited to $25 million in any one period of insurance. In early 1990 an option to extend the policy for a period of 12 months was exercised thus extending the period of insurance for a further period of 12 months from 1 January 1990. The period of insurance, therefore, ran from July 1988 to 1 January 1991. 3. This action commenced on 15 July 1990 within the period of insurance. The original plaintiffs were a group of preferential shareholders of J N Taylor Holdings Limited. Orders winding up J N Taylor Holdings Limited and J N Taylor Finance Pty Ltd were made on 26 March 1991 and 15 February 1991 respectively. On 2 May 1991 an order was made substituting J N Taylor Holdings Limited (in liq) and J N Taylor Finance Pty Ltd (in liq) as plaintiffs in place of the original plaintiffs. 4. On 14 April 1992 an order was made in the Federal Court of Australia declaring the defendant Bond bankrupt and appointing Mr Robert Ramsay trustee of his bankrupt estate. Section 117 of the Bankruptcy Act, 1966 (Cth) provides:-
     "(1) Where -
     (a) a bankrupt is or was insured under a contract of insurance
    against liabilities to third parties; and
     (b) a liability against which he is or was so insured has been
    incurred (whether before or after he became a bankrupt), the
    right of the bankrupt to indemnity under the policy vests in the
    trustee and any amount received by the trustee from the insurer
    under the policy in respect of the liability shall, if the
    liability has not already been satisfied, be paid in full
    forthwith to the third party to whom it has been incurred.
     (2) Sub-section (1) does not limit the rights of the third
    party in respect of any balance due to him after the payment
    referred to in that sub-section has been made.
     (3) This section applies notwithstanding any agreement to the
    contrary, whether entered into before or after the commencement
    of this Act." 5. The effect of s.117 is that the proceeds of a policy of insurance are not divisible among all creditors but are paid to the trustee for distribution by him to the party to whom the bankrupt is liable. 6. It appears that, until 7 May 1992, Mr Bond or the other two defendants in this action had not given notice to AHA of the claims against them. On 7 May 1992 Mr Ramsay wrote to AHA giving notice of his appointment. He also gave notice of these proceedings on behalf of Mr Bond and by virtue of s.117 claimed an indemnity under the policy. On 12 June 1992, AHA replied denying liability under the policy. There is no evidence to show that the defendants Mitchell and Oates have yet given notice. 7. AHA denies liability to indemnify Mr Bond on the grounds:-
     1. That the conduct complained of in the action is not
    covered by the policy in that it does not amount to a wrongful
    act within the meaning of the policy.
     2. In the alternative, if the conduct complained of does
    constitute a wrongful act within the meaning of the policy, the
    claim arises out of matters which are excepted from the policy.
     3. In addition to these grounds, AHA relies on other defences
    arising out of the policy, namely, the failure of the defendant
    Bond to notify it of the claim until 7 May 1992 and the failure
    of the defendants Mitchell and Oates to notify it all; that the
    defendants have not acted diligently to provide prompt
    information and assistance to AHA in connection with the claim;
    and that there has been a failure by Bond to make full
    disclosure of matters relevant to the decision of AHA to extend
    the policy to include J N Taylor Holdings Limited and its
    subsidiaries. In the meantime, on 16 April 1992, the liquidator of the plaintiff companies had sent a letter to Mr Ramsay asking, inter alia, whether Mr Ramsay intended to join AHA as a party in this action. On 23 April 1992 the solicitors for the plaintiffs wrote to AHA giving notice of these proceedings and enclosing a copy of the statement of claim. The plaintiff's solicitors asked that the letter be accepted by AHA as formal notice by the plaintiff companies of a claim on behalf of their former directors under the policy of insurance. On 3 June 1992 the solicitors for the plaintiff companies wrote again to AHA asking if it would indemnify the defendant directors pursuant to the policy. The letter also referred to s.117 of the Bankruptcy Act and asked if AHA would consent to an assignment to the plaintiff companies of the rights of Mr Bond under the policy. By a letter dated 12 June AHA advised the plaintiffs' solicitors that AHA denied liability under the policy to Mr Bond and the other directors. On 31 July 1992 the solicitors for AHA advised that AHA would not consent to an assignment to the plaintiffs of the rights of Mr Bond under the policy. Clause 12 of the conditions of the policy provides that the policy and any rights thereunder may not be assigned without the prior consent of AHA. The solicitors for the plaintiffs assert that Mr Ramsay agreed in June 1992 to an assignment of the rights of Bond under the policy to the plaintiff. This is denied by Mr Ramsay who says that he agreed to the assignment only if AHA consented. As AHA has refused its consent, there is at present no assignment. 8. The plaintiffs' solicitors have prepared a draft statement of claim containing the amendments they would seek to make if the application to add AHA as a defendant is granted. The draft statement of claim pleads the refusal of AHA to indemnify the defendant Bond and its failure to consent to the assignment of the policy. It pleads also the failure of AHA to respond to the plaintiffs' claim for an indemnity for the defendants Mitchell and Oates. The plaintiffs' claim the following relief as against AHA which is set out in grounds 12 to 18 of the proposed amended statement of claim.
    "12. A declaration that AHA is obliged to indemnify the
    second and third defendants and Ramsay for any loss within the
    meaning of definition clause 5 of the Policy sustained by the
    Directors in consequence of judgment being entered against the
    Directors in these proceedings.
     13. A declaration that AHA is obliged to pay the amount up to
    USD$25 million of any sums or damages awarded in favour of the
    plaintiffs against the Directors in these proceedings.
     14. A declaration that the assignment by Ramsay to the
    plaintiffs of the Policy and the rights under it is valid.
     15. In the alternative, an order that AHA consent to the
    assignment by Ramsay to the plaintiffs on the Policy and the
    rights under it.
     16. An order for the payment by AHA of the amount up to
    USD$25 million of any sums or damages awarded in favour of the
    plaintiffs against the Directors in these proceedings.
     17. Costs.
     18. Such further or other orders as this Honourable Court
    deems fit." 9. The plaintiffs' application to join AHA as a defendant is made under paragraphs (e) and (f) of Rule 27.05. Although Rule 27 confers on the Court a broader discretion than hitherto existed as to joinder of parties, there must nevertheless be an issue for determination by the Court between the party joined and another party in the action. As will be seen, there is at present no issue as between AHA and any other party to this action which is capable of being determined by the Court. 10. Mr Gray QC, who appeared for the plaintiffs, submitted that the plaintiff J N Taylor Holdings Limited (in liq) was a party to the contract of insurance and therefore had standing to sue on the policy. I am not satisfied on the balance of probabilities that J N Taylor Holdings Limited (in liq) is a party to the contract of insurance. There is no direct evidence proving who are the parties to the contract or who has paid the premium. The proposal form was completed on 31 May 1988 by an officer of Dallhold on behalf of Dallhold and sought cover for named directors and other officers of a number of named companies. When in December 1988 AHA extended the cover to include J N Taylor Holdings Limited and its subsidiaries, it did so by including J N Taylor Holdings Limited as one of the companies specified in the Schedule to the policy. But the inclusion of J N Taylor Holdings Limited in the Schedule did not result in the company becoming a party to the contract. The company was included in the Schedule for the purpose only of identifying the companies whose directors would be covered by the policy. 11. It appears that the premium was paid by either Bond Corporation Holdings Limited or Bond Corporation Pty Ltd. The evidence currently available does not show whether the individual directors reimbursed those companies for the premium. Memoranda dated 28 June 1988, 6 July 1988 and 13 July 1988 referring to provisions of s.237 of the Companies Code were prepared by Mr Alan Coney, who was Group Manager Insurance employed by Bond Corporation Holdings Limited. In those memoranda, Mr Coney requested that the directors pay a portion of the premium but it is not clear whether the amount payable by each director or other officer was to be the whole or part of the proper share of the premium payable by each individual director of officer. A memorandum prepared by Mr Coney on 2 January 1990 suggests that Bond Corporation Pty Ltd paid 90 per cent of the premium and that the remaining 10 per cent was divided between the directors and officers who were covered by the policy. According to Mr Coney, his recollection is that premiums were paid by Bond Corporation Pty Ltd which in turn was reimbursed by other companies in the Bond Corporation Holdings Limited group of companies. The evidence, therefore, suggests that the greater part, if not the whole, of the premium was paid by Bond Corporation Pty Ltd and perhaps some directors. There is no evidence which proves J N Taylor Holdings Limited paid any part of the premium. Even if it did, that fact would not necessarily make it party to the contract and give it standing to sue. Although J N Taylor Holdings Limited is mentioned in correspondence between AHA and the insurance brokers who negotiated the contract of insurance, that is for the purpose only of the extension of the policy to include its directors and there is nothing in the correspondence which suggests that J N Taylor Holdings Limited was a party to the contract. On the evidence before me, J N Taylor Holdings Limited is not a party to the contract of insurance. AHA has refused its consent to an assignment of the policy. The plaintiffs are therefore unable to sue on the contract. 12. Mr Gray then submitted that by virtue of s.117 of the Bankruptcy Act the plaintiffs had an interest sufficient to maintain an action for a declaration against AHA and that it was therefore proper that AHA be joined as a party. Mr Gray's submission overlooks a number of important issues. First, the plaintiffs have no standing to sue on the contract of insurance as they are not a party to the contract nor is there any assignment to them of the interest of Mr Bond in the indemnity under the policy. Next, although by virtue of s.117, the policy vests in the trustee in bankruptcy and any amount received by the trustee under the policy is payable to the plaintiffs, s.117 does not create a right in the plaintiffs to sue under the policy. The question whether Mr Bond is entitled to recover under the policy is an issue between Mr Bond and AHA and, since the bankruptcy, between the trustee in bankruptcy and AHA. The right to sue on the policy is now vested in trustee in bankruptcy. AHA has denied liability under the policy and the trustee has elected not to sue or otherwise press the claim for indemnity. Mr Gray sought to overcome this difficulty by contending that, if the plaintiffs succeed in this action, they could compel the trustee to institute proceedings against AHA seeking the indemnity under the policy. He called in aid the principle that beneficiaries may institute proceedings to compel a trustee to perform his duty or to protect their beneficial interest in trust property even though that interest might be contingent and he relied on the discussion in paragraph 2303 of Jacobs, Law of Trusts in Australia, (5th edition) at 640. I do not think that the plaintiffs have at this stage any power to compel the trustee to commence legal proceedings to recover the indemnity. 13. The trustee in bankruptcy is not subject to the same duties and liabilities as an ordinary trustee. To begin, he has duties imposed on him by the Bankruptcy Act. He is also required to have regard to the lawful directions of the creditors: see s.171 of the Bankruptcy Act. The plaintiffs are not creditors of Mr Bond's estate and, therefore, have no power to give any directions to the trustee. Should the plaintiffs succeed in this action, they will then be judgment creditors and then, but only then and to the extent that the damages are damages for breach of contract or breach of trust, might be in a position to apply to the trustee for leave to use his name and, upon giving the trustee a proper indemnity as to costs, to institute proceedings themselves against AHA to recover what is due under the policy to Mr Bond. If the trustee in bankruptcy refuses consent to use his name, the plaintiffs are entitled to apply to the Court for leave to use the name of the trustee on giving an indemnity against costs: ex parte Kearsley; re Genese (1886) 17 QBD
1. However, for the time being, the plaintiffs are bound by the decision of the trustee not to pursue any rights Mr Bond might have under the policy of insurance. 14. To summarise, there is no issue at present capable of determination between AHA and any other parties to this action. The plaintiffs have no standing to sue on the contract of insurance. There is no issue between Mr Bond and AHA as the trustee in bankruptcy chooses not to press any claim for indemnity on behalf of Mr Bond. Neither Mr Mitchell or Mr Oates have made any claim under the contract of insurance. At this stage the plaintiffs are bound by the actions of the trustee in bankruptcy and of Messrs Mitchell and Oates. 15. It is true, as Mr Gray submitted, that the Court's jurisdiction to make a declaration is very wide and the plaintiff may seek a declaration notwithstanding that he may have no cause of action: Ibeneweka v Egbuna (1964) 1 WLR 219; Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421. But there must be a real and not a theoretical question for determination, the person raising the question must have a real interest to raise it, and there must be a person who has a true interest to oppose the declaration sought: Russian Commercial and Industrial Bank v British Bank for Foreign Trade Limited (1921) 2 AC 438, 448, Forster v Jododex Australia Pty Ltd (supra) at 437-438; Johnco Pty Ltd v Albury-Wodonga (NSW) Corporation (1977) 1 NSWLR 43, 51-52. The plaintiffs do not have an interest sufficient to maintain an action unless and until they succeed in this action and are able to obtain the consent of the trustee in bankruptcy to prosecute an action in his name to enforce the right of indemnity provided by the policy or, failing that consent, have the leave of the Court to prosecute such an action in the name of the trustee in bankruptcy. It might also be said that the issues which the plaintiffs seek to have determined by the application for a declaration in this action are hypothetical until they succeed in an action against the defendants. 16. There is a further reason why, in the exercise of my discretion, I would refuse leave to add AHA as a defendant. In support of their application to join AHA, the plaintiffs contended that it was desirable to bind AHA to any judgment of this Court holding the defendants liable to pay damages to the plaintiffs. The plaintiffs very properly sought to avoid the time and expense involved in re-litigating that issue. But I do not think that the terms of the policy would enable AHA to re-litigate the question of the liability of the defendants to the plaintiff. By the policy, AHA has agreed to:- "indemnify the Directors or Officers of the Company specified in the Schedule against Loss arising from any Claim(s) made against them jointly or severally during the Period of Insurance as specified in the Schedule, and immediately notified to the insurer in writing during that Period of insurance, by reason only of any Wrongful Act as defined whenever or wherever the same was or may have been committed or alleged to have been committed by them in their capacity as Directors or Officers of the Company, subject always to the Definitions, Extensions, Exceptions and Conditions of this Policy." "Loss" is defined in the policy as follows:-
    "(a) Damages or judgements but excluding any fines,
    penalties or punitive, aggravated or exemplary damages
     (b) Legal costs and expenses awarded against a Director or
    Officer to any claimant or claimants
     (c) Settlements negotiated with the prior written consent of
    the insurer
     (d) Costs and expenses incurred by or on behalf of the insurer
    or by or on behalf of a Director or Officer with the Insurer's
    prior written consent in the investigation, defence or
    settlement of any such claim or claims or of any threat or
    intimation of a claim or circumstance which may give rise to a
    claim, in respect of which a Director or Officer is, at the time
    when the costs and expenses are incurred entitled to indemnify
    under this Policy, up to an amount equal to but not exceeding in
    the aggregate the Limit of Indemnity specified in the Schedule." 17. Thus, if the defendants are adjudged to be liable in damages to the plaintiffs, AHA is by the terms of the policy required to indemnify unless it can establish that the loss is not a wrongful act within the meaning of the policy or that there is some other defence available under the policy. "Wrongful act" is defined in the policy to mean:- "`Wrongful Act' shall mean any actual or alleged breach of duty breach of trust neglect error misstatement misleading statement omission breach of warranty of authority or other act done or wrongfully attempted by any Director or Officer, but shall not include any acts or omissions done or alleged to have been done in conflict or in preferment of the interests of the Company over those of a Subsidiary Company or vice versa.". 18. The question what is a wrongful act involves different issues from those which are involved in a determination whether the defendants are liable to the plaintiffs. That is made especially clear by the words which have been emphasised in the definition. It would I think be undesirable to seek to deal with both issues in the one action. If AHA were joined as a defendant, it would be necessary, in order to avoid complicating what is already an action with complex issues of fact, to separate a number of issues for hearing and determination after the question of the liability of the defendants to the plaintiffs has been heard and determined. Issues for later determination would include defences arising under the policy and would include also the question whether the loss, the subject of the judgment, constituted a wrongful act as defined in the policy. As I see the position, there is no issue involving AHA which could properly be dealt with in the course of the hearing concerning the liability of the defendants to the plaintiffs. Nothing is therefore to be gained by joining AHA as a defendant. 19. For all of these reasons, the plaintiff's application to join AHA as a defendant is dismissed.