The Duke Group Ltd (in Liquidation) v Angus Claymore Pilmer

The defendants in this case sought leave to issue third party proceedings against Western United Limited (In Liquidation) to recover damages for alleged negligent misstatements. The plaintiff, formerly Kia Ora Gold Corporation NL, had sued the defendants for damages alleging breach of contract and negligence in the preparation of an alleged valuation of Western United. The defendants denied any breach of duty owed to Kia Ora but asserted that others were in breach of a duty to them. The defendants claimed damages against Western United, which they sought to recover through the proposed third party proceeding. Western United was ordered to be wound up by the Supreme Court of South Australia on 25th July 1989, and the winding up process was ongoing. Therefore, the defendants required leave to issue the third party proceedings.

The court had to decide whether the defendants had a prima facie case against Western United and whether leave should be granted under s.371(2) of the Companies (South Australia) Code. The court found that the defendants had a prima facie case against Western United as it was likely that there would be a genuine dispute between the defendants and Western United regarding the elements of the tort of negligent misstatement. However, the court refused to grant leave because the proposed action would be futile. Under s.82(2) of the Bankruptcy Act 1966 (Cth.), demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise, or breach of trust are not provable in bankruptcy. This exclusion is absolute unless the company is insured against the liability to a third party, and an amount is received by the company from the insurer with respect to that liability. The defendants were unable to establish that their proposed claim was covered by insurance, and therefore, their proposed action would be futile.

The court also rejected the argument that Western United may not be truly insolvent and may benefit from the action brought by the plaintiff against the defendants. The evidence established that Western United was insolvent and was likely to remain so even if the debt was paid.

The application for leave to issue third party proceedings was refused. The court noted that if the defendants could establish that an insurance cover existed, the application could again be pursued.