FEDERAL COURT OF AUSTRALIA
Kaboko Mining Limited v Van Heerden (No 3) [2018] FCA 2055
File number: WAD 403 of 2016 Judge: MCKERRACHER J Date of judgment: 19 December 2018 Catchwords: INSURANCE – professional indemnity insurance – directors’ and officers’ liability policy – whether an Insolvency Exclusion provision precludes indemnification by the insurer – principles applicable to the construction of exclusion clauses
PRACTICE AND PROCEDURE – interlocutory application – whether the insurer is liable to indemnify certain defendants
Legislation: Corporations Act 2001 (Cth) ss 180, 181, 182, 183, 601ED Cases cited: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99
Australian Casualty Co Ltd v Federico (1986) 160 CLR 513
Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500
Impact Funding Solutions Ltd v Barrington Support Services Ltd [2017] AC 73
Kaboko Mining Limited v Noble Resources International Pte Ltd [2015] WASC 67
Kyriackou v ACE Insurance Ltd [2013] VSCA 150
Major Engineering Pty Ltd v CGU Insurance Ltd (2011) 35 VR 458
McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579
McConnell Dowell Middle East LLC v Royal and Sun Alliance Insurance PLC [2008] VSC 501
Oz Minerals Holdings Pty Ltd v AIG Australia Ltd [2015] VSCA 346
Quintano v BW Rose Pty Ltd [2008] NSWSC 793
Timothy Crowden v QBE Insurance (Europe) Ltd [2017] EWHC 2597 (Comm)
Todd v Alterra at Lloyds Ltd (2016) 239 FCR 12
Date of hearing: 4 September 2018 Registry: Western Australia Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 75 Counsel for the Plaintiff: Mr N Kirby Solicitor for the Plaintiff: Clayton Utz Lawyers Counsel for the First and Second Defendants: The First and Second Defendants did not appear Counsel for the Third Defendant: Mr JE Scovell Solicitor for the Third Defendant: Edwards Mac Scovell Counsel for the Fourth Defendant: Mr G O’Shannessy Solicitor for the Fourth Defendant: Murcia Pestell Hillard Lawyers Counsel for the Fifth Defendant: Mr CJ Delany QC with Ms JA Thornton Solicitor for the Fifth Defendant: Clyde & Co ORDERS
WAD 403 of 2016 BETWEEN: KABOKO MINING LIMITED ACN 107 316 683 (SUBJECT TO A DEED OF COMPANY ARRANGEMENT)
Plaintiff
AND: ANDRIES TOBIAS VAN HEERDEN
First Defendant
JANE ROSEMARY FLEGG
Second Defendant
SHANNON JAYNE ROBINSON (and others named in the Schedule)
Third Defendant
JUDGE:
MCKERRACHER J
DATE OF ORDER:
19 DECEMBER 2018
THE COURT ORDERS THAT:
1.The answer to the preliminary question is ‘No’.
2.The fifth defendant pay the plaintiff’s costs of this application, to be assessed if not agreed.
3.Any party seeking an order different from the previous order file a minute, submissions (not exceeding 5 pages) and any affidavit(s) within 21 days, with any responding materials (not exceeding 5 pages) to be filed within 14 days.
4.Costs be determined on the papers unless the Court otherwise orders.
5.A consent minute as to directions be filed within 21 days, failing…
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- Case
- [2018] FCA 2055
- Decision Date
CaseChat Overview and Summary
The court found that the Insolvency Exclusion did not apply to deprive the defendants of indemnification for the losses claimed by the plaintiff, except for the costs and disbursements of the external controllers, which were attributable to the plaintiff's insolvency. The court held that the relevant loss was not the loss of the plaintiff's opportunity to exploit a valuable commercial opportunity, but rather the loss suffered by the plaintiff as a result of the defendants' breaches of duty. The court noted that the directors' and officers' insurance policy was designed to protect directors and officers from liability for breaches of duty, and that the exclusion should not be interpreted to defeat the commercial purpose of the policy. The court also rejected the defendants' argument that the Statutory Demand and the failure to meet that demand established the actual insolvency of the plaintiff, and that such insolvency led directly to the claimed costs of receivership and administration in insolvency.
The court ordered that the answer to the preliminary question was "No", that the defendants pay the plaintiff's costs of the application, and that a consent minute as to directions be filed within 21 days, failing which a case management hearing be fixed for 10.00 am on 7 February 2019.
Orders
Orders of the court
1. The answer to the preliminary question is ‘No’.
2. The fifth defendant pay the plaintiff’s costs of this application, to be assessed if not agreed.
3. Any party seeking an order different from the previous order file a minute, submissions (not exceeding 5 pages) and any affidavit(s) within 21 days, with any responding materials (not exceeding 5 pages) to be filed within 14 days.
4. Costs be determined on the papers unless the Court otherwise orders.
5. A consent minute as to directions be filed within 21 days, failing which a case management hearing be fixed for 10.00 am on 7 February 2019.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
Background
Background to the litigation
Evidence
Evidence Before The Court
Full text does not contain this section.
Decision
Reasons for decision
Ratio Decidendi
Legal Principle Established
AIG also argues that the Statutory Demand, and the failure to meet that demand, established the actual insolvency of Kaboko. Such insolvency led directly to the claimed costs of receivership and administration in insolvency, part of the damages claimed. AIG says that, by definition, no such costs would have been incurred but for the insolvency of Kaboko.CONSIDERATION 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. 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. 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). 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. 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. 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):8D & 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. 9Due 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.