Kyriackou v Ace Insurance Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2012 0105

MICHAEL KYRIACKOU
	Appellant
v
ACE INSURANCE LTD (ACN 001 642 020)	Respondent

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JUDGES:	HARPER and TATE JJA and KYROU AJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	12 March 2013
DATE OF JUDGMENT:	20 June 2013
MEDIUM NEUTRAL CITATION:	[2013] VSCA 150
JUDGMENT APPEALED FROM:	Kyriackou v ACE Insurance [2012] VSC 214 (Vickery J)

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INSURANCE – Professional indemnity insurance policy – Proceedings brought by ASIC in respect of an alleged unregistered managed investment scheme – Proceedings discontinued by agreement without determination on its merits – Claim by insured for costs of defending the proceedings – Whether claim covered by insuring clause – Civil compensation or damages not sought by ASIC – Whether such a claim implicit in relief sought under s 1324 of the Corporations Act 2001 (Cth) – Whether claim arose out of a breach of duty in a professional capacity – Whether any exclusion clauses applied – Kantfield Pty Ltd v Lockwood [2003] VSC 420, Toomey v Scolaro’s Concrete Constructions & Ors (2002) 12 ANZ Insurance Cases 61-519, Suncorp Metway Insurance Pty Ltd v Landridge Pty Ltd (t/as L J Hooker Hampton Park) (2005) 12 VR 290 and Solicitors’ Liability Fund v Gray & Anor (1997) 147 ALR 154 discussed – Appeal dismissed.

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APPEARANCES:	Counsel	Solicitors
For the Appellant	Dr J D Wilson SC with Mr T J Scotter	Pinto Law
For the Respondent	Mr M W Thompson SC with Ms C M Harris	Moray & Agnew

HARPER JA:

Introduction

As of May 2007, the appellant, Michael Kyriackou, was or had been the director of five of the six corporations in what may be called the Australvic Group. For insurance purposes, the business of the Group (or, more strictly, of the appellant and his co-insured Brian Fisher and Australvic Home Loans Pty Ltd) (‘AVHL’) is described in the schedule to a policy of professional indemnity insurance made in or about August 2006 as:

Finance Originators, Finance Intermediaries, Finance Brokers, Finance Consultants, Mortgage Aggregators.

The insurer under the policy is the respondent, ACE Insurance Ltd (‘ACE’). By clause 1.1 of the policy (‘the insuring clause’), ACE agreed to indemnify the appellant against:

Loss arising from any Claim in respect of civil liability for breach of a duty owed in a professional capacity first made against an Insured during the Period of Insurance.

The policy itself defined a number of expressions used in the insuring clause and elsewhere. Those which were reproduced in the governing text of the policy document were identifiable by the use of capitals in their first letter. For present purposes, three definitions are of particular importance. These are the definitions of ‘Loss’, of ‘Claim’, and of ‘Defence Costs’.

The first of these was ‘Loss’. It was defined in clause 5.13 of the policy as:

… the aggregate of all amounts payable by the Insured or ACE as civil compensation or civil damages in respect of a Claim, including judgments, settlements, legal costs and expenses awarded against an Insured and payments for Defence Costs.

‘Defence Costs’ were defined by clause 5.5 as:

… legal costs and disbursements and related expenses reasonably incurred in –
(a)     defending any proceedings;
(b)     conducting any proceedings for contribution or recovery; or
(c)     investigating, avoiding, reducing or settling any Claim:
incurred by –
(i)the Insured with the written consent of ACE after reporting the Claim to ACE; or
(ii)ACE after it has assumed conduct of any such proceedings.

Defence Costs do not include any internal or overhead expenses of the Firm or the cost of any Insured’s time.

‘Claim’ was defined by clause 5.4 as:

… a written demand for, or an assertion of a right to, civil compensation or civil damages arising out of the Firm’s Business or a written intimation of an intention to seek such compensation or damages.

The appellant contends that he was the subject of a claim, that the claim was covered by the policy, and that the respondent has unjustifiably refused to indemnify him. He issued a proceeding in the Supreme Court seeking a declaration to that effect. The action was, however, dismissed. This is the appeal from that dismissal.

The claim which, according to the appellant, was covered by his policy with ACE was brought in the Federal Court by the Australian Securities and Investments Commission (‘ASIC’) against the appellant and the six companies in the Australvic Group. As listed in the schedule of parties attached to the Originating Process by which the ASIC proceeding was commenced, the appellant is the first defendant, and the remaining defendants (in the order shown in the schedule) are the members of the Group, which are: Australvic Property Management Pty Ltd (‘APM’), MK River Pty Ltd, AVHL, Australvic Construction Services Pty Ltd, Australvic Finance Pty Ltd and Australvic Property Management No 2 Pty Ltd.

By its Originating Process, which is dated 28 May 2007, ASIC sought (among numerous claims for final and interlocutory relief) a declaration by way of final relief ‘that the defendants by engaging in the conduct referred to in the accompanying affidavits have contravened s 601ED of the Corporations Act2001 (Cth) (‘the Act’) by operating a managed investment scheme which required registration but was not so registered’. Consequential final relief, including both an order pursuant to s 1324(1) of the Act that the appellant be permanently restrained from further operating or promoting the scheme, and an order pursuant to s 601EE that the scheme be wound up, was also sought.

By way of what the Originating Process described as interlocutory relief, ASIC sought (again, among other things) orders that Mr Andrew McLennan be appointed as liquidator of the second defendant, APM, and provisionally appointed as liquidator of the other five incorporated defendants.

Managed investment schemes

The expression ‘managed investment scheme’ is (relevantly for present purposes) defined in s 9 of the Act to mean a scheme that has the following features: (i) investors contribute money to acquire rights to benefits produced by the scheme; (ii) the contributions or some of them are pooled to produce financial benefits or rights in property for those who hold interests in the scheme (that is, its members); and (iii) the members do not have day to day control over the operation of the scheme.

The managed investment industry is regulated primarily by Chapter 5C of the Act, which was introduced into the law by the Managed Investments Act 1998 (Cth). That Act commenced on 1 July 1998. It installed a regulatory regime by which (with some exceptions) all schemes which offer interests in themselves to their members must: (i) be registered with ASIC; (ii) be operated by a licensed public company which is subject to statutory duties of care and diligence and is required to act in the best interests of its members; and (iii) have a constitution, an audited compliance plan and a prescribed means of external monitoring.

There is no direct evidence before this Court about the managed investment scheme in which, according to ASIC, the appellant and his companies were involved. An affidavit in support of the ASIC proceeding was sworn by Glen Cook, an ASIC investigator, on 28 May 2007. It was, in effect, the basis for what in ordinary civil proceedings would have been ASIC’s statement of claim. According to Mr Cook, ASIC suspected not only that the appellant had been operating an unregistered managed investment scheme, but also that the defendant companies had been trading while insolvent and that the appellant had diverted scheme funds to his own purpose.[1] In addition, he deposed to his belief that the primary business of the Australvic Group was to procure development finance for residential construction projects from investors;[2] and in excess of $6 million had been procured from at least 29 such persons. The limited financial information to hand, which had been analysed by an ASIC investigating accountant, Sonia Kohary, suggested that the $6m in funds had been credited to the bank accounts of various members of the Group, as well as to the solicitor’s trust account of W P Edward & Co and to the account of the appellant. The funds were then transferred within the Group, but the available records were inadequate to enable those transactions to be reconciled. There was very little cash remaining in the Group’s bank accounts.
[1]Affidavit of Glen Joshia Cook sworn 28 May 2007, [7].
[2]Ibid [8].

In his affidavit, Mr Cook expressed ASIC’s concern that, if allowed to continue operating, the Group would solicit further funds, and that the remaining assets of the Group would be dissipated – possibly to officers of the incorporated defendants – in ways which would make their location difficult.

It was a feature of Mr Cook’s affidavit that he spoke of ASIC’s suspicion and belief about, rather than its knowledge of, relevant facts. He made no claim that ASIC – or, more relevantly for present purposes, any investor in the unregistered managed investment scheme which ASIC suspected the Australvic Group had been operating – had suffered any civil damages. Without damage, there can be no question of compensation (save for such nominal damages as may be awarded for a breach of contract not causing loss). It is in these circumstances not surprising that the Originating Process by which the ASIC proceeding was commenced made no reference to ‘any claim in respect of civil liability’ (to adopt the words of the insuring clause in the ACE professional indemnity policy). Still less did the Originating Process make any reference (again, to adopt the words in the insuring clause) to ‘any claim in respect of civil liability for breach of a duty owed in a professional capacity made against [the appellant] during the period of insurance’.

The Federal Court did have before it at least some evidence about the part played by the second defendant, APM, in the activities which, as ASIC alleged, amounted to a managed investment scheme. Using the example of the dealings between the Australvic Group and a man named Rocco Calderone, one of the developers assisted by the provision of funds which the Group had obtained from its pool of investors, Goldberg J summarised that evidence as follows:

19.… APM was a vehicle intended effectively to ‘bail-out’ land owners and builders under financial pressure pursuant to a two‑stage process. The first stage was achieved by the existing owners transferring property to APM which then undertook to act as trustee of the property and to develop the property with the aim of increasing its value. Upon final development, APM undertook to dispose of the trust property and to distribute the proceeds as payment to the beneficiaries after accounting for APM’s own costs and remuneration.
20.The arrangements existing between APM and the properties owned by Mr Calderone (‘the Calderone Properties’) were alleged by ASIC to evidence the operation of the scheme by the Australvic Group. First mortgagees were in the process of entering into possession of certain of the Calderone Properties and one of the Calderone associated companies was in the process of being wound up.
21.At a meeting on 3 August 2005, a formal agreement was reached (the ‘Calderone Trust Agreement’) which relevantly provided that:
(a)APM would sign declarations of trust acknowledging that APM held the Calderone Properties on trust;
(b)the Developer authorised APM to have full control and management of the properties subject to consultation and input from the Developer with respect to the individual properties;
(c)the Calderone Properties were to be transferred to APM to be held on trust while construction, management and development of the properties was to be undertaken in accordance with the terms of the Calderone Trust Agreement;

(d) APM would obtain funding for the Calderone Properties;
(e)upon final completion of the development of the properties, the property would be sold and the Developer and APM would be joint venture partners as to 50% each of the net profit derived from the sale; and
(f)the Developer would be responsible for all initial costs and overheads arising from the refinancing of the properties including all valuation fees and due diligence costs and certain legal costs.

22.Mr Kyriackou said that the Calderone Trust Agreement contained implied terms to the effect that none of the parties would use their rights to:
(a)prevent, impede or frustrate the development of the properties or subsequent sale;
(b)impede the sale of the Calderone Properties when and if it became expedient or necessary to sell the properties; and
(c)do otherwise than promote the joint development and sale of the Calderone Properties.

23.APM and the financiers of the Calderone Properties (comprising four syndicates) entered into a deed dated 14 September 2005 and a further deed dated 16 September 2005 (‘the Calderone Financiers Agreements’). Pursuant to these deeds, the financiers agreed to become creditors of APM in accordance with an attached pay‑out schedule, on the proviso that the financiers did not lodge, or cause to be lodged, any caveat or registered mortgage that could act to prevent APM from raising development or construction funds on the security of the Calderone Properties.
24.The financiers had already lent the Developer money, the repayment of which had been secured by original securities. The Developer was in default and the financiers’ securities were enforceable. APM agreed with the Developer to acquire the original securities and manage the default with the financiers in the terms of the pay-out schedule attached to the new deeds in which the financiers became APM’s creditors.
25.Mr Kyriackou and APM intended that the financiers would provide additional funding from time to time in order to progress the Calderone Properties into construction. This was asserted by ASIC to amount to the ‘second stage’ of the implementation of the scheme. Further money was required and the financiers’ funds were contributed through APM. It also appeared that outside lenders were also requested to provide funds to APM in order to develop the Calderone Properties and that when funds were received, the outside investors were issued with promissory notes in their favour.
26.ASIC contended that the scheme in operation, known as the ‘Australvic Property Syndicate’ was a scheme by which:
(a)Investors gave money or money’s worth to the defendants to acquire rights to benefits produced by the scheme;
(b)The defendants intended that the contributions would be used to generate a financial return or other benefit for the investor;
(c)The investors had no day-to-day control over the use of the contributions to generate the return or benefit from the scheme;
(d)to the extent that the arrangements comprised a managed investment scheme as defined by s 9 of the Corporations Act it required registration in conformity with the statutory regime.

27.ASIC alleged that approximately $2.9 million had been received in cash from lenders and that only $2 million of this amount had been traced. This was so notwithstanding that only $990,500 had been recorded by the Australvic Group as a liability. ASIC further contended that Mr Kyriackou had received substantial sums of money, including the direct payment to him of loan proceeds and that some $6 million had been received or assumed by the Australvic Group – particularly APM and MK River – but that almost no cash remained in the companies and no payments (including interest payments) had been made.

28. Before Middleton J, the defendants contended that:
(a)the assignment or acceptance of liability was not a contribution of money or money’s worth;
(b)the assignment or acceptance of liability was not a pooling or a contribution to be used in a common exercise;
(c)there was, under the arrangements, no entitlement to benefits provided by the scheme (the repayments were fixed repayments);
(a)[sic]the promissory notes were loans and, as such, could not be characterised as a scheme; and
(b)[sic]there was day‑to‑day control by investors through their agents.[3]

[3]ASIC v Kyriackou & Ors [2010] FCA 9, [19]-[28].

In the end, the ASIC proceeding generated nothing except work for the Federal Court and fees for the lawyers. After a little under three years of litigation involving numerous court appearances, ASIC was granted leave to discontinue. No order for costs was made. And while there was no determination on the merits, and no judgment against the appellant to which ACE as his insurer could have regard when determining whether any liability to indemnify arose, the appellant was left significantly out of pocket. He looked to the ACE professional indemnity policy to cover him for his own legal costs.

The trial judge, however, found that nothing in the ASIC proceeding amounted to a claim within the insuring clause of the policy.

The grounds of appeal

The appellant contends that his Honour was wrong, and relies upon the following grounds of appeal:

As to Questions of Law 1[4] and 2[5]:
The Court erred in failing to construe as ‘civil compensation’ or ‘civil damages’ the relief sought by ASIC in the case of Australian Securities and Investments Commission v Kyriackou [2010] FCA 9.
As to Questions of Law 3[6]:
The Court erred in failing to construe that Michael Kyriackou was acting in a professional capacity as a broker, rather than as an entrepreneur, when he was engaged in the activities the subject of the reasons for judgment in Australian Securities and Investments Commission v Kyriackou [2010] FCA 9.
[4]Whether the plaintiff, Michael Kyriackou, was entitled to a declaration that ACE was liable to indemnify the appellant in respect of certain legal costs incurred by him under the policy of professional indemnity insurance provided by ACE.
[5]Whether the policy responded on the basis that the legal costs that Mr Kyriackou incurred were paid by him as civil compensation or civil damages in respect of a claim as provided in the policy.
[6]Whether Mr Kyriackou was engaged in acts that arose from a breach owed in a professional capacity under the policy.

The notice of contention

For its part, ACE seeks to argue on the appeal not only that the trial judge was correct, but also that, even if the ASIC proceeding brought into existence a claim which would otherwise be captured by the policy, it contains exclusion clauses which in the circumstances of this case apply to relieve the insurer of any liability. These clauses are to be found in a segment of the policy which is headed ‘3. Exclusions’. It opens with the words: ‘ACE will not be liable under the Policy to make any payment for Loss directly or indirectly caused by, arising out of or in any way connected with:’ Under cover of those opening words the following clauses, as numbered in the policy, appear (among others):

...
3.17   Directors and officers liability
Any breach by an Insured of a duty owed in the capacity of a director, secretary or officer of a body corporate.
…
3.27   Insolvency
The insolvency, bankruptcy or liquidation of any person or entity, including an Insured.
…
3.33   Property Development & Construction Exclusion
Any property development or construction, including but not limited to:
(a)any failure to procure or maintain any financing for the payment of contract works or services in connection therewith; or

(b) any failure to effect and/or maintain insurance; or

(c)any error or omission by the Insured in estimates of probable construction cost or cost estimates being exceeded unless such estimates have been substantiated in writing by suppliers prior to such estimations having been given; or
(d)any error or omission by the Insured involving estimations of time; or
(e)any error, act or omission by any sub-consultant of the Insured (provided this exclusion does not affect indemnity available to the Insured in respect of liability which may attach to them as a result of the actions of such sub-consultants); or
(f)any property development or construction which would normally be the responsibility of the building contractor had a separate project manager not been appointed; or
(g)the insolvency of any of the parties involved in any project.
…

3.35 Failure of Counterparty
The insolvency, bankruptcy, liquidation, receivership or administration of, or the failure to pay or suspension of payment by, any bank or banking firm, insurance company, investment company, investment banker or any broker or dealer in securities or commodities, or other persons or organisations of a similar nature, other than the Company.
...
3.38 Discretionary Investments
The investment of funds by the Insured or any representative of the Insured.
...
3.41 Failure to hold or maintain licence
The failure by any Insured to hold or continue to hold any authorisation, licence or approval required by law.

The notice of contention filed by ACE contains five grounds:

1.That, for the purposes of insurance policy insuring clause 1.1, there was no ‘Loss’ arising from the ASIC proceeding in that the ASIC proceeding contained no claim for civil compensation or civil damages as required by definition clause 5.13.
2.That, irrespective of the effect of exclusion clause 3.17, the ASIC proceeding did not constitute a ‘Claim’ for the purposes of insuring clause 1.1 in that it did not contain a written demand for, or an assertion of a right to, civil compensation or damages or a written intimation to seek such compensation or damages as required by definition clause 5.4.
3.In the alternative to ground 2, that the ASIC proceeding did not constitute a ‘Claim’ in that any written demand for, or assertion of a right to, civil compensation or civil damages or any written intimation of an intention to seek such compensation or damages made in the ASIC proceeding did not arise out of the ‘Firm’s Business’ as required by definition clause 5.4.
4.That, further or in the alternative to a finding that the operative provisions of the policy were enlivened, each of the following exclusion clauses applied, with the effect that the respondent was not liable to indemnify the insured:
(a)clause 3.17 Directors and officers liability;
(b)further or alternatively, clause 3.27 Insolvency;
(c)further or alternatively, clause 3.33 Property Development and Construction Exclusion;
(d)further or alternatively, clause 3.35 Failure of Counterparty;
(e)further or alternatively, clause 3.38 Discretionary Investments; and
(f)further or alternatively, clause 3.41 Failure to hold or maintain licence.

The Federal Court proceedings said to be the foundation for the claim under the policy

On 28 May 2007, Finkelstein J granted an ex parte freezing order against the appellant. Thus began two and a half years during which the defendants disputed the allegations made against them by ASIC. The issues were complex and controversial and were canvassed before four different Federal Court judges, among them Middleton J. His Honour extended the restraining orders on several occasions before, on 12 June 2007, he heard both the interlocutory application and a separate proceeding brought by a creditor. The latter was an application to wind up the second defendant (APM). His Honour then conducted further hearings on 18 June 2007, on 9, 10 and 11 July that year, and again on the following 30 August. Their purpose was to enable APM to re-open its case in both proceedings.

Middleton J delivered reasons for judgment in the creditor’s proceeding on 5 October 2007, and in the ASIC proceeding on 22 November 2007. His Honour’s orders in the creditor’s proceeding included an order that the second defendant be wound up in insolvency and that a liquidator be appointed.[7] In the ASIC proceeding, his Honour continued the restraining orders against the third, fourth and sixth defendants, but did not think such orders were necessary for the fifth or seventh defendants because neither had commenced trading, opened any bank accounts, or completed tax returns or financial statements. His Honour:

… refused to make orders against Mr Kyriackou personally as he was of the view that there was no material before the court suggesting that Mr Kyriackou would dispose of assets or act otherwise than co-operatively in delivering up the books and records in relation to the various corporate defendants.[8]

[7]See the judgment of Goldberg J in Australian Securities and Investments Commission v Kyriackou [2010] FCA 9, [17].

[8]Ibid [18].

More hearings followed. On 8 July 2008, after ASIC had filed its statement of facts and contentions, Jessup J heard an application by the defendants to have that document struck out as not disclosing any case against them or as an abuse of process. Alternatively, they sought summary judgment. His Honour refused both applications.

On 22 July 2008 (the day listed for final hearing) Goldberg J was informed by ASIC that the parties had agreed that the proceeding be either discontinued or dismissed. No determination was ever made on its merits. Nor was any payment made by the defendants by way of any settlement. However, the question of costs remained to be resolved. The defendants sought costs on an indemnity basis. That dispute was sent to mediation, which failed. The parties remained impervious to that procedure. The defendants subsequently served a Notice to Produce on ASIC, it appears with the intention of justifying an award of indemnity costs by establishing that the case against them was doomed. That application was heard by Finkelstein J, who set the notice aside on 9 December 2008.

Goldberg J then heard the costs dispute, and delivered judgment on 20 January 2010. His Honour granted leave to ASIC to discontinue, dismissed (with costs) the application by the defendants for indemnity costs and otherwise ordered there be no other orders as to the costs of the proceeding. The defendants sought leave to appeal against this decision. On 22 March 2010, Ryan J refused that application, with costs.

Meanwhile, on Friday 20 March 2009 the appellant, for the first time, contacted ACE to make a claim under his policy of professional indemnity insurance. For its part, ACE did not seek to make the point that the claim was out of time. Rather, given the appellant’s reliance on s 54(1) of the Insurance Contracts Act 1984 (Cth), the insurer did not press either clause 4.1 (Notice of Claims) or clause 4.6 (incurrence of Defence Costs); and it confirmed that the policy was in existence during the relevant period.

The appellant seized the opportunity, and made a claim. ACE nevertheless refused to indemnify him. It gave two bases for its refusal. The first was that the claim failed to fall within the insuring clause. The second was that the exclusion clauses set out above applied to relieve the insurer from any obligation to meet the claim.

The Trial Judge’s Findings

Vickery J identified the central question as being whether the ASIC proceeding was a ‘Claim’ within the meaning of the policy. His Honour took the references to ‘civil compensation’ or ‘civil damages’ to mean ‘a claim for pecuniary redress for some actionable wrong’.[9] After considering the Originating Process and the material in support filed by ASIC, his Honour concluded that nowhere was there a specific claim for civil compensation or civil damages.[10] He rejected a submission made on behalf of Mr Kyriackou that the reliance by ASIC on s 1324 of the Act to obtain injunctive relief incorporated a claim for civil compensation because sub-s (10) provided that the Court may, either in addition to or in substitution for the grant of the injunction, order that the person pay damages to any other person. His Honour observed that the Originating Process did not seek such damages. Indeed, it did not refer to s 1324(10); it only sought orders under s 1324(1).
[9]Kantfield Pty Ltd v Lockwood [2003] VSC 420, [12] (Byrne J) (‘Kantfield’).
[10]Kyriackou v ACE Insurance Ltd [2012] VSC 214, [34] (‘the Kyriackou judgment below’).

The trial judge further noted that, even if one were to have regard to the material in Mr Cook’s affidavit directed to ASIC’s suspicion of insolvent trading and breach of director’s duties, any claim arising from that would be ‘comfortably excluded by clause 3.17 of the Policy’.[11]
[11]Ibid [42].

It followed therefore that there was no claim which fell within the policy. In addition, his Honour found the appellant did not fall within the insuring clause because he was not satisfied that the ASIC proceeding gave rise to any claim for civil liability for breach of any duty owed in a professional capacity. Even adopting a broad definition of ‘professional’ as used by Eames J in Toomey v Scolaro’s Concrete Constructions & Ors,[12] the evidence did not demonstrate that the appellant was acting in such a capacity. His Honour rejected the submission that Mr Kyriackou was acting as a broker. Rather, his Honour concluded that the appellant was acting ‘in his capacity as an entrepreneur in the management of the Australvic Group of companies and the scheme managed or promoted.’ Such activity was ‘in a commercial sphere, not in a professional one.’[13]
[12](2002) 12 ANZ Insurance Cases ¶61-519, [60] (citing Kirby P in GIO General t/as GIO Australia Limited v Newcastle City Council (1996) 38 NSWLR 558, 568-569).
[13]The Kyriackou judgment below, [50].

Ground 1 - Was the ASIC claim a claim for civil compensation or civil damages?

The appellant concedes that ASIC did not, in terms, seek relief by way of damages or compensation, either in its own name or on behalf of anyone else. However, the submissions put at trial are reiterated: ASIC did seek orders – under ss 1323 and 1324 of the Act – that the scheme be shut down and assets be preserved. These applications must have been predicated on a claim for civil damages or civil compensation – or so the appellant submits. Why else would injunctions and other relief be sought? According to the appellant, a civil damages claim was at the heart of, and underpinned, the whole of the ASIC proceeding.

The fact that the Originating Process did not expressly raise a claim for civil damages or civil compensation was, the appellant contends, a reflection of the embryonic stage of the litigation. ASIC acknowledged before Finkelstein J that the investigation was in its very early days, and ASIC did not have access to all the records necessary if a clear picture of the various transactions were to emerge. But the prospect of a claim by some or all of the investors was clearly implicit in the actions it took. In particular, freezing orders are usually made to preserve assets without which a judgment in favour of a litigant or potential litigant, such as the investors here, might remain unsatisfied.[14]
[14]Cardile v LED Builders Pty Ltd (1999) 198 CLR 380, 401 (Gaudron, McHugh, Gummow and Callinan JJ).

The appellant contends that his case is supported by remarks made by Vickery J in a judgment delivered during the interlocutory stages of this proceeding. His Honour had heard an appeal from Evans AsJ, who had in turn dismissed the proceeding under r 23.03. In allowing the appeal, his Honour said:

A freezing order will usually only be made where the claimant can show that there was at least a good arguable case that they would succeed at trial and that the refusal of an injunction would involve a real risk that a judgment or award of damages in favour of the applicant would be unsatisfied. …
It follows that the Federal Court application and the order for the Mareva injunction granted in the course of that proceeding, both of which I infer were served upon Mr Kyriackou and brought to his attention, at least arguably comprised written information to him of an intention to seek compensation or damages. Otherwise there would have been no point in seeking or being granted a Mareva injunction unless it was intended to preserve assets to satisfy a judgment for damages or compensation which at that time was indicated by or in the contemplation of ASIC.[15]

[15]Kyriackou v ACE Insurance Ltd [2009] VSC 647, [36] and [37].

This approach was, the appellant submits, correct. That adopted by his Honour in his final judgment was not. Moreover, the judge did not before delivering the latter judgment give any indication to the appellant that he was contemplating a change of view. Had he done so, the appellant would have made submissions on the point.

There is no need for this Court to make any finding about this contention, save to observe that his Honour only described as ‘arguable’ the conclusion which the appellant favours, and that he was in any event entitled to change his mind between delivering his interlocutory judgment and delivering his final opinion. Indeed, he was bound to do so if he thought that any aspect of the earlier judgment was wrong in law. For present purposes the crucial point, however, is that the appellant has been able to put before this Court all that it might have put to his Honour.

Of more substance is a submission which is based upon the breadth of the ASIC proceedings. Section 1324 of the Act provides in sub-s (10) that the Court may, ‘either in addition to or in substitution for the grant of the injunction, order [the] person [to whom the injunction is directed] to pay damages to any other person.’ And ASIC gave no indication that this sub-section would not be invoked if the course of the litigation demonstrated that a claim for damages should be pressed. The appellant relied upon the inclusion in the relief claimed in the Originating Process of a prayer for ‘[s]uch further or other orders as the court deems fit’. When read with s 1324(10), this would, he submitted, constitute a claim of the requisite kind. Nor (his submission continued) does s 1324(10) require that those claiming such relief be joined as putative plaintiffs.

The appellant also relied on the definition of ‘Claim’ in clause 5.4 of the policy. That definition includes the phrase ‘a written intimation of an intention to seek such compensation or damages’ (my emphasis). At the very least, he submitted, the ASIC proceedings must have constituted a written intimation as defined in clause 5.4. And the appellant points in support to the observations of Vickery J in the interlocutory judgment:

In my opinion, the originating motion issued by ASIC at least signalled, indicated, suggested or hinted that an application for damages or compensation was intended to be made. The application specifically was made under s 1324 amongst the other provisions of the Corporations Act 2001, all of which were referred to in the originating process.[16]

[16]Kyriackou v ACE Insurance Ltd [2009] VSC 647, [33].

The appellant further contends that, when counsel for ASIC informed Finkelstein J during the ex parte application that some $2.9 million of investors’ money had been lost, he was in effect invoking s 1324(10). This is so because ‘the only conclusion open is that ASIC, or someone, was going to bring to account the recovery of that amount.’

By contrast, the respondent submits that this argument is based on nothing more than conjecture. In truth (so the argument put by ACE continues) ASIC was by its institution of proceedings doing no more than seeking to provide the Court with the information which the Court would need before it could make an informed decision about whether or not the defendants or any of them were conducting an unregistered managed investment scheme.

According to the respondent, the task before the trial judge, and that before this Court, is to determine what liability would have been established had the ASIC claim – the nature of which is to be determined having regard only to the materials actually before the Court – been taken through to its conclusion and succeeded.[17] And given that neither the Originating Process nor the material in support sought either civil compensation or civil damages, such relief would not have been granted. No reference was made to s 1324(10) in the Originating Process, or by Mr Cook in his affidavit, or by counsel in the ex parte application before Finkelstein J.
[17]Major Engineering Pty Ltd v CGU Insurance Ltd (2010) 16 ANZ Insurance Cases 61-828, 77,928 [9] (Pagone J) (Overturned on appeal: see [2011] VSCA 226).

The respondent also contests the argument that a reference to s 1324 imports a claim, or an intimation of one, under s 1324(10). Rather, the applications in fact made by ASIC under ss 1323 and 1324 were to shut the managed investment scheme down and preserve its assets before they were dissipated. This was an interim and protective step. It did no more than enable ASIC to complete its investigation and protect the assets during that interim period. What might follow, if anything, would be determined according to the results of the investigation.

It is in these circumstances not surprising, the respondent notes, that the appellant did not at trial press the argument that the ASIC proceedings constituted a written intimation of an intention to seek such compensation or damages. Nor, for the reasons already advanced, could such an argument have been successfully maintained. The fact that s 1324(10) incorporates a means of seeking damages does not amount to an intimation that any such claim will be made. And indeed, in the almost three years of litigation which followed the issue of ASIC’s Originating Process, no claims of that kind were instituted. According to the respondent, none were even foreshadowed, by either aggrieved investors or by ASIC on their behalf, because the indicators relied upon by the appellant were not even straws in the wind. And the individual claimants may well have had competing claims. The very nature of the ASIC litigation would have required drastic alteration. For one thing, before ASIC brought proceedings in the name of an aggrieved investor it would have been necessary for that person to provide his or her written consent.

The respondent emphasized that the wording of the policy requires that any intimation be written; an implicit, unarticulated, possibility that a claim may be made (if made at all) by presently unidentified persons could not be sufficient. A suggestion or hint would not be enough to trigger the policy. There must at the least be a written intimation from which the identification of the claimant and the general nature of the claim is possible.

And, according to the respondent, the nature of a claim is necessarily to be ascertained from the matters actually raised and the relief in fact sought. The ASIC proceeding which, on its face, did not seek civil compensation or civil damages but, rather, sought orders designed (among other things) to enable ASIC and others to decide whether any, and if so what, civil compensation or civil damages might be pursued, cannot be said to be a ‘written intimation of an intention to seek such compensation or damages.’

There is, it seems to me, force in these submissions. Pleadings in civil actions are required to inform the opposite party or parties of the claim they are asked to meet. This obligation is not fulfilled by the mere intimation of an otherwise undisclosed intention. In any event, I do not discern in ASIC’s express claim for the relief it seeks by the issue of its Originating Process any intimation of a claim for any other relief, still less an intimation of a claim for civil compensation or civil damages.

The claim brought by ASIC sought, among other things, interim protection of the public interest. In this context it is relevant to note references made to that interest by Goldberg J. His Honour was recounting the reasons given by ASIC for entering into negotiations with the appellant and the Australvic Group when he said:

As a result of these matters ASIC formed the conclusion that there was insufficient need from a public interest perspective in pressing for final scheme‑related relief provided that the key incorporated defendants were to be wound up.
...
ASIC decided not to press for the winding up of the fourth and seventh defendants because it considered that they posed no risk to the public interest given the cessation of the scheme which had been the catalyst for the proceeding.[18]

His Honour made no mention of any foreshadowed claims by ASIC on behalf of aggrieved persons. Indeed, the tenor of those remarks was that it was now appropriate to bring the proceedings to an end. The reference by his Honour to ‘final scheme-related relief’ must have been confined to the form of relief delineated by the Originating Process, which made no reference to a claim for damages.

[18]Australian Securities and Investments Commission v Kyriackou [2010] FCA 9, [57] and [60].

As another element in its contention that the claims made in the ASIC proceeding bore (and bear) no relationship to a claim covered by its policy of professional liability insurance as taken out by the appellant, the respondent relies on the observations of Byrne J in Kantfield.[19] Like the case presently before this Court, that case was concerned with the application of an insuring clause in a policy of professional indemnity insurance which indemnified the insured against civil liability arising from any claim – being a written or verbal demand by a third party for compensation or damages – or against a civil proceeding for such compensation or damages.
[19][2003] VSC 420.

Mr Lockwood had been appointed receiver over the assets of a company which manufactured wheelie bins. Under the receivership, Mr Lockwood incurred a liability for the unpaid price of the resins supplied by Kantfield which were used in the manufacture of the bins. Kantfield issued proceedings against Mr Lockwood, who (having regard to the provisions of s 419 of the Corporations Act) did not oppose judgment for the greater portion of the amount claimed. The receiver did, however, bring a claim against his professional indemnity insurer, which was joined as a third party, after it declined to indemnify him. Byrne J was asked to determine, as a preliminary question under r 47.04, whether the claim by Kantfield was covered by the policy. His Honour found that it was not and said:

… the expression in the definition of claim, ‘compensation or damages’, shows that what is there intended is a claim for pecuniary redress for some actionable wrong. An obligation in contract or otherwise to pay a sum in a certain event is not properly to be seen as an obligation to compensate; it is an obligation to perform the contract. Finally, s 419 imposes upon the receiver personal liability for certain debts. A claim to enforce this liability for debt is not in normal parlance to be characterised as a claim for compensation or damages.[20]

[20]Ibid [12].

The appellant pointed out during oral submissions that the wording in issue in Kantfield ‘while seductively similar, is not identical to the form of wording that is in issue in this case’. Senior counsel did not, however, elaborate on the significance of the differences. He submitted, rather, that Kantfield does not deal with the point that s 1324(10) either itself gave rise to a claim in damages ‘or was available to be turned into one.’

Kantfield is, however, authority for the proposition, with which I respectfully agree, that a claim for civil damages or civil compensation does not include a claim in debt. Like reasoning points equally strongly to the conclusion that nor does such a claim encompass a claim for restitution, or for a civil penalty. Still less does it include a claim for any of the relief sought by ASIC.

Aggrieved persons may have claims of various kinds – for example, in restitution, or debt, or damages – or some combination of these (the terms ‘damages’ and ‘compensation’ are synonymous).[21] But a claim for damages requires a breach of a duty or obligation and would therefore exclude claims for restitution or debt.[22] Thus, in the present case the available evidence suggests that, if any claims were to be made by aggrieved investors, they would likely be for the return of borrowed funds, or to enforce contractual rights – in other words, for restitution of money had and received, or for a debt due or payable under contract – neither of which would constitute payment of compensation or damages. Such claims fall outside the insuring clause (clause 1.1) of the professional indemnity policy with which these proceedings are concerned.
[21]Eres v Deer Park Installations Pty Ltd & Ors (1985) ANZ Insurance Cases 60-604, 78,680 (Gray J).
[22]Hall Brothers Steamship Co Ltd v Young [1939] 1 KB 748, 756 (Sir Wilfred Greene MR).

During the debate which accompanied the hearing of the appeal, it was suggested that there might be a contradiction in the policy arising out of the obligation to indemnify for ‘Loss’. It will be recalled that, as defined in the policy, ‘Loss’ includes ‘judgments, settlements [my emphasis], legal costs and expenses awarded against an Insured and payments for Defence Costs.’ But each of these must also fall within ‘the aggregate of all amounts payable by the Insured or ACE as civil compensation or civil damages in respect of a Claim’. The danger of internal inconsistency is thereby avoided.

The word ‘settlements’ in the definition quoted above was emphasised so that the point presently being made may be more readily understood. It is of course true that, when an action for civil damages or civil compensation is settled by negotiation, and when by the terms of settlement the party from whom the damages or compensation had been sought agrees to pay the claimant, the cause of action which arises thereby is no longer in tort but in contract, and is likewise transformed from a claim for civil damages or civil compensation and becomes one for money due under that contract. Yet the professional indemnity policy issued by ACE in this case would (applicable exceptions aside) cover that circumstance because the settlement would, ex hypothesi, originate in a claim for civil compensation or civil damages.

In other words, the policy issued by ACE to the appellant would in the circumstances postulated apply so as to indemnify the insured. It seems to me that the insuring clause and the definition of ‘Claim’ cover such circumstances. This is especially so since on this hypothesis the settlement is of a claim for civil damages or civil compensation.

By like reasoning, ‘Defence Costs’, although not themselves falling within the category of civil damages or civil compensation, are so defined in clause 5.5 of the policy as to be limited to such costs as have been incurred either after a claim has been notified to the insurer (ACE), or after ACE has assumed the conduct of the proceedings. The definition, it is true, begins by stating that ‘Defence Costs’ are ‘legal costs ... incurred in (a) defending any proceedings [or] (b) conducting any proceedings’. But the definition then continues: ‘... incurred by (i) the insured with the written consent of ACE after reporting the Claim to ACE or (ii) ACE after it has assumed conduct of any such proceedings’ (again, my emphasis). Accordingly (as it seems to me) the necessary link between the postulated claim on the one hand, and civil compensation or civil damages on the other, is therefore clearly established even in cases which at first glance might not seem to encompass the relevant connection.

A more significant problem is a mismatch between the insuring clause – by which the insurer binds itself to indemnify the insured ‘against Loss arising from any Claim in respect of civil liability for breach of duty owed in a professional capacity’ – and the definition of ‘Claim’. By that definition, a ‘Claim’ is a written demand for, or an assertion of a right to, civil compensation or civil damages arising out of the business of the insured. (My emphasis in each case). The difficulty is that the expression ‘civil liability’, which the policy does not define, is in ordinary usage not confined to liability for civil compensation or damages, but has a meaning which is wider than the latter expressions.

The most appropriate solution, it seems to me, is to read down the words ‘civil liability’ so that their reach for the purposes of the insuring clause is restricted to such liability as is potentially exposed by a written demand for, or an assertion of a right to, civil compensation or civil damages. Such an approach to the construction of the insuring clause is consistent with the inclusion in that clause of the words ‘for breach of a duty owed in a professional capacity’. These words fit neatly with the concept of a claim for civil compensation or civil damages; they do not fit so well with other claims, such as for a debt, or for restitution. When the insuring clause and the definition of a word with a very significant place in it – the word ‘Claim’ – are read together, the insuring clause becomes (with the emphasis again being mine):

ACE will indemnify the insured against Loss arising from any written demand for, or an assertion of a right to, civil compensation or civil damages arising out of the [insured’s] business or a written intimation of an intention to seek such compensation or damages in respect of civil liability for breach of a duty owed in a professional capacity ...

There is, however, no need for me to come to a final decision on the point. Whatever the proper construction of the insuring clause, it does not cover the claims made by ASIC, which were not claims for civil liability of any kind. That, it seems to me, is the fundamental flaw in the appellant’s position.

For these reasons, I would dismiss the first ground of appeal. In these circumstances, the appeal itself must necessarily also be dismissed. The issues which would otherwise remain as having been raised by ground 2 should nevertheless be examined in this judgment because they received much attention during the course of the hearing of the appeal and because it is the duty of this Court, as an intermediate court of appeal, to give its opinion on any issue which may become alive should an appeal against its principal finding be upheld.

Ground 2 - Was the appellant acting in a professional capacity as a broker?

The appellant submits that a true analysis of the ASIC claim demonstrates that it was his work as described in the schedule to the policy which gave rise to the ASIC proceedings. The trial judge, however, held (in effect) that, even if this were so, the insurer’s liability was restricted by the insuring clause to ‘Loss arising from any Claim in respect of civil liability for breach of a duty owed in a professional capacity’ (my emphasis); and in his Honour’s opinion, the expression ‘professional capacity’:

… as it is used in clause 1.1 of the policy is intended to have a meaning which takes it beyond the concept of a mere pursuit of a calling or other employment.[23]

[23]The judgment below, [44].

The appellant submits that this approach fails to take recent developments in Victoria into account. There is no dispute that the term ‘professional’ is no longer limited to the learned professions. But, it is said, his Honour erred in being influenced by the views expressed by Eames J in Toomey v Scolaro’s Concrete Constructions Pty Ltd & Ors (No 5).[24] In that case, Eames J observed that the determination of the question of whether or not particular activities fell within the term ‘professional capacity’ will ‘involve both the narrow and broader focus, but primarily the specific actions which gave rise to the liability will require keenest attention.’[25] Eames J adopted the formulation for ‘professional’ enunciated by Kirby P (with whom Sheller and Powell JJA agreed) in GIO General Ltd v Newcastle City Council.[26] His Honour held that:

[T]he term ‘professional’ … involves, in the context of a policy written for a local government authority, no more than advice and services of a skilful character according to an established discipline.[27]

[24](2002) 12 ANZ Insurance Cases 61-519 (‘Toomey’).

[25]Ibid 76,074 [59].

[26](1996) NSWLR 558 (‘GIO v Newcastle’).

[27]Ibid 568.

Toomey concerned not a policy of professional indemnity insurance, but a public liability policy which provided that the insurer was not liable for claims ‘arising out of any breach of duty owed in a professional capacity’. It may therefore be distinguished from the present case. It excluded the very cover which was the essence of the policy which, in the present case, the insureds (including the appellant) entered into with ACE. The judgment in Toomey must be read with this distinction in mind.

In the form of proposal which, as one of the insureds, a company called Hudson Conway Ltd completed before the insurance in Toomey was taken out, Hudson Conway described its business as that of property development and construction as well as property investment. The other insureds were members of the Hudson Conway Group, and included Davidson Hughes Estates Pty Ltd as the owner of the land upon which a Group development project known as the ‘Balmoral Apartments Project’ was under construction.

Mr Toomey was injured after falling over a Balmoral Apartments balustrade rail which had not been built to the height required by the relevant building code. Eames J found for Mr Toomey, but was then asked in third party proceedings to consider the scope of the business covered by the policy and, in particular, whether it covered the insured’s activities in property development and construction, including liability for the failure by the insured’s site manager to take remedial action when he became aware that the balustrade did not comply.

It was in this context that, for the purposes of the insured’s public liability policy, his Honour considered the concept of professionalism. His Honour found that the claim did not arise out of any breach of duty owed in a professional capacity, and that that exclusion did not apply. The judge also found, however, that for other reasons the insurer was not liable to Hudson Conway, while being liable to indemnify Davidson Hughes Estates Pty Ltd.

Having found (in relation to Hudson Conway) in favour of the insurer on the extent of coverage, his Honour’s examination of the phrase ‘arising from a breach of a duty owed in a professional capacity’ was obiter dicta.[28] Given its place in the submissions put before this Court on this appeal, I will nevertheless examine his Honour’s reasoning.
[28]And indeed, before considering the question of ‘professional capacity’, Eames J indicated that he would not have found there had been any breach of a duty of care by the insured, but rather that liability arose as a result of vicarious liability, with the result that, because the exclusion clause must be interpreted contra proferentum, it did not apply: Toomey [52] and [54].

In invoking the formulation of ‘professional’ laid down by Kirby P, Eames J was dealing with an argument that he should focus on the role of the insured as a project manager – a recognised profession – rather than on the specific activities of the particular employee, the site manager, who was a carpenter by trade and who occupied the lowest rung in the pecking order of the company. It was in this context that his Honour made the remarks which I have quoted in [62] above. After reviewing the decisions in FAI General Insurance Co Ltd v Gold Coast City Council,[29] Chemetics International Ltd v Commercial Union Assurance Co of Canada[30] and GIO of NSW v City of Penrith[31], Eames J concluded that:

Each of those decisions demonstrates that the question must be resolved by an examination of the totality of the circumstances, but with a focus on the actual conduct, by action or omission, of the negligent individual performing the services.[32]

[29](1995) 2 Qd R 341.

[30](1984) 11 DLR (4^th) 754.

[31][1999] NSWCA 42.

[32]Toomey [65].

Eames J held that the conduct of the site manager did not amount to action in a ‘professional capacity’; he was not a qualified surveyor or building inspector; and he was not performing professional functions, not even within the broad definition adopted by Kirby P. However, his Honour also pointed out that the position may have been different had the court been asked to consider an argument by the insurer seeking to restrict the scope of cover under a professional indemnity policy. Had that been the case, his Honour may well have found that liability arose out of a failure to render appropriate professional services.[33] That is so because professional indemnity policies and public liability policies are set in different contractual contexts, and it may be necessary to apply different principles in those different contexts; or, on occasion, the same principles are to be applied, but in ways which recognise the differences. This is perhaps especially true of the principle of contra proferentum, which hovers above so many of the questions of construction to which contracts of insurance give rise.
[33]Ibid [67].

The appellant says that Vickery J failed to have regard to the decision in Suncorp Metway Insurance Pty Ltd v Landridge Pty Ltd (t/as L J Hooker Hampton Park).[34] In that case an incorporated real estate agent, which had been retained by a landlord to manage premises, sought indemnity from its professional indemnity insurer after it settled an action for damages brought by a tenant who was injured when she tripped on the premises. The tenant had, on several occasions in the five or six months preceding the accident, complained to the agent’s receptionist about the hazard; but no action had been taken. Indeed, the complaint had not even been conveyed to the landlord. The business described in the schedule to the policy included ‘residential property management’, as well as ‘established residential sales & new home sales’ and ‘finance applications’. The issue was whether the agent’s liability to the tenant was for a breach of a professional duty. A County Court judge held that it was. The Court of Appeal agreed. Buchanan JA (with whom Nettle JA and Hollingworth AJA agreed) said:

The construction of the policy is an exercise to be carried out in the context of the circumstances in which it was formed, so as to give effect to the intention of the parties. The activities which could give rise to liability requiring protection were those of an estate agent selling houses, managing the letting of houses and arranging finance. In order to make commercial sense of the policy, in my view it is necessary to regard those core activities of the agent’s business as carrying on a profession, while at the same time recognising that not everything done by an estate agent is to be described as carrying on a profession. If the word ‘professional’ in the insuring clause is limited to the conduct of a learned profession, the cover afforded by the policy will be restricted to probably no more than some incidental aspects of the business of an estate agent. Put another way, unless the agent was to be regarded as under a professional duty to monitor the condition of leased premises and ensure that they were kept in good repair, it is difficult to see that any professional duties were owed by the agent in respect of property management, a major component of the agent’s business.[35]

[34](2005) 12 VR 290 (‘Suncorp’).

[35]Ibid 293 [11] (footnotes omitted).

While observing that the definition given to a ‘professional duty’ by Kirby P in GIO v Newcastle City Council[36] was appropriate to a professional indemnity policy issued to a local government authority (which performs a combination of functions, some of which include ‘the activities of orthodox professions’) Buchanan JA expressed the view that ‘there is very little work done by an estate agent which answers the description of the provision of advice or services of a skilful character according to an established discipline, save perhaps advice as to property values and rental rates’. Therefore, ‘[u]nless the core activities of the agent’s business, arranging the selling of property and managing property leases, are regarded as carrying on a profession, the policy will afford no significant protection.’ In contrast to the approach taken by Eames J in Toomey, Buchanan JA observed that:

The question whether a breach of duty answers the description of a breach of a professional duty depends upon characterisation of the overall activity in the context of which the breach occurs, and is not answered by concentrating on the specific task which has not been performed or badly performed so as to give rise to liability. The relatively simple tasks of the council clerks the subject matter of the cases relied upon by the insurer [including GIO v Newcastle] were not part of the councils’ professional activities. The breaches by the agent’s employees in the present case, on the other hand, occurred in the course of carrying out the activity of property management, which in my opinion is to be regarded as a professional activity for the purposes of the policy of insurance.[37]

[36](1996) 38 NSWLR 558.

[37]Suncorp 294 [16].

The effect of Suncorp, the appellant submits, is that the question of whether Mr Kyriackou was engaged in a professional capacity must be assessed having regard to the description of the business in the schedule to the policy. That is what the policy purports to cover.

The trial judge did not examine the ASIC material to determine whether it was Mr Kyriackou’s activities as a finance originator, finance intermediary or finance consultant, or as a mortgage aggregator, which gave rise to the ASIC proceedings. But it is true that, even had his Honour done so, the evidence available was scant. The appellant gave very brief evidence before Vickery J about his background, training and qualifications. He was equally brief in describing the differences between finance originators and finance brokers. Otherwise, the only materials relied on by the parties were the Originating Process and supporting affidavits, the transcript of the ex parte application made to Finkelstein J, and the description of the scheme and the competing arguments by each side made by Middleton J using the example of one investor, Mr Calderone, and summarised by Goldberg J in his costs judgment as set out at [16] above.

The appellant sought on the hearing of the appeal to supplement this evidence by resort to s 37B of the Consumer Credit (Victoria) Code which, at the time,[38] defined a ‘finance broker’ as ‘a person who engages in finance broking’. The latter phrase in turn was defined to mean either ‘to negotiate consumer credit for a fee’ or ‘to hold oneself out to the public as being prepared, for a fee, to negotiate consumer credit’. In focussing on conduct which his Honour characterised as entrepreneurial and not professional, the trial judge had, according to the appellant, failed to acknowledge that (as demonstrated by these statutory definitions) the two are not inconsistent.
[38]These provisions have since been repealed.

In my opinion, this argument lacks substance. It cannot be said that his Honour erred in failing to delve into the definition of ‘finance broker’ in an Act which, by its own terms, was irrelevant for present purposes.[39]
[39]The Consumer Credit Code set out in the Appendix to the Consumer Credit (Queensland) Act 1994 was by section 5 of the Consumer Credit (Victoria) Act 1995 deemed to apply as a law of Victoria and to be referred to as the Consumer Credit (Victoria) Code. The Code (reprint No 3D) limited its application to credit contracts where the debtor was a natural person or a strata corporation (s 6(1)(a)) and where the credit is ‘provided or intended to be provided wholly or predominantly for personal, domestic or household purposes’ (s 6(1)(b)).

The appellant further submitted that a wide range of cases which consider the word ‘professional’ show that a person may engage in both commercial and professional activities at the same time.

The respondent submitted before the trial judge (and repeated the submission in this Court) that Mr Kyriackou’s role in the Australvic Property Scheme was not that of a member of a profession. He was engaged in soliciting moneys from the public, with whom he had no professional relationship, to supplement funds for existing investment schemes that were experiencing cash flow problems. In essence, he was the bag man for the venture. There was no evidence that he was giving advice or providing learned services in accordance with an established discipline. It was not the case, for example, that Mr Kyriackou was acting as a broker for the investors and providing them with negligent advice. Nor was there any evidence that he was retained by the lenders to provide advice, or that he received any fee or commission for the work he was performing. It would not be enough for him to be acting as a finance originator, a finance intermediary, a finance broker, a finance consultant or a mortgage aggregator; he would also have to be in a professional relationship with a client or with someone involved in the transaction which gave rise to a claim.

According to the respondent, the uncontradicted evidence was that Mr Kyriackou was the alter ego of the scheme. It followed that if, in managing the scheme, he was not acting in a professional capacity, then the scheme itself incorporated no professional element. And, the respondent submitted, this conclusion was reinforced by evidence given by Mr Kyriackou under cross examination before Vickery J. He told his Honour that, although he did have professional indemnity insurance for the 2005/2006 and 2006/2007 years, he mistakenly thought it had lapsed because he did not ‘do any further finance work at that stage.’[40] The respondent says that Mr Kyriackou was there conceding that he was not doing financial work, for which he was obliged to be insured; on the contrary, he was engaged in entrepreneurial work.
[40]Trial transcript, T 32, lines 15-16.

The circumstances of the present case, the respondent submits, are analogous to the situation which arose in Solicitors’ Liability Fund v Gray & Anor.[41] The respondents in that case were two solicitors who were involved in a scheme in which they purchased properties and then promoted and sold those properties to clients with the aim of providing investment and tax advantages to the clients. The transaction the subject of the proceeding involved the purchase and then sale of a kiwi fruit orchard to a syndicate of clients. The syndicate sued the respondents for false representations, negligence and breach of fiduciary duty. The action was settled for $500,000. The respondents then sought indemnity under their professional indemnity policy for the settlement sum, as well as their costs of defending the action against them. The insurer resisted on the basis that the work being performed by the respondents was not in connection with their practice as solicitors.
[41](1997) 147 ALR 154 (‘Gray’).

The primary judge found in favour of the respondents on this point. The appeal was allowed. Lockhart J found that the respondents were engaged in the business of syndicating property transactions and therefore the liability incurred by them in settling the claim was not incurred in connection with their practice as solicitors.[42] Beaumont and Burchett JJ (agreeing with Lockhart J) held that the respondents were acting as entrepreneurs rather than as legal professionals. In reaching that conclusion, their Honours had regard to the evidence that the respondents did not perform any of the conveyancing work generated by the scheme, or provide taxation or legal advice. Their sole interest was in obtaining the 10 per cent acquisition fee from the members of the syndicate, who were at arms length from them. Significantly, the respondents were not sued as professionals; the allegations were that the respondents made misrepresentations about the commercial aspects of the venture, or that they failed to disclose relevant information.[43]
[42]Ibid 168.
[43]Ibid 196-197.

The respondent submits that, in the present case, the appellant has not identified any of the ASIC materials as showing that a claim for professional negligence had been brought, or was contemplated. Indeed, the respondent goes further. It contends that the circumstances upon which such a claim could be based have never existed.

The appellant argues that this is a very different case to that in Gray. In his written submissions it is said that there was a lacuna in the evidence regarding the nature of the activities of the finance industry or the extent (if any) of Mr Kyriackou’s engagement in them. According to the appellant, his Honour’s finding that he (the appellant) was acting in an entrepreneurial rather than a professional capacity was unsupported by the evidence.[44]
[44]Submissions of the appellant, 16 October 2012, [42]-[45].

I observe, however, that those written submissions refer to ‘an abundance of evidence’ that Mr Kyriackou was acting as a finance originator, a finance intermediary, a finance consultant or a mortgage aggregator (without precisely identifying that evidence). They also state that Mr Kyriackou ‘was only able to obtain professional indemnity insurance applicable to a broker if he was licensed as such.’[45] During oral submissions, senior counsel for the appellant submitted that the appellant’s role was ‘finding money for the purposes of the Australvic arrangement which has, at its heart, the conversion of property of cash-strapped developers, or real estate owners, and converting that into more valuable real estate’ which ‘is ordinary, everyday brokerage activity which he was licensed to do.’
[45]Ibid [41].

In refuting the argument that Mr Kyriackou was the alter ego of the scheme, senior counsel for the appellant pointed to the observation by Goldberg J that ASIC decided not press for the winding up of AVHL.[46] This, it was said, demonstrated that ‘the Kyriackou interests and the AVHL interests were hived off from those of the others for the very simple reason that those parties did the acts of financing, sourcing, being the intermediary, where the others were doing the other activities.’
[46]ASIC v Kyriackou [2010] FCA 9, [60].

In the end, the appellant’s argument in favour of his second ground of appeal is in my opinion made out not because the activities of the appellant were properly characterised as ‘professional’ but because, for the purposes of the policy, the activities of a finance originator, finance intermediary or finance consultant fell within the phrase ‘professional capacity’ in the insuring clause. I respectfully agree with Buchanan JA who, in the passage quoted at [70] above from his judgment in Suncorp, held that whether a breach of duty answers the description of a breach of a professional duty depends upon characterisation of the overall activity in the context of which the breach occurs, and is not answered by concentrating on the specific task which has not been performed or badly performed so as to give rise to liability.

If there was any breach in the present case, it occurred in the context of the overall activity involved in the group’s business as a finance originator; and, when engaged in this business, the appellant and the other insured were acting in a professional capacity.

Although ground 2 is for these reasons made out, the appellant’s case is not itself rescued from the insuperable difficulty that any loss he suffered did not arise from a claim for civil compensation or civil damages in respect of civil liability for breach of duty.

Notice of Contention – Application of exclusion clauses

In my consideration of grounds 1 and 2 of the Notice of Appeal I have covered the issues raised by grounds 1-3 of the Notice of Contention. It is therefore unnecessary for me to consider them further. Indeed, given my conclusion that the appellant did not suffer any loss covered by the relevant policy, any discussion of the applicability or otherwise of the exclusion clauses, about which ground 4 of the Notice of Contention is concerned, is obiter. I turn to the exclusion clauses nevertheless, because (as was the case with the second ground of appeal) they were the subject of much argument on the appeal, and because it is the duty of this Court as an intermediate court of appeal to give its opinion on any issue which may become alive should an appeal against its principal finding be upheld.

The burden lay on the appellant to prove at trial that his loss was caused by the risk against which the policy had been taken out. It was only when that onus was discharged that it became necessary for the insurer to establish the applicability of the exceptions upon which it relied.[47] Exclusions in general are to be construed in a manner favourable to the insured.[48]
[47]Boonham v C E Heath Underwriting & Agency Services (NZ) Limited (1993) 7 ANZ Insurance Cases 61-189; Desmond Derrington and Ronald Ashton, The Law of Liability Insurance (Butterworths, 1990) 441.
[48]Desmond Derrington and Ronald Ashton, The Law of Liability Insurance (Butterworths, 1990) 438.

The relevant exclusion clauses are found in section (or clause) 3 of the policy, which is headed ‘Exclusions’ and which in clause 3.1 opens with the words: ‘ACE will not be liable under the policy to make any payment for loss directly or indirectly caused by, arising out of or in any way connected with: …’. The individual exclusion clauses then follow.

Clause 3.17 – Directors and officers liability

This clause excludes loss directly or indirectly caused by ‘any breach by an insured of a duty owed in the capacity of a director, secretary or officer of a body corporate.’

An interesting point arises where issues which are raised in legal proceedings are never the subject of final determination. In the present case, the evidence of Mr Cook was that ASIC held a ‘suspicion’ that Mr Kyriackou was in breach of his duties as a director of corporations in the Australvic Group by misappropriating funds or permitting the companies to trade while insolvent. The respondent argues that exclusion clause 3.17 is thereby engaged. In other words, the respondent submits, the proper approach to the application or otherwise of exclusion clauses is the same as that which is adopted when assessing whether or not the claim made by the appellant falls within the insuring clause: the Court has regard to the nature of the claim, ascertained from the allegations made in the ASIC proceedings.

There is a potential difficulty with this argument. The suspicions allegedly held by ASIC were never translated into any findings of fact. Where costs are incurred in defending allegations, which, if established, may well form the basis for an insurer to invoke an exclusion clause, does it matter that such allegations were not proved?

The appellant contends that the unproven allegations made by ASIC in proceedings which were then withdrawn do not satisfy the respondent’s burden of establishing that exclusion clause 3.17 applies. The matters raised by the ASIC material were ‘cast in a nebulous way’. If the mere allegation, or indeed mention, of a matter is sufficient to trigger an exclusion clause, then (the appellant submits) an insurer enjoys an unduly low threshold.

The latter proposition, however, seems to be consistent with the approach taken by the Supreme Court of Canada. In American Home Assurance Co & Anor v Nichols,[49] an action alleging fraud was brought by a bank against Mr Nichols, a lawyer and member of the Law Society. He gave notice of the suit to the Society’s insurer and called upon the insurer to exercise its duty to defend him. The insurer denied any such liability, relying on an exclusion precluding coverage for fraudulent acts or omissions of the insured. The bank subsequently discontinued its action. Although costs were awarded to Mr Nichols on a party and party basis, he claimed the balance of his costs from the insurer. The argument put on his behalf was that, as the exclusion referred only to acts or omissions, and not to allegations, the exclusion did not apply in the absence of a finding of actual fraud. The duty to defend therefore remained.
[49][1990] 1 SCR 810.

McLachlin J delivered the judgment of the Court. Her Honour held that the practitioner’s argument was ‘overly complex and flawed.’ In her opinion, the real question was whether the bank’s suit claimed damages which might be payable under the policy. She then considered the distinction between the obligation on an insurer to indemnify, and compared that obligation with the broader duty of an insurer to defend. The former is triggered by established acts or omissions, while the latter is triggered by the nature of the claim, as ascertained by the allegations, even if such allegations are groundless, false or fraudulent.[50]
[50]American Home Assurance Co & Anor v Nichols [1990] 1 SCR 801, 808-810.

Neither party on this appeal referred in submissions to American Home Assurance Co & Anor v Nichols. By the reasoning in that case, the appellant in the present litigation is entitled to be indemnified for defence costs if the allegations contained in the ASIC materials demonstrate that the claim falls within the insuring clause; it is not necessary for the acts or omissions to be proved. In like fashion, however, the approach to the operation of exclusion clauses falls within the general approach taken to ascertaining whether or not the claim falls within the policy, with a duty to defend being triggered thereby. If that is so, then the relevant allegations determine whether an exclusion clause applies.

Here, the relevant allegation was that the appellant, an officer of several of the corporate defendants, was the ‘directing mind of the Australvic Group and each of these corporations’,[51] that the assets of the group have been dissipated, [52] and that the directors and officers of the Group ‘may have engaged in multiple contraventions of the Act, including … using their position to appropriate the Group’s assets for their own benefit’.[53] The need in these circumstances to consider the potential application of exclusion clause 3.17 is clear.
[51]Affidavit of Glen Joshia Cook sworn 28 May 2007, [21].
[52]Ibid[16(b)].
[53]Ibid [14].

The respondent relies upon these allegations, and also points to the approach taken by Brereton J in Quintano v B W Rose Pty Ltd[54] as being the appropriate course to adopt in this case.
[54][2008] NSWSC 793.

Mr Quintano suffered traumatic brain injury when he was shot in a nightclub operated by B W Rose Pty Ltd (‘BRW’). BRW thought it had insurance, but the insurer had been wound up. BRW sued its insurance broker, Prestige, alleging negligence in placing the insurance with an unregistered overseas insurer and failing to advise of the risks. Prestige in turn sought indemnity from its professional indemnity insurer, which denied indemnity based on a number of exclusion clauses. When BRW went into voluntary administration and then liquidation, the claim against Prestige was discontinued. But that left Prestige with its costs and expenses incurred in defending the claim. The broker’s insurer invoked an exclusion which relieved it of liability where a claim arose from the insolvency of any insurer or reinsurer, or from a breach of any duty to advise on the suitability of any insurer or reinsurer. Although the claim against Prestige was expressed to be in negligence, his Honour found that the reason BRW was left without insurance was because its insurer was insolvent. His Honour said:

A claim can be said to arise from a matter – at least – if it has a foundation in that matter, so that the matter is one of the underlying facts that, if they exist, together justify the claim. The loss that was the gist of BWR’s claim in negligence against Prestige was, as a matter of fact, attributable to International Unity’s insolvency: International Unity’s insolvency was a material underlying fact. Accordingly, the claim arose from the insolvency of an insurer, and clause 2.18(a) operates to exclude cover.[55]

[55]Ibid [23].

The relevant loss in this case is of defence costs which, according to the appellant, were not caused by any breach of director’s duties. He says that the broad approach advocated by the respondent would mean that any claim in which an allegation of breach of director’s duties happens to be made along with other allegations would be denied. That, he contends, cannot be so.

The respondent submits that this is indeed the effect of the authorities. Where there are two or more causes of loss, one of which falls within the general words of the policy and the other which is excluded, the insurer can rely on the exception: Wayne Tank Co v Employers Liability Ltd[56] and McCarthy v St Paul International Insurance.[57] The respondent also points to the breadth of the opening words to s 3 of the policy, which exclude liability for any loss ‘directly or indirectly caused by, arising out of or in any way connected with’ the particular exclusions then enumerated.
[56][1974] 1 QB 57, 67 (Lord Denning MR), 69 (Cairns LJ) and 75 (Roskill LJ).
[57](2007) 157 FCR 402.

In my opinion, should it become relevant, clause 3.17 would exclude the insurer from liability for the defence costs of the appellant. The policy in question is a professional indemnity policy. There is a clear and well established distinction between the scope of such a policy and one for directors’ and officers’ liability. That is reflected both in the limits appearing in the insuring clause itself (breach of a professional duty) and the inclusion of clause 3.17. To the extent, therefore, that the costs being claimed by the appellant were incurred in defending claims brought by ASIC that he had breached his duty as a director in misappropriating company funds, the policy would not apply. It also seems to me that, as evidenced by the Originating Process and the supporting affidavits, these concerns were one of the principal motivations behind ASIC’s institution of the ASIC proceedings.

It is true that ASIC sought to base its claim on its suspicions and fears rather than on hard evidence. That, however, may be sufficient to sustain a successful application for injunctive relief – to give one example. And it is claims which are the focus of the insuring clause.

Clause 3.27 – Insolvency

This clause excludes loss directly or indirectly caused by the insolvency, bankruptcy or liquidation of any person or entity, including an Insured.

It will be recalled that, in addition to expressing a concern about insolvent trading, the relief sought by ASIC included the appointment of a provisional liquidator to, and ultimately the winding up of, the third to seventh corporate defendants. While orders were made freezing the assets of the defendants, and those orders were extended from time to time, a liquidator was not appointed and the companies were not wound up. However, a liquidator had been appointed to the second defendant, APM. Eventually that company was wound up in insolvency.

The respondent points to the material contained in the Cook affidavit and, in particular, to ASIC’s concerns that the Australvic Group had not met its obligations to make interest payments and capital repayments to investors, while the investors’ contributions in the scheme could not be accounted for and the Group did not have sufficient assets to refund the investors’ contributions.[58] Mr Cook also outlined information provided by Mark Beck, who joined the Australvic Group in 2006 to assist in preparation and maintenance of its accounts. Shortly after joining the Group, Mr Beck formed the view that it was insolvent.[59]
[58]Affidavit of D Cook, [13], Appeal Book C64.
[59]Ibid [35], Appeal Book C79.

The appellant submits that, while a liquidator was appointed to the second defendant, this was before the ASIC proceedings were issued. Moreover, that liquidation was stayed. The order that the second defendant be wound up in insolvency was made after the issue of the ASIC proceedings. The suspicions held by ASIC about insolvent trading are, according to the appellant, no more than speculation and form an inadequate basis for the respondent’s reliance on the exclusion clause. In any event, ASIC’s own conduct brought on the insolvency by obtaining the freezing orders.

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.

In my opinion, exclusion clause 3.27 would not therefore exclude the insurer from being liable for defence costs.

Clause 3.33 – Property Development and Construction

This clause excludes loss directly or indirectly caused by property development or construction.

The respondent says that the reference in clause 3.33 to ‘any’ property development or construction does not require that property development or construction to be carried out by the insured. It points to material in Mr Cook’s affidavit to the effect that the scheme involved financing and redeveloping of residential construction projects and the provision of borrowing capacity to property developers. Indeed, it says, counsel for ASIC in the hearing before Finkelstein J referred to Mr Kyriackou’s business plan as going to be ‘property development using money’.[60] The factual foundation of the ASIC proceeding was therefore property development and financing construction projects.
[60]Appeal book C751.

The appellant submits that on a fair reading the ASIC claim went (at its furthest) no further than to allege that APM was involved in financing property development. This, the appellant contends, is too remote.

In my opinion, the appellant’s submission should be upheld. I would not allow the respondent to rely upon this exclusion clause.

Clause 3.35 – Failure by Counterparty

This clause excludes loss directly or indirectly caused by the insolvency, bankruptcy, liquidation, receivership or administration of, or the failure to pay or suspension of payment by, any bank or banking firm, insurance company, investment company, investment banker or any broker or dealer in securities or commodities, or other persons or organisations of a similar nature, other than the Company.

The respondent points out that this clause also applies to insolvency of any ‘investment company’ or organisation of a similar nature (other than AVHL)[61], as well as the failure to pay by such an entity. It says that the companies in the Australvic Group are such entities, and that ASIC alleged their failure to pay the investors the moneys due to them. This, according to the respondent, was a significant basis for the ASIC proceedings.
[61]The exclusion clause refers to ‘the Company’ but, as far as I can see, that term is not defined in the policy. I take this to be a reference to the Firm, which according to the schedule includes Australvic Home Loans Pty Ltd.

The appellant again argues that the ‘Loss’ arose not out of any insolvency, but from Mr Kyriackou’s expenditure on legal expenses. The Court is likewise again being asked to speculate about the reason for ASIC issuing its proceedings.

The appellant does not address the point that the Group’s alleged failure to pay its debts to its investors was one of the principal reasons why ASIC issued its proceedings. In my opinion, this exclusion clause applies.

Clause 3.38 – Discretionary Investments

This clause excludes loss directly or indirectly caused by the investment of funds by the insured or any representative of the insured.

The respondent says that the Australvic Group was involved in procuring funds or security from investors which it then pooled for further investment in the developments. This caused immediate loss to the investors and indirectly caused loss to Mr Kyriackou because he had to incur legal costs in the ASIC proceedings.

The appellant points out that ASIC did not allege that Mr Kyriackou or his companies invested funds; rather, the allegation was that members of public invested funds. The fault of the Group was that it then failed to further invest them as the investors envisaged. He accordingly submits that the exclusion does not apply.

In my opinion, there is substance in the appellant’s submission. Accordingly, this exclusion clause is inapplicable. In any event, reliance upon it seems to have been abandoned by the respondent.

Clause 3.41 – Failure to hold or maintain licence

This clause excludes loss directly or indirectly caused by the failure by any insured to hold or continue to hold any authorisation, licence or approval required by law.

The respondent points to the allegation by ASIC that the appellant was

operating an unregistered managed investment scheme contrary to s 601ED(5) of the Act. The requirement for registration is an ‘authorisation … or approval required by law’ with the terms of clause 3.41. The fact that the proceeding was discontinued is irrelevant for the purposes of determining whether the exclusion applies; the Court must have regard to the allegations in the ASIC claim.

The appellant reiterates that his loss was his expenditure in defending the ASIC proceedings and that the respondent has failed to discharge its burden of proving that it is relieved of liability under this exclusion, given that the allegations remained unproven.

In my opinion, this exclusion clause applies.

Conclusion

For the reasons I have set out above, I would dismiss the appeal.

Since preparing this judgment in draft form, I have had the benefit of reading, in draft, the judgment of Kyrou AJA. I respectfully associate myself with his Honour’s observations on ground 2 of the grounds of appeal.

TATE JA:

I have had the considerable advantage of reading, in draft form, the reasons of Harper JA, with which I agree. I would dismiss the appeal for the reasons his Honour gives.

KYROU AJA:

I have had the benefit of reading the judgment of Harper JA and gratefully adopt his Honour’s statement of the facts, the issues on the appeal and the parties’ contentions.

I agree that the appeal should be dismissed. My reasons can be stated briefly.

In relation to Ground 1, if the insuring clause were to be combined with the relevant parts of the defined terms ‘Loss’ and ‘Claim’, it would read as follows:

ACE will indemnify the Insured against [all amounts payable by the Insured … as civil compensation or civil damages … including … payments for Defence Costs] arising from any [written demand for, or an assertion of a right to, civil compensation or civil damages arising out of the Firm’s Business or a written intimation of an intention to seek such compensation or damages] in respect of civil liability for breach of a duty owed in a professional capacity first made against an Insured during the Period of Insurance.

The policy defines ‘Defence Costs’ as:

legal costs and disbursements and related expenses reasonably incurred in —
(a) defending any proceedings;
…
incurred by —
(i)the Insured with the written consent of ACE after reporting the Claim to ACE …

In the present case, the only amounts for which the appellant sought indemnity under the policy are the legal costs that he has paid to his lawyers for defending the ASIC proceeding. In order to be entitled to indemnity (subject to the exclusions), the appellant’s costs liability must fall within the insuring clause and the definition of ‘Defence Costs’.

Leaving aside the fact that the appellant incurred the legal costs without ACE’s written consent and before he claimed indemnity, the appellant must satisfy the definition of ‘Claim’ because that definition is embedded in the insuring clause and in the definition of ‘Defence Costs’.

Thus, the critical issue is whether the ASIC proceeding contains ‘a written demand for, or an assertion of a right to, civil compensation or civil damages arising out of the Firm’s Business or a written intimation of an intention to seek such compensation or damages’.

For the purposes of analysis, I am prepared to assume that the presence of the undefined phrase ‘civil liability’ in the insuring clause requires the expression ‘civil compensation or civil damages’ to be read as meaning any primary liability of the insured to pay money — that is, any liability other than legal costs — to the person claiming against the insured or to persons on whose behalf the claim is being made. Even on the basis of this assumption, however, the appellant cannot succeed because the ASIC proceeding did not seek any relief by way of payment of money other than legal costs. The existence of a possibility that, in the course of the ASIC proceeding, the nature of the relief sought might be expanded to incorporate monetary relief tends to support, rather than to contradict, the proposition that, in its extant form, the ASIC proceeding did not seek such relief. Furthermore, such a possibility falls short of ‘a written intimation of an intention to seek [civil] compensation or [civil] damages’.

It follows from the above that ground 1 must be rejected.

I agree with Harper JA, for the reasons that his Honour gives, that ground 2 is made out. I would add the following observations.

At the time that professional indemnity insurance policies were sold only to persons in professional vocations, it made sense to confine the insuring clause to liability for a breach of a duty owed in a professional capacity (‘Professional Capacity Wording’). Thus, if a solicitor also carried on business as a fencing contractor, his or her solicitor’s professional indemnity policy would not be expected to provide cover for liabilities incurred as a fencing contractor.

In modern times, professional indemnity policies are sold to all types of businesses, including fencing contractors. Yet, many policies continue to retain the Professional Capacity Wording in the insuring clause. If such a policy is sold to a person who is not in a traditional profession, a narrow reading of the Professional Capacity Wording would deprive the insured of any meaningful cover. Recent authorities have recognised this problem and have sought to overcome it.

In my opinion, where:

(a) the insuring clause of a professional indemnity policy contains the Professional Capacity Wording;

(b) the policy is sold to a person who is not in a traditional profession; and

(c) the policy defines the business that the person conducts,

the effect of the Professional Capacity Wording is simply to require that the liability for which cover is sought under the policy arises from a breach of duty owed in connection with that business.

In the present case, the above requirement was satisfied.

I agree with Harper JA in relation to exclusions 3.27 (Insolvency), 3.33 (Property Development and Construction), 3.38 (Discretionary Investments) and 3.41 (Failure to hold or maintain a licence). Exclusion 3.41 is critical because at the heart of the ASIC proceeding was the allegation that the appellant operated a managed investment scheme which was unregistered. The appellant incurred legal costs substantially for the purpose of defending that allegation.

In my opinion, exclusions 3.17 (Directors and officers liability) and 3.35 (Failure by Counterparty) are not engaged because their subject matter was not positively alleged in the ASIC proceeding or because there was an insufficient nexus between their subject matter and the incurring of legal costs by the appellant.

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[2013] VSCA 150

20 June 2013