Lofthouse v ACN 081 121 495 Pty Ltd
[2003] VSC 253
•3 July 2003
| IN THE SUPREME COURT OF VICTORIA |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
CORPORATIONS LIST
No. 5370 of 2003
| DAVID JAMES LOFTHOUSE AND RICHARD JOHN CAUCHI in their capacity as administrators of ACN 081 121 495 PTY LTD (formerly known as WSA Online Limited) (Subject to a deed of company arrangement) | Plaintiffs |
| V | |
| ACN 081 121 495 PTY LTD (formerly known as WSA Online Limited) & Ors (Subject to a deed of company arrangement) | Defendants |
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JUDGE: | Hansen J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 17 June 2003 | |
DATE OF JUDGMENT: | 3 July 2003 | |
CASE MAY BE CITED AS: | Lofthouse v ACN 081 121 495 PTY LTD (formerly WSA Online Limited) | |
MEDIUM NEUTRAL CITATION: | [2003] VSC 253 | |
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Corporations – Deed of company arrangement – Application by deed administrators for directions – Corporations Act 2001, s 447D.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr R S Randall | Ponte Earle Harrick |
| For the Second Defendant | Mr P G Cawthorn | Herbert Geer & Rundle |
HIS HONOUR:
This is an application by administrators under a deed of company arrangement dated 24 September 2001 in respect of a company now known by an ACN number but formerly known as WSA Online Limited. I will refer to the company as WSA.
WSA was registered in Victoria as a proprietary company in December 1997. It engaged in the provision of computer related applications. In September 2000 WSA was registered as a public company to facilitate an Investment Private Offer. The Offer was unsuccessful. Subsequent attempts to procure capital from private investors also failed.
On 24 July 2001 the directors of WSA appointed administrators to the company. At the second meeting of creditors held on 3 September 2001 it was resolved that the company execute a deed of company arrangement in accordance with a proposal which had been received from the directors. There being no other nominations for the position of deed administrator, the administrators were taken to be appointed as administrators of the deed. The deed of company arrangement was duly prepared and executed on 24 September 2001.
Clause 5.2 of the deed stated that the administrators had taken control of all of the assets of the company existing at the Commencement Date (which was defined as the date of execution of the deed) and had realised or would realise all such assets as part of the deed. Clause 6 provided that the deed administrators would act as an agent for and on behalf of the company.
Clause 5 dealt with the property available to pay creditors' claims. As part of the proposal for the deed, a company called MultiEmedia Limited would pay $50,000 to the administrators; that sum was duly paid. The administrators would then add $20,000 from the MultiEmedia payment to the realised assets of WSA to create a pool of funds called the Priority Creditors Fund. That Fund would be applied in payment of the remuneration, costs, disbursements and liabilities incurred by the administrators during the administration insofar as they related to the claims of Priority Creditors (as defined), and then pari passu among the Priority Creditors. The deed also provided that the directors would pay $300,000 to the administrators; that has been paid. This $300,000, and the $30,000 of MultiEmedia's contribution which remained, plus any surplus after paying Priority Creditors, was to constitute a second pool of funds for payment of a dividend to the Participating Creditors (defined to exclude certain Excluded Creditors and Priority Creditors), which fund was called the Participating Creditors Fund. That fund was to be applied in payment of the Arrangement Costs and Expenses (as defined) other than those already covered as referred to above, and then pari passu among the Participating Creditors. The deed provided that no dividend was to be paid to the Excluded Creditors.
The deed contains a moratorium on taking or continuing any action with respect to any claim against the company, an extinguishment of debts on payment of the dividend to Priority and Participating Creditors and a bar to claims.
Save for one matter concerning a person called Simon Arms, to which I refer below, the conditions required by the deed have been met, the administrators have taken control of all of the assets of the company and are, or would be, but for the matter concerning Simon Arms, in the position of declaring a dividend. It is this matter of Arms which has given rise to the application for directions, and, accordingly, I now turn to it.
Prior to the appointment of the administrators, Simon Arms had notified WSA of a claim against it for damages. WSA advised CGU Insurance Limited ("CGU") of the claim. CGU insured WSA under a policy of professional indemnity insurance for the period 18 February 2000 to 18 February 2001. On 27 April 2002, Herbert Geer and Rundle, as solicitors for CGU, wrote to WSA advising that CGU was prepared to instruct them to represent WSA in the defence of the proceeding brought by Arms if WSA agreed to four conditions set out in the letter. WSA was asked to confirm its agreement to the proposal by signing and returning a copy of the letter. The copy letter in evidence was signed by WSA by way of acceptance. It is clear that WSA returned the signed copy of the letter to CGU's solicitors as those solicitors, Herbert Geer and Rundle, commenced to act for WSA in the defence of the claim.
On 4 May 2001 Arms commenced a proceeding against WSA and two former employees of WSA in the Federal Court of Australia. The application seeks declarations that WSA had acted in contravention of s 52 and s 53(a) and (c) of the Trade Practices Act 1974 ("the Act"), that WSA had supplied products in breach of s 71(1) and (2) of the Act, and that the former employees had been involved in the contravention. In addition, damages are sought under s 82 of the Act, and for breach of warranty, negligent statement and breach of agreement. The statement of claim alleges that by a contract in writing WSA agreed to supply Arms with strategic business advice, design, technical development, marketing and hosting services in respect of his business of marketing wine on the internet. It is alleged that Arms was induced to enter into the agreement by representations of the former employees of WSA, that the representations were false, that the website was delivered in a condition which did not meet the representations, and that as a result Arms has suffered loss and damage. This is the s 52 claim. There is an alternative claim of breach of the condition and warranty in s 71(1) and (2) of merchantable quality and fitness for purpose. Then there are alternative claims of negligent statement and breach of agreement.
Herbert Geer and Rundle filed a defence to the claim.
The administration of WSA then interceded. Consequently, CGU withdrew from conducting the defence of the claim. Since that time the administrators have borne the burden and cost of defending the claim.
On 7 November 2001 Arms applied to the Federal Court for leave to continue the proceeding against WSA. The application was heard on 16 November 2001. On Arms' undertaking to submit to the administrator of WSA a proof of the debt claimed to be due to him by 20 November 2001, Ryan J ordered that unless the proof was admitted by 21 December 2001, Arms have leave pursuant to s 444E(3) of the Corporations Act 2001 to proceed against WSA.
A proof of debt for a total amount of $258,092.23 was received on 22 November 2001, and further supporting material on 10 December 2001. The proof was not admitted. As a result, Arms had leave to proceed.
In the affidavit sworn in support of the present application for directions by David James Lofthouse, one of the deed administrators, an explanation was given of the reason for the refusal to admit the proof. In relation to the quantum of the claim, Lofthouse had reservations as to the link between the events complained of and the loss and damage alleged to be suffered. In addition, he was not satisfied that the source material relied upon by Arms was independent or able to be tested against any recognised measure. Thus, on the evidence, he was not satisfied as to the veracity of the claim.
The administrators have since attempted, without success, to reach an agreement with Arms as to a figure at which to admit his claim. These attempts have included a mediation, which was attended by a representative of CGU. In the negotiations the administrators had to exercise care not to breach the condition in cl 7.6 of the insurance policy that requires an insured not to admit liability for or settle a claim without the consent of CGU.[1]
[1]Clause 7.6 provides that:
"An Insured must not
(a)admit liability for or settle any Claim; or
(b)incur any costs or expenses for a Claim without first obtaining Our consent in writing.
If Our prior consent is not obtained, the Insured's right to cover under this Policy may be affected."
The continued existence of the Arms litigation is preventing the administrators from completing their tasks under the deed of company arrangement. All of the company’s assets have been brought within the control of the administrators and realised, save for the right of indemnity under the CGU insurance policy. As to this, the question has arisen whether any amount paid under the policy in respect of Arms' claim would be held for the benefit of creditors generally or only for the benefit of Arms. That depends on whether s 562 of the Corporations Act 2001 applies to any such sum. It is a point of law, and it is the first matter upon which the administrators have sought direction.
It is presently estimated that the dividend payable to unsecured creditors under the deed is approximately 12.4 cents in the dollar on proved claims. If Arms' proof were admitted in full, the dividend would reduce to approximately 11.1 cents in the dollar. Thus, as matters stand at present, the impact upon unsecured creditors of the success or failure of Arms' claim is in the order of 1.3 cents in the dollar. For this reason, in a practical sense, regarding the matter from the point of view of WSA's creditors, there is something to be said for the administrators allowing the claim and making a distribution. If the payment of a dividend is delayed until the Arms' litigation is concluded, finalisation of matters under the deed of company arrangement will be delayed and, depending on the course CGU takes, the administrators will incur costs in relation to the defence of the proceeding. There is also the risk of costs being payable to Arms. The worst case scenario is that the costs might consume the entire amount available for distribution.
That scenario depends upon both whether and when CGU decides to resume the conduct of the litigation, and the litigation is resolved. Wishing to hasten CGU's decision, on 2 August 2002 solicitors for the administrators served a request on CGU under s 41(2) of the Insurance Contracts Act 1984. Section 41 provides that:
"(1)This section applies where it would constitute a breach of a contract of liability insurance if, without the consent of the insurer, the insured were to:
(a) settle or compromise a claim made against the insured; or
(b) make an admission or payment in respect of such a claim.
(2)An insured who has made a claim under a contract of liability insurance may at any time, by notice in writing given to the insurer, require the insurer to inform the insured in writing:
(a)whether the insurer admits that the contract applies to the claim; and
(b)if the insurer so admits, whether the insurer proposes to conduct, on behalf of the insured, the negotiations and any legal proceedings in respect of the claim made against the insured.
(3) Where the insurer does not, within a reasonable time after the notice was given, inform the insured that the insurer admits that the contract of liability insurance applies to the claim and that the insurer proposes to conduct, on behalf of the insured, the negotiations and any legal proceedings in respect of the claim made against the insured, the insurer may not refuse payment of the claim, and the amount payable in respect of the claim is not reduced, by reason only that the insured breached the contract as mentioned in subsection (1)."
CGU's solicitors, Herbert Geer and Rundle, replied on 13 August 2002. The letter stated, inter alia, that "CGU has instructed us that indemnity is granted to WSA … in respect of the claim … by Simon Arms … on the following terms". There then followed two paragraphs, numbered 3 and 4, in which certain terms were set out. Then, in paragraph 5, the letter stated that if WSA agreed to the foregoing, "CGU would instruct us to act for WSA in the defence of the proceeding, and to pay our costs and disbursements of so acting, subject to WSA acknowledging and agreeing to the following matters". Those matters were four in number and were to the same effect (and with little difference in expression) as the four terms in Herbert Geer and Rundle's letter dated 27 April 2000. The letter concluded with a request for advice as to "whether WSA accepts the grant of indemnity on the above terms and, if so, agrees to our acting on the terms set out in this letter. If it does agree we will prepare appropriate documentation, prior to our assuming conduct of the proceeding".
On 14 August 2002 the administrators' solicitors replied, contending that CGU's response did not comply with s 41(3) of the Insurance Contracts Act. In the first place, CGU's response did not specify whether the policy applied to each claim in the proceeding. At least, that is my understanding of the reference in the letter to "elements of the claim". Secondly, the administrators’ solicitors contended that there was no scope under s 41(3), or the policy, to make the proposal subject to conditions. Furthermore, the acknowledgment in para 5(a) appeared inconsistent with the grant of indemnity, and the acknowledgments in para 5(b), (c) and (d) were unacceptable. The administrators’ solicitors requested a further response.
On 19 August 2002 Herbert Geer and Rundle replied, stating that they had properly responded to the request under s 41.
According to Lofthouse, the administrators regard it as uncertain whether CGU's response is in terms which satisfy s 41(3) and, thus, whether they are able to admit the claim in whole or in part, or to otherwise settle the claim, without prejudicing the right to indemnity under the policy. In particular, according to Lofthouse in his affidavit, it is unclear whether the response contains –
(a)an acceptance of liability on the part of CGU to indemnify the company under the policy, and
(b) an offer to assume the conduct of the proceeding,
that satisfies the requirements of s 41(3).
Before turning to the questions or matters on which the administrators seek directions, it is necessary to say something about the form of the proceeding. The originating process by which the proceeding was commenced named the administrators as plaintiffs and the company as defendant. The originating process and Lofthouse's affidavit were served on CGU and Arms by delivery to their respective solicitors. On the first return of the proceeding on 9 May 2003, CGU and Arms were represented. I ordered that CGU and Arms be added as defendants on the basis that they were, as it seemed, rival contenders, gave directions to CGU and Arms to file and serve any affidavits on which they intended to rely and to the administrators to file and serve any answering affidavits, and fixed the proceeding for hearing on 17 June 2003. As it happened, no further affidavits were filed. At the hearing on 17 June the administrators and CGU were represented by counsel and presented submissions. There was no separate appearance for the company. A solicitor appeared for Arms as a matter of courtesy to inform me that he no longer wanted to take part in the proceeding. Having said that, the solicitor withdrew.
The first question on which a direction is sought is this – If any amount is payable by CGU to WSA pursuant to the insurance policy in respect of the claim made by Arms against the company, is such an amount –
(a) subject to the provisions of s 562, so that such payment is available only to Arms, or
(b) is it available to all creditors of the company entitled to be admitted to proof under the deed of company arrangement, subject to the terms of the deed?
In the first instance it seems that the solicitors acting for Arms raised the question of the applicability of the section. I accept that this is a matter which genuinely concerns the administrators in the sense that they entertain serious doubt as to whether the section applies in the context of a deed of company arrangement. The point did not concern CGU which, consequently, presented no submission on it.
In my view, s 562(1) does not apply in the present context. The section is found in Part 5.6 of the Corporations Act which is concerned with winding up generally. More specifically, the section is in Subdivision D in Division 6. Division 6 is concerned with the proof and ranking of claims in a winding up, and Subdivision D is concerned with the matter of priority of payments in a winding up. That s 562 is concerned with the priority of a particular type of payment in a winding up is reinforced by the language of the provision itself. There is the expression "relevant date",[2] the reference to the liquidator, and the reference to the scheme of priority of payments in s 556. Furthermore, neither Part 5.3A nor the deed of company arrangement incorporate s 562.
[2]Defined in s 9, in relation to a winding up, to mean the day on which the winding up is taken to have begun.
It was submitted by counsel for the administrators that the above question should be answered as follows –
(a) No.
(b) Yes.
In my view, the more appropriate answer is that any such amount is not subject to s 562(1). That would avoid any possibility of a suggestion that the answer deals with the administrators' entitlement to recover costs and expenses. That is a separate matter which I regard as inappropriate to consider under this question.
The second question concerns the request under s 41. The question was not well expressed, and in the end counsel for the administrators did not seek an answer to it.
Question 3 asks whether Herbert Geer and Rundle's letters dated 13 and 19 August 2002 constitute –
(a) an acceptance of liability on the part of CGU to indemnity pursuant to the policy,
(b) an admission that the contract of liability insurance applies to Arms' claim, and
(c) a statement that CGU proposes to assume to conduct, on behalf of WSA, the negotiations and any legal proceedings in respect of the claim -
in accordance with s 41?
In his written submissions, counsel for the administrators said that CGU's response did not unequivocally inform WSA that it admitted that the contract of insurance applied to the claim and that it proposed to conduct, on behalf of WSA, the negotiations and the legal proceeding in respect of Arms' claim. In his oral submissions counsel put the matter at a higher level in that, consistent with the letters from WSA's solicitors, he submitted, positively, that CGU's response did not satisfy s 41(2). If this is correct, the administrators are free to admit or settle the claim without being in breach of cl 7.6 of the policy. However, in doing so WSA is required to act in good faith in respect of CGU’s interests. As counsel for the administrators acknowledged, the interests of CGU may not be identical with the interests of the creditors.
Yet, counsel made it clear that the preferred position of the administrators is that CGU take over the conduct of the claim. That is understandable, as the administrators would then be relieved of the financial burden of conducting the defence of the claim, and to that extent the funds available for distribution to creditors would be preserved.
Counsel for CGU submitted that CGU’s response satisfied the requirements of s 41 and contended that each part of the above question should be answered yes. I interpolate here that although counsel for the administrators submitted that the question in para (a) above was inappropriate and should not be asked or answered, counsel for CGU submitted that it should be answered in the affirmative.
In what respect did the administrators submit that the insurer's response was inadequate for the purpose of s 41? The first point is that the response did not inform WSA that CGU admitted that the contract of insurance applied to the claim. As mentioned earlier, the point is, as I understand it, that the response did not make such an admission in relation to the several causes of action pleaded in the statement of claim. The letter of response stated "that indemnity is granted to WSA … in respect of the claim". The reason why the administrators' solicitors contended that this was not sufficient seems, reasonably evidently, to be that, as was conceded by counsel for the administrators, not every cause of action on which Arms has sued is covered by the policy. Counsel for CGU identified the claim based on a breach of warranty as being in this category. That is by reason of an exclusion clause, as I understand it. Perhaps the administrators apprehend other difficulties of that nature in respect of one or other of the balance of the causes of action. The analysis of counsel did not extend further than this general identification of the issue, but that is sufficient to understand the administrators' concern. They are concerned at making an admission, settlement, or paying an amount in respect of a cause of action for which CGU may subsequently establish it is not liable under the policy.
In my view, in principle, the administrators' approach is correct. When s 41(2) refers to "the claim" it refers to the separate parts of the claim meaning the several causes of action, if there be more than one. It is axiomatic that "the claim" may include a claim based on a cause of action constituted by facts and events that are outside the cover of an insurance policy. It will be necessary to attend to the distinction between "the claim" in the sense of the overall claim, and in the sense of the two or more causes of action that comprise it.
Here, as I understand it, CGU's position is that the several causes of action would seem to be within the policy cover, but the claim based on breach of warranty, at least, may be within an exclusion clause.[3] There is also an exclusion in respect of claims arising from manufacture, installation, assembly, sale and supply of goods and workmanship.[4] These exclusions may be attracted on the facts indicated in the statement of claim.
[3]Clause 6.3(a).
[4]Clause 6.6.
The response of CGU in the letter from Herbert Geer and Rundle did not express itself in the language of s 41(3). Rather than saying that CGU admitted that the contract applied to the claim, it said that "indemnity is granted … in respect to the claim". And the letter went on further to express itself in language and terms apt to the situation where an insurer is setting out the terms on which it is prepared to take over the conduct of a claim, as distinct from addressing the terms of s 41(2) and (3).
In stating that indemnity is granted, CGU went further than s 41 contemplated, counsel for CGU submitted. It is unnecessary for me to consider, in the context of the terms of the letters, the difference between an admission that the contract of insurance applies to the claim, and the stated grant of indemnity in respect of the claim. In my view it is sufficient, for present purposes, that the latter statement constitutes an admission that the contract applies to the claim.
That conclusion is not contradicted by the further statements in the letter as to the basis on which indemnity is granted. That is because those statements (in paras 3 and 4, and I would add para 5(a)) amount to no more than a statement that the policy applies subject to its several conditions, including exclusions, in which respect cl 6.3 and cl 6.6 were expressly mentioned. Section 41 does not provide that an admission constitutes a waiver by the insurer of any and every condition in the contract that the insurer might otherwise have been able to rely on to exclude liability. It is not necessary that s 41 so provide in order to achieve its purpose, which is to overcome the effect of the point upheld in Distillers Company Biochemicals (Australia) Pty Ltd v Ajax Insurance Co Limited.[5] The court in Distillers held that the making of an admission, offer, promise or payment to a party in an action by an insured, without the consent of the insurer, would constitute a breach of a condition akin to that in cl 7.6 in the CGU policy, notwithstanding that the insurer had elected not to take over and conduct the defence or settlement of the action. Consistent with this purpose, the words "by reason only" in s 41(3) make it clear that the section is dealing only with a contractual condition like cl 7.6, that the insured would be in breach of the contract of insurance if, without the consent of the insurer, it settled or compromised a claim against the insured, or made an admission or payment in respect of the claim. As Professor Sutton has observed, s 41 prevents an insurer "from refusing an indemnity by reason only that the assured has broken a condition of the contract requiring the prior approval of the insurer to any settlement or admission of liability".[6]
[5](1973) 130 CLR 1.
[6]Sutton, Insurance Law in Australia, 3rd ed. (1999), p. 1095.
I now turn to the administrators' second point of attack on CGU's response. The administrators' submission focuses on para 5(b), (c) and (d) of Herbert Geer and Rundle's letter dated 13 August 2002. This paragraph reads, so far as relevant, as follows:
"If WSA agrees to the foregoing, we are instructed further that CGU would instruct us to act for WSA in the defence of the proceeding, and to pay our costs and disbursements of so acting, subject to WSA acknowledging and agreeing to the following matters:
(a) …
(b)That we may pass on to CGU any information acquired in the course of conducting the defence of the proceeding, including information which may entitle CGU to exercise rights under the policy, or at law, in relation to WSA's claim under the policy.
(c)That we may advise, and continue to advise, CGU in respect of indemnity issues, and that we may continue to act for CGU in the event of a dispute between WSA and CGU, and further, that WSA acknowledges that our retainer does not extend to advise it as to indemnity issues.
(d)That communications between us and CGU, and communications between us and counsel, shall remain confidential between CGU, us and such counsel appointed to advise CGU."
I omit para (a) as it is sufficiently referred to at [39]. The letter concluded, in para 6, with a request for advice as to "whether WSA accepts the grant of indemnity on the above terms and, if so, agrees to our acting on the terms set out in this letter". If WSA agree, Herbert Geer and Rundle "will prepare appropriate documentation, prior to our assuming conduct of the proceeding".
Counsel for CGU submitted that this letter constituted a response by an insurer within the meaning of s 41. It was a manner of response commonly used by an insurer when offering terms on which the insurer will take over the conduct of a claim made against an insured. The invariable approach of insurers is to offer to act subject to a reservation of rights. The reservations, or conditions, in para 5 were said to be typical in this respect, and counsel referred to and relied on similar terms set out in para 15.62 in Insurance Law in Australia.[7] It was submitted that the imposition of these terms did not mean that CGU had not agreed to take over the conduct of the proceeding. More particularly, it was submitted that notwithstanding the requirements of the terms, the letter constituted a statement for the purpose of s 41(3) that CGU proposed to conduct, on behalf of WSA, the negotiations and any legal proceeding in respect of the claim. Accordingly, question 3(c) should be answered in the affirmative.
[7]Ibid., p. 1107.
The contrary submission of the administrators contained several objections. The fundamental objections are that:
(a) the inclusion of conditions meant that the offer was not a statement of proposed action within the meaning of s 41(2), and
(b) the conditions in para 5(b), (c) and (d) were unacceptable as WSA required that it be fully informed and properly and adequately advised as to the conduct of the proceeding and its rights in relation to the proceeding at all times.
Counsel relied in this respect on the several objections expressed in the letter from the administrators' solicitors dated 14 August 2002. Putting aside what I have described as the fundamental objections, there were several other objections. I consider them to have no substance. That is because, in part, the solicitors address the response in terms of it being a grant of indemnity, as distinct from a statement for the more limited purpose of s 41. The solicitors may, of course, have been led to this by the language in Herbert Geer and Rundle's letter which addressed itself to the grant of an indemnity and not to the language of s 41. That led the administrators' solicitors to object to the condition in para 5(a) as appearing to be inconsistent with a grant of indemnity. I have already dealt with that para at [39].
The question with which I am concerned is whether Herbert Geer and Rundle's letter is a response within the meaning of s 41(2) and (3). Just as s 41 was enacted to deal with a particular problem, and that problem alone, so is the present question confined to one issue, namely, whether the insurer's response satisfied the element in s 41(2)(b). The question is not concerned with CGU’s practice generally or the practice of other insurers when asked by an insured to take over the conduct of a claim, or the terms on which CGU or other insurers might commonly be prepared to do so. I am merely concerned with whether the particular response of CGU satisfied the element in s 41(2)(b). In my view it did not.
Section 41(2)(b) required CGU to state whether it proposed to conduct, on behalf of WSA, the negotiations and legal proceedings in respect of Arms' claim. CGU either proposed to do so, or it did not. Instead of saying that, in terms responsive to s 41, CGU put forward an offer to act that would be effective only if WSA accepted a string of conditions. Consequently, the response is not properly to be characterised as a proposal which answered the requirement in s 41(2)(b), but as a set of terms on which CGU would be prepared to act. Furthermore, even if WSA had accepted the conditions, CGU's letter stipulated that the preparation of "appropriate documentation" was required before CGU would take over the conduct of the proceeding. In other words, the "offer" in the letter was not complete in itself. CGU's solicitors would not act until the "appropriate documentation" was prepared and, presumably, signed by WSA. It might be supposed that the purpose of the documentation would be to implement the agreement reached between the parties if WSA was to accept "the grant of indemnity on the above terms", but the precise nature and terms of the "appropriate documentation" is not stated in the letter. It is possible, particularly in view of the contention in the correspondence between the parties' solicitors, that the terms ultimately agreed upon might have varied from those outlined in Herbert Geer and Rundle's letter. In these circumstances it clear that WSA’s acceptance of the terms in the letter was the first step in a process that was to be completed by the entry into "appropriate documentation". It is apparent that between those steps the contention in the solicitor's correspondence would have to have been resolved and, if it was resolved, terms differing in some respect or other from those in Herbert Geer and Rundle's letter might have been agreed upon. In my view, the more that one teases out the true nature and terms of CGU's letter of response, the more it becomes apparent that it did not satisfy s 41(2)(b).
In light of this conclusion it is not necessary to deal with the second aspect of the administrators' submission. That concerns the nature and acceptability of the conditions in para 5(b), (c) and (d). In the circumstances, I say little about the submission. I say nothing at all about para (b), as that seems unobjectionable having regard to CGU's interest. The objections to para (b), and to paras (c) and (d), were much influenced by the reference in CGU's response to a grant of indemnity. Moving from that premise, as distinct from the premise of a response which truly satisfied s 41, counsel for the administrators objected that the conditions in para 5 were either inconsistent with the grant of indemnity or not acceptable to WSA.
In particular, para (c) was repugnant because of the requirement, contrary to the position at common law if a conflict between the respective interests of the insurer and the insured arose, that Herbert Geer and Rundle could continue to act for CGU. Para (d) was repugnant because it appears to render every communication between Herbert Geer and Rundle and counsel confidential to CGU. It is understandable that these conditions caused concern. In the course of his submissions counsel for CGU stated that para (d) was not intended to apply to communications bearing on the WSA’s liability to Arms. It was, he said, meant to apply only to communications concerned with "indemnity issues". If that is so, and I do not doubt counsel's instructions in this regard, para (d) was not well expressed and was understandably objected to.
For these reasons, question 3(b) will be answered yes, and 3(c) no. As I have said, question 3(a) is not appropriate, as it is not directed to s 41(2)(a). That ground is covered by question 3(b). Nevertheless, counsel for CGU asked that question 3(a) be answered yes and I will do so accordingly on the basis of these reasons. The answer is a complement to the answer to question 3(b), and does not affect the conclusion or answer in respect of question 3(c).
I add the following comment. The position that is reached requires the administrators to exercise caution and to act with good faith, having regard to the interest of CGU in such action as they make take hereafter in relation to negotiating and agreeing terms with Arms. It would be prudent for the administrators to consult with CGU on the matter of Arms' claim.
Question 4 asks whether the administrators are obliged to continue to defend the Arms' litigation where:
(a) by admitting the claim in full, the likely difference in the dividend to creditors entitled to prove under the deed of company arrangement will be 2 cents in the dollar, or
(b) alternatively, continued opposition to the claim may exhaust the pool of funds available to the creditors?
I accept that in principle the subject matter of the question of whether to settle a legal proceeding may properly be the subject of an application to the court for directions under s 447D of the Corporations Act. It is sufficient in that regard to refer to Sanderson v Classic Car Insurances Pty Ltd.[8] However, it is not appropriate to give such direction in this case. I am not sufficiently informed of matters concerning the litigation to give the direction sought. I have no way of knowing whether Arms will prosecute his case in light of my decision on the applicability of s 562. I am not informed of the relevant facts in order to be able to form a view on the merits of his claim or of any defences, and I have no evidence as to the parties negotiations and how close they are to reaching an agreement. I have no evidence of the financial position of Arms and thus no idea whether he could meet an order for costs. Furthermore, the question asks whether the administrators are "obliged" to continue to defend the litigation, and not whether, for instance, an offer should be accepted or other specific action taken in relation to it on the facts before me. I am in no position to consider what the administrators should do in relation to the litigation as I have no idea of the merits of the matters to which I have referred. In the first place, it is for the administrators, rather than the court, to form a view, based on the relevant facts and circumstances before them, as to the appropriate response to the litigation.
[8](1985) 10 ACLR 115, 117.
Ultimately, in light of such matters, that in the end counsel for the administrators suggested that questions 4 and 5 not be answered at this stage. The preferable course, he suggested, was to reserve liberty to apply. Question 5 is related to question 4, as it asks whether the administrators are obliged to continue to defend the proceeding where WSA and the administrators may not be indemnified under the policy. I agree with counsel that this question should not be answered for the reasons outlined in relation to question 4. I do not propose to reserve liberty to apply. If the administrators decide to return to the court for directions it is preferable that they do so on an application that addresses the factual and legal situation then obtaining. It is most likely that if the present questions were stood over, and later brought on for argument, they would require amendment and supplementary evidence. It is better to start afresh.
Question 6 asks whether the administrators enjoy any statutory or other charge on any funds which might be provided by CGU in settlement of Arms' claim.
I am somewhat at a loss to understand why this question has been asked. Counsel for the administrators said that there was no statutory basis on which the administrators might rely to recover their costs and expenses connected with the Arms' claim or negotiating with CGU, whether from any amount paid by CGU or the pool of funds now in their hands. As for the deed of company arrangement, it provides for the remuneration of the administrators "for work performed pursuant to" the deed. The remuneration is on a time basis at rates agreed at the meeting on 3 September 2001.[9] The deed also provides, in summary, that the administrators are entitled to be indemnified against all costs, charges and expenses that may be sustained or incurred arising out of or in connection with the performance of their duties and obligations under the deed.[10] One of those duties under cl 5.2, is to take control of and realise all of the assets of WSA. One of those assets is the chose in action constituted by the right to indemnity under the CGU policy. It would have seemed that in acting as they have in defence of the Arms claim, and in pursuing the right of indemnity, the administrators were acting pursuant to their obligations under the deed. It is also to be borne in mind that in acting as they have in these respects, the administrators have been seeking to preserve the pool of funds otherwise available to creditors. All this would seem self-evident. Yet, it seemed that the administrators have considered it arguable whether the entitlement in cl 7 and cl 8 extends to matters arising out of or connected with the Arms claim, apparently on the basis that that matter is "outside the ambit of the administration of the deed of company arrangement". I am willing to hear counsel further, but it seems to me, as presently advised, that the submission has proceeded on a misapprehension of the administrators' position.
[9]Clause 7.
[10]Clause 8.
At the end of his submissions on question 6, counsel for the administrators raised a new point. If CGU made a payment direct to Arms would the administrators have a lien over the amount for their costs and expenses of the proceeding or of negotiating an indemnity with CGU? It was implicit in the submission that the payment was of a sum in settlement of the claim. The question was asked, and the possible circumstance (which is not a presently existing or threatened situation) was described as "the difficulty that the deed administrators find themselves in". No answer was suggested. Then, a little later, counsel said that it was unlikely, in view of the non-application of s 562, that CGU would pay Arms direct. That, with respect, is an understandable observation and seemed to bring one back to square one. In principle, any settlement sum received by WSA from CGU will augment the fund available to creditors subject to the administrators' entitlement to be paid their remuneration, costs and expenses. In the present circumstances, and in light of the answer to question 1, this discussion is sufficient to answer the question and, in my view the related questions 7 and 8.
In relation to questions 7 and 8, it is necessary only to note the following. Question 7 commenced with the words "[i]f yes to question 6", which counsel sought leave to delete by amendment. Subject to that, the question is whether the administrators are entitled to deduct from any settlement sum the costs of the proceeding and the costs of negotiating an indemnity pursuant to the policy with CGU. Question 8 asked whether the same deductions could be made out of the funds available to creditors under the deed. The difference between the questions was explained as being whether any settlement sum came into the hands of the administrators. That is, the premise in question 7 is that any settlement sum is received by the administrators. In that situation, which is that referred to above as the likely scenario, the funds will come in and augment the pool. It follows that whether considered alone or as part of the pool, the settlement sum will be liable to bear costs of the type mentioned. The premise in question 8 is that the administrators do not receive any such settlement sum. In that event, the administrators will have their entitlement under the deed to recover costs of the type mentioned. That, in my view, represents the position in principle. I put it that way as, apart from the costs presently incurred, the matters raised concern events that may occur in the future. What will actually occur must be a matter of speculation. It is for this reason, and because it is desirable to consider directions in light of doubts and differences arising in relation to events that have occurred, or as to which there is an appropriate likelihood of occurrence, that I answer the questions raised no further than I have.
In conclusion, I give leave to amend the originating process by amending questions 1 and 6 as sought by counsel. As amended the questions will be answered as follows:
1 (a) & (b) Any such amount is not subject to s 562(1) of the Corporations Act 2001.
2 This is not an appropriate question and is not answered.
3 (a) & (b) Yes.
(c) No.
4 & 5 It is not appropriate to answer these questions.
6 In principle, any payment received from CGU Insurance Ltd in settlement of the claim will augment the fund available to creditors subject to the administrators' entitlement to be paid their remuneration, costs and expenses.
7 (a) & (b) On the premise that the administrators receive the settlement sum, in principle and subject to any necessary approval as to the items, yes.
8 (a) & (b) On the premise that the administrators do not receive the settlement sum, in principle and subject to any necessary approval as to the items, the administrators would be entitled to be paid such costs and expenses out of the said funds.
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