Mead v Allianz Australia Ltd

[2006] NSWSC 366

CITATION:	Mead v Allianz Australia Ltd [2006] NSWSC 366 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	13/03/06
JUDGMENT DATE :	3 May 2006
JUDGMENT OF:	Bergin J
DECISION:	Answer to seperate question - "No".
CATCHWORDS:	Separate question as to whether defendant has validly denied liability under Policy - where insured is liquidator of company - where insured commences proceedings to recover assets of company - where insured ordered to pay costs personally - where insured removed as liquidator - where insured ordered to pay costs of removal proceedings personally - where Policy excludes liability for claim directly or indirectly based upon, attributable to, or in consequence of, any "malicious or reckless act" which is "established by judgment or other final adjudication" - whether judgments in various proceedings "establish" "malicious" or "reckless" acts by insured.
LEGISLATION CITED:	Crimes Act 1900 (NSW) Uniform Civil Procedure Rules 2005
CASES CITED:	Abrath v North Eastern Railway Co (1883) 11 QBD 440 Banditt v The Queen (2005) 80 ALJR 421; [2005] HCA 80 BL & GY International Co Ltd v Hypec Electronics Pty Ltd [2001] NSWSC 705; (2001) 164 FLR 268 BL & GY International Co Ltd v Hypec Electronics Pty Ltd & 2 Ors [2002] NSWSC 38 BL & GY International Co Ltd v Hypec Electronics Pty Ltd (in liq) [2003] NSWSC 1226 BL & GY International Co Ltd v Hypec Electronics Pty Ltd (in liq) [2004] NSWSC 1119 BL & GY International Co Ltd v Hypec Electronics Pty Ltd (No 2) (Gzell J, 16 December 2004, Supreme Court of New South Wales) Fraser v B N Furman (Productions) Ltd [1967] 1 WLR 898 Hypec Electronics Pty Ltd (in liq) v Mead & Ors (2003) 202 ALR 688 Hypec Electronics Pty Ltd v Mead [2004] NSWCA 221 Hypec Electronics Pty Ltd (in liq) v Mead & Ors [2004] NSWSC 731; (2004) 61 NSWLR 169; (2004) 50 ACSR 448 Legal & General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390 Mead v Watson [2005] NSWCA 133 Mogul Steamship Company v McGregor Gow, & Co, & Ors (1889) 23 QBD 598 Rapley v Rapley (1930) 30 SR (NSW) 94 Roberts v Bass (2002) 212 CLR 1 Trobridge v Hardy (1955) 94 CLR 147 Wilkie v Gordian Runoff Ltd (2005) 79 ALJR 872; [2005] HCA 17
PARTIES:	Colin Anthony Mead (first plaintiff) David Patrick Watson (second plaintiff) Allianz Australia Insurance Ltd (defendant)
FILE NUMBER(S):	SC 50143/05
COUNSEL:	D Fagan SC/V Bedrossian (first and second plaintiffs) I Mescher (defendant)
SOLICITORS:	Etheringtons Solicitors (first and second plaintiffs) Tress Cox Lawyers (defendant)

- 50 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

BERGIN J

3 MAY 2006

50143/05 COLIN ANTHONY MEAD & ANOR v ALLIANZ AUSTRALIA INSURANCE LIMITED

JUDGMENT

1 The second plaintiff, David Patrick Watson, claims indemnity under a policy of insurance with the defendant, Allianz Australia Insurance Limited, in respect of costs liabilities to the first plaintiff, Colin Anthony Mead. I shall refer to Mr Watson as the plaintiff and to Mr Mead by name. Mr Mead was a director and shareholder of Hypec Electronics Pty Ltd (Hypec), a company that imported computers and computer components from Taiwan for sale in Australia. The other director and shareholder was Mr Mead’s then wife who was also a 44% shareholder in a Taiwanese company BL & GY International Co Ltd (BL).

2 In June 2003 the defendant issued an accountants professional indemnity insurance policy (No 740017194 PLP) to Walter Turnbull Pty Ltd (the Policy). At all relevant times the plaintiff was employed with Walter Turnbull Pty Limited. The Policy provided cover for the period 30 June 2003 to 30 June 2004 and was renewed to provide cover for the period 30 June 2004 to 30 June 2005. Mr Mead has been involved in a number of proceedings personally and on behalf of Hypec, some in which the plaintiff has also been involved and from which the plaintiff’s costs liabilities arise.

3 The defendant has denied indemnity and claims that it is justified in doing so on the basis that the claim by the plaintiff is “directly or indirectly based upon” or is “attributable to” or is “in consequence of” a “malicious or reckless act or omission” which has been “established by judgment or other final adjudication” (cl 21 of the Policy). In those circumstances it is necessary to trace some of the litigious background between Mr & Mrs Mead, the plaintiff and Hypec to put the various arguments in respect of the Policy into context.

Litigious background

4 In September 1997 BL commenced proceedings in the Common Law Division of this Court (12674 of 1997) (the Common Law proceedings) seeking, inter alia, as against Hypec, repayment of $4.8 million of loans allegedly made in the period 1992 to 1996, plus interest. Default judgment was entered against Hypec on 6 January 1998. In February 2001 BL served a Statutory Demand on Hypec. On 7 May 2001 the plaintiff was appointed liquidator of Hypec in winding up proceedings in the Equity Division of this Court (1933 of 2001) (the Winding Up proceedings).

5 By Notice of Motion in the Winding Up proceedings Mr Mead sought leave to act on behalf of Hypec in order to make application to set aside the default judgment in the Common Law proceedings and to proceed to defend and bring a cross-claim in those proceedings. On 2 August 2001 Mr Mead commenced proceedings in the Equity Division of this Court (3832 of 2001) (the Equity proceedings) seeking the same relief that he sought in the Notice of Motion in the Winding Up proceedings.

6 The Equity proceedings commenced by Mr Mead seeking leave to act for the company were heard by Einstein J who delivered judgment on 21 August 2001: BL & GY International Co Ltd v Hypec Electronics Pty Ltd [2001] NSWSC 705; (2001) 164 FLR 268. Einstein J granted Mr Mead the relief he sought and noted an undertaking that Mr Mead would indemnify the plaintiff and Hypec in respect of any orders resulting from exercising the leave to act for Hypec. Mr Mead then made application to set aside the default judgment in the Common Law proceedings. On 25 September 2001 Sully J made an order setting aside the default judgment against Hypec and allowed the filing of a Defence and Cross-claim on behalf of Hypec.

7 Mathews AJ heard the Common Law proceedings for 15 days commencing on 5 November 2001. At the completion of those proceedings her Honour reserved her judgment. By this time Mr & Mrs Mead’s marriage had broken down and proceedings had been commenced in the Family Law Court of Australia (the Family Court proceedings). In December 2001 the plaintiff lodged caveats over properties owned by Mr & Mrs Mead, some of which were the subject of restraining orders in the Family Court proceedings.

8 On 14 February 2002 Mathews AJ delivered judgment in the Common Law proceedings: BL & GY International Co Ltd v Hypec Electronics Pty Ltd & 2 Ors [2002] NSWSC 38. The claim brought by BL against Hypec and Mr Mead was dismissed. Hypec failed in its cross-claim against BL, Mrs Mead and her partner in the Taiwanese company. Mr Mead had claimed that BL owed Hypec money rather than Hypec owing any money to BL. In pursuit of this claim Mr Mead had “recreated” accounts as between BL and Hypec but Mathews AJ was unable to accept that evidence. Mathews AJ ordered that BL and Mrs Mead’s partner, Ms Yang, pay Mr Mead’s and Hypec’s costs of the Common Law proceedings on an indemnity basis.

9 During the course of Hypec’s liquidation the plaintiff had concluded that the directors of Hypec had improperly used Hypec’s funds to acquire assets in their personal names and that Hypec’s profits had been understated. The plaintiff also concluded that Mr & Mrs Mead had understated their personal income. The plaintiff wrote to the Australian Taxation Office advising of these conclusions and on 30 May 2002 the Commissioner of Taxation issued amended assessments to Hypec relating to the years 30 June 1989 to 30 June 1994 creating a tax debt of approximately $1.4 million.

10 The plaintiff brought proceedings in the Equity Division to recover certain assets claimed to belong to Hypec (1268 of 2002 combined with 1933 of 2001) (the plaintiff’s proceedings). The plaintiff’s proceedings were heard by Campbell J who delivered judgment on 3 November 2003: Hypec Electronics Pty Ltd (in liq) v Mead & Ors (2003) 202 ALR 688. The background that I have set out above is taken from that judgment. The assets that the plaintiff sought to recover on behalf of Hypec included 11 parcels of real estate. The orders sought were consented to except that there was a dispute in relation to two blocks of land at Lisarow, acquired using Hypec’s money but registered in the name of a different company associated with Mr & Mrs Mead. There was also a dispute in relation to whether the plaintiff was precluded from obtaining an order for the transfer of four other parcels of real estate or their proceeds of sale.

11 Campbell J referred to some of the plaintiff’s conduct which included: an application to appear before Sully J in the hearing of Mr Mead’s application to set aside default judgment, which Sully J refused [77]; the plaintiff’s consent to leave being granted to BL to proceed against Hypec in the Common Law proceedings [79]; the presence of an employee of the plaintiff throughout the hearing of the Common Law proceedings [85]; the filing of an affidavit by the plaintiff in the plaintiff’s proceedings that Campbell J observed was in part “incorrect” [89]; and in relation to which Campbell J concluded that the cross-examination of the plaintiff “caused a different picture to emerge to that presented in his affidavit” [89].

12 In the Family Court proceedings injunctions had been granted in relation to the four properties the subject of the plaintiff’s proceedings. Campbell J held that the plaintiff was estopped from obtaining an order for the transfer of those four items of real estate or their proceeds of sale. His Honour concluded that Mr Mead assumed that the plaintiff raised no opposition to him seeking orders in the Family Court proceedings for access to the four properties for the purpose of obtaining funding for the Common Law proceedings and that if he did so the plaintiff would not stand in the way of orders being implemented [96]. Campbell J also held that the plaintiff induced Mr Mead to adopt that assumption and expectation and that he acted in reliance on that assumption and expectation [97]-[99]. Campbell J also held that the plaintiff knew that Mr Mead would be conducting the Common Law proceedings on the basis that he had obtained funding pursuant to the Family Court order and that Mr Mead would expect not to have to hand back to the plaintiff the proceeds of sale of the properties [100]. His Honour also held that the plaintiff failed to make clear to Mr Mead prior to the hearing of the Common Law proceedings that he would be claiming that the four properties were the assets of Hypec [101].

13 In the plaintiff’s proceedings Mr Mead sought a direction that the plaintiff ought not continue with proceedings against him to recover the four properties [183]. Campbell J concluded that by bearing the expenses of running the Common Law proceedings Mr Mead had conferred a very substantial benefit on Hypec in that he had established that it was not liable for the debt of BL [189]. Campbell J then said at [189]:

It is, it seems to me, not a proper exercise of the liquidator’s discretion to accept the benefit of the judgment which Mr Mead had obtained in [Hypec’s] name, while not accepting the burden of that part of the costs which Mr Mead claims in these proceedings. His attempt to do so, in the present proceedings, is, in my view, a clear case of pressing a claim which has no merit.

14 Campbell J then dealt with the plaintiff’s counsel’s submission that the incurring of those expenses by Mr Mead was not necessary for Hypec to become freed of BL’s claim. His Honour rejected that submission and noted that the plaintiff’s investigations were being funded by Ms Yang and that the plaintiff tended to accept what Mrs Mead told him. At par [190] Campbell J said:

The liquidator had formed a view (which ultimately proved right) that Mr Mead’s proposed cross-claim lacked substance, and his scepticism extended to Mr Mead’s opposition to BL’s claim. In any event, the relevant question is, when the liquidator has in fact obtained the benefit of [Hypec] being freed from the BL claim, at Mr Mead’s expense, he ought be permitted to decline to have the company bear the expense, to the extent to which Mr Mead seeks it.

15 Campbell J concluded that it would be unfair for the plaintiff to recover the proceeds of sale of the four subject properties when he had not only, by his inaction, encouraged Mr Mead to spend money in the belief that he would be able to have access to the four properties, but had also achieved significant benefits as a result of Mr Mead making that expenditure [195]. His Honour concluded that the principle in Ex Parte James prevented the plaintiff from laying claim to the four properties [198].

16 An appeal from Campbell J’s judgment was dismissed by the Court of Appeal on 6 July 2004 (the Court of Appeal proceedings): Hypec Electronics Pty Ltd v Mead [2004] NSWCA 221.

17 On 13 August 2004 Campbell J delivered a judgment in relation to the costs of the plaintiff’s proceedings: Hypec Electronics Pty Ltd (in liq) v Mead & Ors [2004] NSWSC 731; (2004) 61 NSWLR 169; (2004) 50 ACSR 448 (the costs judgment). Campbell J referred to the affidavit that the plaintiff had sworn in the main proceedings and, in the following paragraphs (not reported in 61 NSWLR, but reported in 50 ACSR), said (at 50 ACSR, 481):

147. Mr Watson has given evidence in these costs proceedings that when he swore the affidavit in question he believed that it was accurate and correct, but he now accepts that “the paragraphs were not put properly in context and were not completely correct”. The affidavit involved a mis-statement by the liquidator of his own state of mind, on a topic of central importance to the estoppel case. It is not at all satisfactory that this mis-statement occurred. However, I am not prepared to find that the errors in his affidavit arose as a consequence of anything other than the taking of insufficient care.
148. In evaluating the significance of the errors in the liquidator’s affidavit, the question to be addressed is not whether the liquidator did something which he ought not to have done. The question is whether the errors in his affidavit show, or assist in showing, that his conduct in causing the company to oppose the estoppel allegations was unreasonable. In my view, the errors do not lead to that conclusion. … The errors do not lead to a conclusion that his conduct in opposing the estoppel defences was unreasonable.

18 Mr Mead sought an order that the plaintiff pay the costs personally. Campbell J said of this application (at 50 ACSR, 483):

156. In circumstances where there is no attack on the bona fides of the Liquidator in having run the litigation, the findings to which [counsel] points are not ones which show that there is any improper conduct, in the Beddoe sense, in the liquidator’s conduct of the litigation. The fact that he has lost the litigation concerning the Four Properties on the grounds on which he lost it, does not mean that he has fallen short of the standards of conduct which the Court expects of liquidators. The fact that, in exercise of its supervisory supervision, the Court has held that the Liquidator’s claim to the Four Properties is one which a liquidator, acting fairly, ought not make, does not mean that there was the sort of impropriety which attracts a personal costs order in making the claim.

19 It is apparent from the costs judgment that Mr Mead became aware that the plaintiff had appeared in the Family Court proceedings on 28 November 2003 purporting to “correct the Court record”: at [170]. When Mr Mead became aware of that appearance he applied to Campbell J for a direction that the plaintiff make no further intervention in or application in the Family Court proceedings and that he make no further submission that Mr Mead had failed to disclose to the Family Court material facts relating to any claim by Hypec to the four properties. Campbell J made an order preventing the plaintiff from further intervening in the Family Court proceedings: BL & GY International Co Ltd v Hypec Electronics Pty Ltd (in liq) [2003] NSWSC 1226. The plaintiff sought leave to appeal from Campbell J’s decision and the Court of Appeal refused leave: Hypec Eletronics Pty Ltd v Mead [2004] NSWCA 221.

20 Mr Mead sought an order that the costs of the application made to Campbell J for the order to prevent the plaintiff from intervening in the Family Court proceedings be paid personally by the plaintiff on an indemnity basis. Campbell J said:

175. The application of 10 December 2003 was a necessary and appropriate one for Mr Mead to make, given that the liquidator’s intervention in the Family Court was not justified by any proper performance by the liquidator of his functions. The undertakings proffered by Mr Mead were no more than fine-tuning of the relief sought. They were designed to ensure that the Family Court had information it properly should have about the proceedings, and that the liquidator had the opportunity to make such intervention or application as this Court might in future hold is proper. Those undertakings in no way detracted from the fact that the liquidator’s appearance in the Family Court on 28 November 2003 had been outside his proper functions. In accordance with the principles earlier outlined, the liquidator should bear the costs of the application of 10 December 2003 personally.

21 Campbell J refused to make a costs order on an indemnity basis. The costs orders made by Campbell J included the following order in the plaintiff’s proceedings (1268 of 2002):

4. The Plaintiff [Hypec] to pay costs of the First Defendant [Mr Mead] of these proceedings, being costs of and incidental to claims made by the plaintiff to recover the Four Properties.

22 In the Winding Up proceedings (1933 of 2002) Campbell J made the following orders:

5. Costs of the applicant [Mr Mead] and of David Patrick Watson of proceedings begun by interlocutory process filed 13 December 2001, to the extent that that Interlocutory Process was heard together with proceedings number 1268 of 2002 be paid from the assets of Hypec Electronics Pty LTd (in liquidation).
6. Costs of Colin Mead of the application made on 10 December 2003 be paid by David Patrick Watson personally.

23 On appeal in respect of those costs orders order 4 was overruled and the plaintiff was ordered to pay Mr Mead’s costs of the plaintiff’s proceedings personally and on an indemnity basis. Order 5 was overruled and the plaintiff was ordered to pay the costs on an indemnity basis. There was no change to order 6 (the costs appeal): Mead v Watson [2005] NSWCA 133.

24 In the Winding Up proceedings Mr Mead sought an order for the removal of the plaintiff as liquidator of Hypec. That application was heard by Gzell J who delivered judgment on 2 December 2004: BL & GY International Co Ltd v Hypec Electronics Pty Ltd (in liq) [2004] NSWSC 1119 (the removal judgment). Mr Mead claimed that the plaintiff had actively opposed his claim that the default judgment be set aside and that the plaintiff unfairly and oppressively exercised his powers against him. Gzell J set out the litigious background and referred to Mr Mead’s constant requests of the plaintiff for extensions of time to file Hypec’s Report as to Affairs. Gzell J said that the plaintiff was “justifiably indignant” about those constant requests and also about the meagre nature of the information that was ultimately supplied: at [27]. Gzell J extracted the cross-examination of the plaintiff in which he claimed that Mr Mead would not co-operate and provide him with original documentation so that he could look at the cross-claim “impartially and quickly”: at [27]. Gzell J also referred to the plaintiff’s evidence that he would have expected Mr Mead to go to see him and work in a co-operative way with him. His Honour also referred to the plaintiff’s view that Mr Mead was interfering with the orderly administration of the liquidation of Hypec: at [29] and [32]. Gzell J also referred to the allegation of fraud against BL and observed that the question of whether the BL default judgment could be set aside assumed a significance that should have caused the plaintiff to advance the time at which he would consider whether or not to admit BL’s proof of debt.

25 Gzell J analysed the plaintiff’s conduct in relation to the proceedings before Sully J to set aside the default judgment. On 11 September 2001 the plaintiff wrote to the solicitors for BL and advised that he had read Einstein J’s judgment in which his Honour granted leave to Mr Mead to act on behalf of Hypec in seeking to set aside the default judgment and conduct those proceedings. Part of that letter which is extracted at par [40] of the removal judgment included the plaintiff advising BL’s solicitors that his legal advice was that BL should file affidavit evidence on the issues raised by Mr Mead in his application to sue Hypec. The plaintiff also referred to his concern that the Court had before it the evidence of BL that the statements of fact made by Mr Mead were based on wrong assumptions or conjectural and hearsay evidence inconsistent with objective records. Gzell J observed that the plaintiff’s duty was to Hypec and that he should have supported the application by Mr Mead to set aside the default judgment. His Honour referred to the plaintiff’s encouragement of BL to put on evidence in opposition to Hypec’s case that showed the plaintiff’s alignment with Mrs Mead’s interest to the detriment of Mr Mead and that such constituted action against the interests of Hypec: at [41].

26 Gzell J observed that the plaintiff failed to see that there was any conflict of interest in forwarding that letter to BL’s solicitors: at [42]. His Honour also referred to the fact that when the plaintiff sought leave to be heard on Mr Mead’s application before Sully J, which was refused, he did not disclose that his funding was coming from BL: at [52]. Gzell J referred to the plaintiff’s willingness to give evidence on behalf of Hypec’s opponent in the Common Law proceedings and his refusal to inform Mr Mead’s counsel of the substance of that evidence. His Honour said that this was indicative of an association between the plaintiff and the interests of Mrs Mead to the detriment of Mr Mead: at [56].

27 His Honour also referred to the plaintiff’s solicitor appearing before Mathews AJ in which submissions were made that amounted to Mr Mead being deprived of his costs. His Honour said:

62. Mr Mead had succeeded in relieving Hypec of a debt in a very large amount. To suggest that he should be deprived of his costs indicated an antipathy to Mr Mead and a lack of that objectivity which is demanded of a liquidator

…

70. It was submitted on behalf of the liquidator that it was entitled to criticise Mr Mead and make the submissions on costs because he had an obvious concern that Hypec’s assets were being dissipated and he sought to protect that position.

71. I fail to see how the liquidator’s conduct in relation to the ATO advanced that position. No doubt it was important to clarify Hypec’s liability to tax but to take the additional step and suggest that the Commissioner might raise assessments against its directors was, to say the least, officious. I fail to see any relevance of this course of conduct to the liquidator’s submission that Mr Mead should have been deprived of an order for costs.

…

72. In the course of hearing the appeal from the decision of Campbell J, Ipp JA made the following comment:

“The inference I draw from all of this is the liquidator was more interested in acting to prejudice to Mr Mead that ( sic ) promoting the interest of the company. That is a very serious thing, especially when it seems on the evidence he is being paid by someone who has the interest of Mrs Mead at heart. It is a very serious thing.”


73. It was submitted on behalf of the liquidator that the Court of Appeal did not have the liquidator’s full submissions on costs made to Mathews AJ. Mr Mead said they did. The liquidator submitted that the Court of Appeal was not aware that the liquidator had withdrawn so soon as his interests were protected. Nor was it aware of the events preceding the making of the submissions. It was submitted that, in consequence, the remarks of Ipp JA should be disregarded.

74. I have had the benefit of the surrounding circumstances and the submissions of counsel on the liquidator’s behalf. I endorse the remarks.

28 In respect of the plaintiff’s proceedings before Campbell J, Gzell J observed that Campbell J was not prepared to find that the errors in the plaintiff’s affidavit arose as a consequence of anything other than the taking of insufficient care and that he, Gzell J, was invited to form a different view: at [81]. His Honour said:

82. The liquidator was cross-examined and maintained that the affidavit stated his then belief. While it is difficult to imagine that the liquidator would have forgotten receipt of the documents, I am not prepared to find that the affidavit was falsely sworn.

29 In respect of the plaintiff’s application for leave to appeal from Campbell J’s order restricting him from further intervention in the Family Court proceedings, Gzell J said that such application was “totally unmeritorious and a further waste of the assets of Hypec”: at [100].

30 Gzell J concluded:

120. The liquidator was incensed by Mr Mead’s failure to lodge the report as to affairs or to discuss with him Mr Mead’s concerns over the probity of the default judgment. He failed to investigate properly Mr Mead’s contentions and thereafter set a course consistent with the partial view that Mr Mead was interfering in his administration and ought to be opposed.

121. The persistent opposition to Mr Mead’s proceedings before Einstein J, before Sully J and before Mathews AJ stand out as a favouring of the interests of Lucy Mead at the expense of Mr Mead. His appearance before Mathews AJ at the costs hearing and his submission that Mr Mead should not have an order for costs after he had freed Hypec of an enormous debt indicates how far the liquidator had gone in his determined opposition of the interests of Mr Mead.

…

125. This lack of impartiality was exacerbated by the liquidator’s reliance upon Lucy Mead’s interests to pay his costs.

…

131. The liquidator’s urging of the solicitors for BL & GY to put on evidence to rebut that of Mr Mead after he had given leave by Einstein J to move to set aside the default judgment on behalf of Hypec was, in my view, an extraordinary abandonment of the impartiality demanded of a liquidator. The same may be said of the liquidator’s willingness to give evidence on behalf of BL & GY before Mathews AJ but not to disclose the nature of that evidence to counsel for Mr Mead.

31 Gzell J made orders for the removal of the plaintiff as liquidator of Hypec. On 16 December 2004 Gzell J made an order that the plaintiff pay Mr Mead’s costs personally and on an indemnity basis (the costs judgment in the removal proceedings): BL & GY International Co Ltd v Hypec Electronics Pty Ltd (No 2).

These proceedings

32 The plaintiff sought indemnity under the Policy for his liability for the costs of Mr Mead. The defendant refused indemnity. These proceedings were commenced on 21 September 2005 in which the plaintiff seeks declaratory relief as to his entitlement to indemnity under the Policy. On 18 November 2005 Einstein J made an order pursuant to Part 28 rule 2 of the Uniform Civil Procedure Rules 2005 for the separate determination of the question:

Was liability under the Policy issued by the defendant properly denied pursuant to clause 21 of the Policy, being the issue raised by paragraphs 22, 23, 24 and 25 of the Defence?

33 The proceedings on the separate question were heard on 13 March 2006 when Mr D Fagan SC leading Mr V Bedrossian, of counsel, appeared for the plaintiff and Mr I Mescher, of counsel, appeared for the defendant. Supplementary submissions were filed by 17 March 2006 when judgment was reserved.

34 Paragraphs 22 to 25 of the Defence referred to in the separate question are as follows:

22. Further, in answer to the whole of the Summons the defendant says that the Policy excluded liability for claims directly or indirectly based upon, attributable to, or in consequence of any dishonest, fraudulent, malicious, or reckless act or omission.

Particulars
Clause 21 of the Policy

23. In his judgment dated 2 December 2004 in proceedings number 1933 of 2001 his Honour Mr Justice Gzell made findings in regard to the second plaintiff’s conduct as the liquidator of Hypec which amount to findings that the second plaintiff’s conduct was reckless and/or malicious.

Particulars
Judgment of Gzell J dated 2 December 2004 in Supreme Court of New South Wales proceedings number 1933 of 2001

24. Similarly, in its judgment of 28 April 2005 in proceedings number CA40770 of 2004 in New South Wales Court of Appeal made findings in regard to the second plaintiff’s conduct as the liquidator of Hypec which amount to findings that the second plaintiff’s conduct was reckless and/or malicious.

Particulars
Judgment of New South Wales Court of Appeal dated 28 April 2005 in Supreme Court of New South Wales proceedings number CA40770 of 2004

25. In the circumstances pleaded herein, the defendant was entitled to deny indemnity to the second plaintiff by reason of the provisions of clause 21 of the Policy and has so denied indemnity.

35 Although Mr Mescher initially submitted that the defendant is entitled in these proceedings to seek a declaration that the plaintiff’s conduct as a liquidator was malicious and/or reckless, irrespective of any findings in the other judgements referred to in the litigious background above, such submission was abandoned in respect of the hearing of the separate question (tr 5; 58-59). What I am asked to decide is whether the plaintiff’s claim is directly or indirectly based upon, or is attributable to, or is in consequence of a malicious or reckless act or omission established by the judgments relied upon by the defendant. Those judgments that are referred to in paragraphs 23 and 24 of the Defence are the removal judgment, (Gzell J) and the costs appeal judgment (Court of Appeal). Although the separate question was limited to those two judgments by reference to the paragraphs of the Defence, the defendant’s submissions also relied upon Campbell J’s judgment in the plaintiff’s proceedings, Campbell J’s costs judgment in the plaintiff’s proceedings and Gzell J’s costs judgment in the removal proceedings.

36 The Policy states the following:

Part 1: what we insure you for

1. Insuring clause

1.1 General

We agree to indemnify you against civil liability arising from any claim that is first made against you during the period of cover in respect of your conduct of the professional business.


…

2. Defence costs

2.1 General

We agree to pay any defence costs :

…

(b) that you incur with our written consent.

…

3. Limited indemnity

3.1 General

We are only liable to indemnify you against civil liability arising from any one claim, up to the limit of indemnity .

…

Part 2 – Automatic extensions

6. Fraud and dishonesty

6.1 General

We agree to indemnify you against civil liability arising from any claim that is first made against you during the period of cover , in respect of a dishonest, fraudulent, malicious or reckless act or omission committed or alleged to have been committed by any other person or entity covered by this policy in the conduct of the professional business . However, we are not liable to indemnify you under this clause:
(a) if you personally committed or condoned any act, omission or breach excluded by the fraud and dishonesty exclusion in clause 21; …

…

This extension applies notwithstanding the fraud and dishonesty exclusion in clause 21.

6.2 Meaning of ‘you personally’

For the purposes of this clause, ‘ you personally’ refers to the person or entity covered by this policy seeking indemnity under this policy .


…

Part 4 – Exclusions from Liability

…

21. Fraud and Dishonesty

We are not liable to indemnify you in respect of any claim directly or indirectly based upon, attributable to, or in consequence of any:
(a) dishonest, fraudulent, malicious, or reckless act or omission; or
(b) any wilful violation or wilful breach of any statute or regulation,
by you or your consultants, sub-contractors or agents where such act, omission, violation or breach is established by judgment or other final adjudication.

37 “Claim” is defined to mean a written or verbal demand by a third party for compensation or damages or a civil proceeding brought by a third party for recovery of compensation or damages (cl 42(a)). “Limit of Indemnity” is $20 million (cl 42(g); schedule item 4). “Professional Business” is defined as including the practice, occupation or business of receivers, liquidators or official managers (cl 42(j)(iii)). There is no issue that the plaintiff is someone who is insured under the Policy and there is no issue that the claim for indemnity for the costs liability to Mr Mead is a claim within the definition of that term in the Policy.

38 The defendant denied indemnity on the basis of alleged malicious or reckless acts or omissions by the plaintiff “established by judgment or other final adjudication”. The defendant claims that the acts and/or omissions that have been established by the abovementioned judgments of Campbell J, Gzell J and the Court of Appeal amount to findings that the plaintiff committed acts that were malicious and/or reckless.

Malicious

39 The defendant submitted that the proper construction of the word “malicious” in clause 21(a) of the Policy is the construction given to that term in the tort of malicious prosecution. In Trobridge v Hardy (1955) 94 CLR 147 the section under consideration prevented any action being brought against various officers unless, inter alia, “there is direct proof of corruption or malice”: at 154. Kitto J said (at 162):

The word “malice” must here mean what has been variously called express malice, actual malice or malice in fact as contrasted with malice in law which is no more than the unlawful intent which is present whenever an injurious act is done intentionally and without just cause or excuse: Shearer v Shields [[1914] AC 808 at 813, 814, 815].

40 At 163 Kitto J said:

The distinction which Virtue J considered to be relevant was that to which Cave J. referred to in Brown v Hawkes [(1891) 2 Q.B. 718] when he said in dealing with a case of malicious prosecution: “malice can be proved, either by shewing what the motive was and that it was wrong, or by shewing that the circumstances were such that the prosecution can only be accounted for by imputing some wrong or indirect motive to the prosecutor” [(1891) 2 Q.B. 718 at 722].

41 Taylor J in assessing the conduct in question said (at 176):

He was possessed of authority which, quite obviously, he used for the purpose of inflicting quite needless suffering and humiliation on the appellant. It is unnecessary to speculate why the respondent so used his authority for, whatever the reason, a desire to exercise his authority for its only legitimate purpose must have been entirely absent. In these circumstances a finding that the respondent was actuated by malice is not only possible but inevitable.

42 The defendant submitted that to prove that the acts of the plaintiff were malicious it must establish that the conduct complained of was actuated solely or predominantly by a wrong or indirect motive. Reliance was also placed on Rapley v Rapley (1930) 30 SR (NSW) 94 in support of the submission that an indirect or improper motive is a “wrong or sinister motive”. Rapley v Rapley was a case in which Mrs Rapley claimed damages from her son upon the grounds that he had falsely and maliciously, without reasonable and probable cause, charged her as a person deemed to be insane, wandering at large, and caused her to be arrested and imprisoned (at 95). The only matter that the plaintiff had to prove to the jury was the malice of her son in his actions. The trial judge adopted the language of Bowen LJ in Abrath v North Eastern Railway Co ((1883) 11 QBD 440 at 455) and directed the jury that what the plaintiff had to prove was that the proceedings were initiated against her “in a malicious spirit, that is, from an indirect and improper motive, and not in furtherance of justice”. Street CJ (with whom Ferguson and James JJ concurred) said (at 99):

The suggestion that, because the defendant on his own admissions went beyond the bounds of accuracy in swearing that the plaintiff was wandering at large, he could not be heard to say that he was not acting maliciously, and that, because he admitted that in taking proceedings his desire was to stop the plaintiff from disposing of her property, he must be taken to have had an indirect and improper motive for taking them, cannot be supported. What is meant by an indirect and improper motive is some wrong or sinister motive, some other motive or desire, as Hawkins , J. said in Hicks v Faulkner , than to do what the moving party bona fide believed to be right in the interests of justice.

43 The defendant submitted that in the light of these authorities, so long as an indirect or improper motive can be attributed to the plaintiff that is, a desire to embark on a course of conduct other than which was in the interests of Hypec, then his conduct can be characterised as “malicious” leading to the application of clause 21(a) of the Policy. It was also submitted that if the plaintiff’s conduct was actuated predominantly by a wrong or indirect motive of causing detriment to one of the directors, Mr Mead, and favouring another director, Mrs Mead, then malice will be established.

44 The plaintiff submitted that the words “malicious” and “reckless” have alternative possible meanings and thus should be regarded as ambiguous. In those circumstances it was submitted that the words should be construed against the insurer by giving them the meaning that narrows the scope of the exclusion. The plaintiff relied upon the definition of “malice” as contained in the Shorter Oxford English Dictionary as extracted in its submissions as follows: “(1) Badness: esp. wickedness; (2) The desire to injure another person; act of ill-will or hatred; (3) Malicious conduct: a malicious act or device; (4) Power to harm, harmful action or effect, malignancy; and (5) LAW. Wrongful intention, esp. as aggravating guilt in certain offences or depriving some act of a justification or excuse that might otherwise have been allowed”.

45 The definition of “malicious” in the same dictionary was similarly extracted as “given to, arising from, or characterised by malice”. Of the above meanings the plaintiff submitted that the fifth is the one likely to have been intended by the adjective “malicious” in clause 21(a) of the Policy. Emphasis was placed on the fact that the word malicious was used in collocation with “dishonest” and “fraudulent” which terms connote wrongful intention, acting with knowledge and appreciation of wrongfulness. It was submitted that it is likely that a similar meaning is intended for the term “malicious” when used in connection with those words. The defendant drew upon the criminal text, P. Gillies, Criminal Law (4th ed., 1997), Law Book Company, Sydney at p. 757 as follows:

The adverb ‘maliciously’ as employed in statutory provisions creating criminal liability, has been treated as a technical term [ Commissioner of Police v Caldwell [1981] 2 WLR 509 at 512] and as such has been consistently interpreted as importing mens rea. In Cunningham [[1957] 2 QB 396] the English Court of Criminal Appeal accepted that the following statement from Kenny’s Outlines of Criminal Law accurately stated the meaning of the term:

‘In any statutory definition of a crime, malice must be taken not only in the old vague sense of wickedness in general but as requiring either (1) An actual intention to do the particular kind of harm that in fact was done; or (2) recklessness as to whether such harm should occur or not (that is, the accused had foreseen that the particular kind of harm might be done and yet has gone on to take the risk of it). It is neither limited to nor does it require any ill will towards the person injured’.

This notion, that malice requires no more or less than that the defendant intend that the prescribed harm take place, or that he or she acts recklessly in respect of it in the sense that the defendant does an act causing it to happen without the desire that it should happen but knowing that there is a risk that it will happen, has been approved in Australia [ Vallance v R ( 1961) 108 CLR 56 at 59, 73; Blevins ( 1988) 48 SASR 65].

46 It was submitted that the second meaning in the dictionary, an “act of ill-will or hatred”, is not likely to have been intended by the parties. It was submitted that it would not be a relevant or useful sense of the word for the purposes of the parties to an insurance policy and would serve no practical commercial purpose for an insurer to exclude liabilities incurred merely because they were accompanied by ill will or personal hatred. On the other hand it was submitted that utility can be seen in an insurer excluding cover where liability has arisen from acts perpetrated with wrongful intention, that is, deliberate, intended, wrong doing or action accompanied by indifference to foreseen risks, being recklessness.

47 The plaintiff also referred to the meaning of “malice” in the Macquarie Dictionary that defines the term as (1) desire to inflict injury or suffering on another and (2) Law. Evil intent on the part of one who commits a wrongful act injurious to others. It was submitted that this definition supports the abovementioned submissions.

48 Reference was also made to the term “malice” in the law of defamation. A defence of qualified privilege may be defeated by the plaintiff proving “express malice” which in context has come to mean “a purpose or motive that is foreign to the occasion [of the qualified privilege] and actuates the making of the statement”: Roberts v Bass (2002) 212 CLR 1 at 30 [75]. It was submitted that the use of the term malice in the law of defamation and in the law of malicious prosecution referred to in Trobridge v Hardy have emerged from the evolution of the common law in those areas and that such usages are not of assistance in determining the meaning of the term “malicious” in clause 21(a) of the Policy.

49 Mogul Steamship Company v McGregor Gow, & Co, & Ors (1889) 23 QBD 598 was a case in which the plaintiff and the defendants were rival shipowners vying for market share in the tea trade between China and Europe. The defendants had formed an association that offered the merchants and shippers in China that shipped their tea exclusively with members of the association a 5% rebate on all freights paid by them. The plaintiff was excluded from the benefits of the association and sued the defendants for damages for an alleged conspiracy to prevent the plaintiff carrying out its trade between London and China. Lord Coleridge C.J. found for the defendants (21 QBD 544) and the appeal to the Court of Appeal was dismissed. Bowen LJ, with whom Fry LJ agreed, Lord Esher MR dissenting, said (at 612- 613):

We were invited by the plaintiffs’ counsel to accept the position from which their argument started—that an action will lie if a man maliciously and wrongfully conducts himself so as to injure another in that other’s trade. Obscurity resides in the language used to state this proposition. The terms “maliciously,” “wrongfully,” and “injure” are words all of which have accurate meanings, well known to the law, about which also have a popular and less precise signification, into which it is necessary to see that the argument does not imperceptibly slide. An intent to “injure” in strictness means more than an intent to harm. It connotes an intent to do wrongful harm. “Maliciously,” in like manner, means and implies an intention to do an act which is wrongful, to the detriment of another. The term “wrongful” imports in its turn the infringement of some right. The ambiguous proposition to which we were invited by the plaintiffs’ counsel still, therefore, leaves unsolved the question of what, as between the plaintiffs and defendants, are the rights of trade. For the purpose of clearness, I desire, as far as possible, to avoid terms in their popular use so slippery, and to translate them into less fallacious language wherever possible.

50 His Lordship said later (at 613):

Now, intentionally to do that which is calculated in the ordinary course of events to damage, and which does, in fact, damage another in that other person’s property or trade, is actionable if done without just cause or excuse. Such intentional action when done without just cause or excuse is what the law calls a malicious wrong [see Brommage v Prosser 4 B. & C. 247; Capital and Counties Bank v Henty (1882) 7 App. Cas. 741 at 772].

51 I am of the view that the expression “malicious” in clause 21(a) of the Policy should be construed in the context in which it appears taking its colour from the words and expressions within the clause. This is a clause excluding the insurer’s liability for the intentionally wrongful or wilful acts or omissions of the insured. The concepts of dishonesty and fraud and wilful violations and breaches seem to me to suggest that the insured’s conduct that disqualifies him from indemnity must be intentional. I am of the view that a “malicious” act or omission referred to in clause 21(a) of the Policy relevant to the issues in this case is an act or omission done or made for the predominant purpose of inflicting harm or damage to another person.

Reckless

52 In Banditt v The Queen (2005) 80 ALJR 421; [2005] HCA 80, the High Court was considering an appeal in which the appellant had been convicted at a jury trial of an offence under s 112(1) of the Crimes Act 1900 (NSW) (the Act) for the serious indictable offence under s 61I of the Act of having sexual intercourse without the consent of the other person with knowledge that the other person did not consent. Section 61R of the Act deals with knowledge under s 61I of the Act and provides, inter alia, that knowledge includes being “reckless as to whether the other person consents”. An appeal to the Court of Criminal Appeal was dismissed. The appellant complained that the trial judge misdirected the jury in relation to recklessness in two passages in the summing up by directing them that “recklessness” included: “If he was aware that there is a possibility that she is not consenting but he goes ahead anyway” and “or at least he recognised that there was a possibility that she may not consent but he went ahead and did it anyway”: reproduced at 425 [14].

53 Gummow, Hayne and Heydon JJ said (at 422–424):

1. The term “reckless” has various uses as a criterion of legal liability. This appeal turns upon one such use of the term in the New South Wales criminal law, but it is convenient first to consider some aspects of the civil law.

2. When “reckless” is used in applying the principles of the tort of negligence, the yardstick is objective rather than subjective. On the other hand, to sustain an action in deceit, fraud is proved when it is shown “that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false” [ Derry v Peek (1889) 14 App Cas 337 at 374 per Lord Herschell]. But (3) is but an instance of (2) because, as Lord Herschell put it in Derry v Peek [at 374]:
“[O]ne who makes a statement under such circumstances can have no real belief in the truth of what he states.”
This reasoning is akin to that which supports the evidentiary inference explained by Lord Esher MR as being that one who wilfully shuts his eyes to what would result from further inquiry may be found to know of that result.

3. To these expositions of the civil law by Lord Herschell and Lord Esher there may be added the following statement by Lord Edmund-Davies in his dissenting speech in R v Caldwell [[1982] AC 341 at 358]:

“ So if a defendant says of a particular risk, 'It never crossed my mind,' a jury could not on those words alone properly convict him of recklessness simply because they considered that the risk ought to have crossed his mind, though his words might well lead to a finding of negligence. But a defendant's admission that he ‘closed his mind’ to a particular risk could prove fatal, for, ‘A person cannot, in any intelligible meaning of the words, close his mind to a risk unless he first realises that there is a risk; and if he realises that there is a risk, that is the end of the matter’. [See Glanville Williams, Textbook of Criminal Law (1978), p. 79].”
(Original emphasis)

4. In La Fontaine v The Queen [(1976) 136 CLR 62] Gibbs J discountenanced, in those States where legislation did not adopt terms such as “reckless” or “reckless indifference”, their use in summing up at a trial on a murder count. His Honour said (at 76-77):

“ To tell a jury that they may convict of murder when they are satisfied that the accused acted with recklessness or reckless indifference is to invite confusion between murder and manslaughter resulting from criminal negligence. In many, if not most, cases where the Crown alleges that the accused acted knowing that his act would probably cause death or grievous bodily harm it will also be alleged by the Crown, in the alternative, that the accused was guilty of criminal negligence. The expression ‘reckless’ is also used to describe that very high degree of negligence which, if it causes death, amounts to manslaughter [see Andrews v Director of Public Prosecutions [1937] AC 576 at 583; Evgeniou v The Queen (1964) 37 ALJR 508 at 509]. It is not easy to explain to a jury the difference between the reckless indifference which, if it exists, may justify a conviction of murder and that recklessness which would warrant a conviction for manslaughter.”

5. Particular questions about recklessness in murder and disputes about distinctions between probable and possible consequences, which were considered in La Fontaine , do not presently arise. However, it may be noted that in R v Crabbe [(1985) 156 CLR 464 at 468-469 per Cibbs CJ, Wilson, Brennan, Deane and Dawson JJ] they were resolved consistently with the views of Gibbs J.
6. As Gibbs J noted in La Fontaine , criminal offences may be created by statute with a criterion of recklessness or reckless indifference. One such law is s 1(1) of the Criminal Damage Act 1971 (UK) which was considered by the House of Lords in R v G [[2004] 1 AC 1034]. Section 1(1) states:

“A person who without lawful excuse destroys or damages any property belonging to another intending to destroy or damage any such property or being reckless as to whether any such property would be destroyed or damaged shall be guilty of an offence.”

In G , the House of Lords held that foresight of consequences was an essential ingredient of recklessness in s 1(1) and that a formulation which made no allowance for a defendant's youth or lack of mental capacity when assessing obviousness of the risk of damage to property was erroneous.

7. In his speech in G , Lord Bingham of Cornhill rejected the proposition that the above construction of the statute would lead to the acquittal of those whom public policy would require to be convicted. His Lordship said (at 1057):

"There is no reason to doubt the common sense which tribunals of fact bring to their task. In a contested case based on intention, the defendant rarely admits intending the injurious result in question, but the tribunal of fact will readily infer such an intention, in a proper case, from all the circumstances and probabilities and evidence of what the defendant did and said at the time. Similarly with recklessness: it is not to be supposed that the tribunal of fact will accept a defendant's assertion that he never thought of a certain risk when all the circumstances and probabilities and evidence of what he did and said at the time show that he did or must have done.”

54 Their Honours also said (at 429 [36]):

It may well be said that “reckless” is an ordinary term and one the meaning of which is not necessarily controlled by particular legal doctrines. However, in its ordinary use, “reckless” may indicate conduct which is negligent or careless, as well as that which is rash or incautious as to consequences; the former has an “objective”, the latter a “subjective”, hue. These considerations make it inappropriate for charges to juries to do no more than invite the application of an ordinary understanding of “reckless” when applying s 61R(1).

55 Callinan J, in agreeing that the appeal should be dismissed, said (at 429; footnotes omitted):

108. The fact that competing submissions can plausibly be made, the plethora of articles, and the different judicial and legislative formulations advanced or enacted, demonstrate only one matter clearly, that attempts to define “recklessness” are bound to give rise to, and have given rise to unnecessary uncertainty. “Reckless” is an old and well understood English word. It has been said that there are no true synonyms in the English language. The search for a truly synonymous phrase or expression will equally, frequently be likely to be futile. It is true as Gummow, Hayne and Heydon JJ point out that in different branches of the law and different enactments recklessness may have different elements. It is equally true that on occasions in the law a word will need explanation, elaboration, or definition, but that need tends to arise most often by reason of an uncertain or ill-expressed context of which it forms part. Section 61R is not such a context. The clause “who is reckless as to whether the other person consents to the sexual intercourse” is a perfectly simple one. I do not accept that it is beyond the capacity of a jury to understand and give effect to it, without judicial exegesis, particularly in modern times when juries are composed indiscriminately of the sexes.

56 In the context of insurance law, perhaps thankfully, “reckless” has been held to mean an act made with actual recognition by the insured that a danger exists and not caring whether or not it is averted: Fraser v B N Furman (Productions) Ltd [1967] 1 WLR 898 at 906 per Lord Diplock; Legal & General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390 at 397 per Kirby P and at 403 per Glass JA.

57 The alternative meanings referred to in Banditt must in my view yield to a meaning in the context of this Policy. I am of the view that the meaning of a “reckless” act or omission in clause 21(a) of the Policy is an act done or an omission made when the insured could see the risk that harm may be caused from doing the act or making the omission and proceeded to act or commit the omission not caring about or being indifferent to averting that risk.

“Established by judgment or final adjudication”

58 The parties submitted that there was no authority on the meaning of the term “established by judgment or final adjudication” however the term was considered in Wilkie v Gordian Runoff Ltd (2005) 79 ALJR 872; [2005] HCA 17 a case in which the High Court was considering the construction of a Directors & Officers/Company Reimbursement Policy. Exclusion 7 under that Policy excluded insurance for loss arising out of any claim “based upon, attributable to, or in consequence of (i) any dishonest, fraudulent, criminal or malicious act or omission; or (ii) any deliberate breach of any statute, regulation or contract; where such act, omission or breach has in fact occurred”. The clause also provided that the words “in fact” included a meaning that the conduct was “subsequently established to have occurred following the adjudication of any court, tribunal or arbitrator”. Extension 9 in that Policy reserved to the insurer the right to recover from the insured any Defence Costs paid to the insured, in the event that and to the extent that it was subsequently “established by judgement or final adjudication” that the insured was not entitled to indemnity under the Policy.

59 The appellant sought advance payment of Defence Costs under the Policy for the purpose of defending a criminal prosecution the outcome of which was uncertain at the time the insurer denied the claim. Gleeson CJ, McHugh, Gummow and Kirby JJ (with whom Callinan J agreed) said (at 878 [42]):

Extension 9 is subject to all the exclusions of the Policy, including Exclusion 7. It becomes necessary to relate the concept of denying indemnity in stipulation (i) of Extension 9 to the requirement in Exclusion 7 that the specified misconduct “has in fact occurred”, that is, has been admitted or established by adjudication. Putting the possibility of admission to one side, where there is, for example, an allegation of a criminal act, an element necessary for the operation of Exclusion 7 is adjudication of criminal guilt. It is not the fact of criminal conduct that enlivens the exclusion; it is the fact of adjudication of guilt, ordinarily by conviction. The evident purpose of the concluding words of Exclusion 7 (and the corresponding words in Exclusions 5 and 6) is to deprive the Insured of an entitlement to indemnity only where there has been a curial finding of misconduct of a kind specified. Where, by hypothesis, there has been no such finding, a necessary element of the exclusion is missing. In those circumstances, there is as yet no ground to which GIO can point as a legal basis for a denial of indemnity. The denial of indemnity of which Extension 9 speaks is a refusal of indemnity on a ground for refusal provided by the Policy, not a statement which foreshadows that indemnity will be refused if and when a ground for refusal becomes available.

60 As I have said earlier, the hearing on the separate question does not require an adjudication, independently of the judgments relied upon, that specified conduct by the plaintiff was malicious or reckless within the meaning of that term in clause 21(a) of the Policy. There is no issue that such an adjudication can occur in the proceedings in relation to the primary obligation under the insuring clause: see Wilkie at 878 [38]). However that is not what is being sought at this stage. The question is directed quite specifically to whether the findings in the judgments referred to above are “curial finding(s) of misconduct of a kind specified”.

61 There is no express finding in any of the judgments relied upon by the defendant that the plaintiff’s acts were “malicious” or “reckless”. However the defendant submitted that inferences may be drawn from those findings that the conduct that led to the plaintiff’s costs liabilities to Mr Mead, were malicious or reckless acts within the meaning of those words in clause 21(a) of the Policy.

62 The plaintiff emphasised the context in which the words “malicious” and “reckless” appear in clause 21 of the Policy. All of the alternatives in clause 21 are serious. They are dishonesty, fraud, wilful violation or breach of statutory regulation and malice or recklessness. It was submitted that a finding that a professional person had committed an act in any of those categories would be a grave reflection upon that professional person. It was submitted, therefore, that the parties would not have intended that such serious matters could be taken to have occurred without a clear judicial determination of the facts. It was also submitted that the expression “established by judgment” should be taken to mean that there must be a clear, direct, express finding of the relevant matter (malice or recklessness in the present case) in the reasons of a Court which has adjudicated on the facts. In this submission the plaintiff accepted that “judgment” includes reasons for judgment. It was also submitted that whether malice or recklessness has been “established” depends upon whether there can be identified any judicial findings in relation to the plaintiff’s state of mind such that he engaged in intentional wrongdoing or acted with knowing indifference to an actually perceived risk. I agree with that submission.

134 At the very least, it was unreasonable for them not to have ascertained the error, corrected it and reconsidered their position with respect to their continued opposition to the estoppel defence insofar as it related to the four properties. It must follow that, in the Beddoe sense, Mr Watson in his continued opposition to that defence acted in a way which involved an improper performance of his duties to the creditors and contributories of the company. It was, in our opinion, a clear case of Beddoe impropriety.
…
159 In our respectful opinion the disregard by Mr Connolly, and his disparaging of the merits, of the Family Court application was entirely misplaced and bordered on the reckless. Regrettably, it affected his and Mr Watson's conduct of the litigation that was thereafter instituted for the recovery of the four properties. Further, the conduct of Mr Connolly and Mr Watson when taken as a whole justifies a special order for costs against Mr Watson. Accordingly, in our view Mr Mead has made out a case for an award of costs on an indemnity basis.

86 The above paragraphs make clear that there is no finding of malicious conduct or reckless conduct. Indeed the reference in paragraph 159 to the term “reckless” makes very clear that there are no such findings. The Court concluded that what Mr Connolly did “bordered on” reckless conduct. Far from making a finding of recklessness in respect of Mr Connolly, the Court stopped short of making such a finding. To suggest that these paragraphs can amount to a finding that the plaintiff acted maliciously or recklessly is simply not justified.

Answer to separate question

87 The question was:

Was liability under the Policy issued by the defendant properly denied pursuant to clause 21 of the Policy, being the issues raised by paragraphs 22, 23, 24 and 25 of the Defence?

88 The answer to the question is “No”.

89 The matter is listed for directions on 12 May 2006 and for any costs argument should the parties not be able to agree on a costs order.

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