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Insurance Policy Disclosure in Insolvency Administrations

We have recently been involved in two voluntary administrations which lead to Deeds of Company Arrangement (DOCA) where a creditor sought a copy of the company’s insurance policy which they knew was in existence and which was relevant to their claim. The creditor knew of the policy’s existence due to the terms of their contract with the company, which required the company to maintain such a policy. The creditors in each case were keen to learn of the amount of the indemnity which might be available to the company under that policy, now that the company was insolvent.

In each administration, the approved DOCA quite properly retained the creditor’s rights which would have existed in liquidation under section 562 of the Corporations Act 2001. Section 562 requires any recovery by a liquidator from an insurer in respect of a creditor’s claim, to be remitted to the creditor after deduction of the expenses incurred by the liquidator in getting in that insurance indemnity. The creditor thereby obtains a priority to that net asset, as compared to other unsecured creditors.  Case law has clarified that a liquidator’s remuneration incurred in getting in the insurance proceeds forms part of those “expenses”.

This priority causes any benefiting creditor to be intensely interested in understanding what steps the liquidator, or DOCA administrator, is taking to try to obtain the indemnity from the insurer and when it might be obtained. The insurer is seen by the creditor as the potential “deep pocket”.

The practical difficulties and tensions with applying this section are:

  • The company will have both a contractual and statutory duty to the insurer. That most likely prevents the liquidator from disclosing the policy and the communications with the insurer about the claim made under it to third parties;
  • The liquidator also has a duty to act in the interests of the creditor;
  • The creditor will benefit under any policy indemnity, but is also an adverse party in the insurer’s eyes;
  • The insurer may not readily respond if there are doubts about whether the policy indemnifies the claim;
  • The liquidator may need funding to better assert or prove the claim or perhaps to even sue the insurer if it is wrongly refusing to respond;
  • The creditor is the perfect candidate to fund the liquidator, but it will not do so without knowing about the policy and any complications in obtaining indemnity.

The risk in giving a copy of the policy to a creditor is that the policy might then be sought to be avoided by the insurer, or at least it might create an argument that it could be. This is because the policy may have confidentiality provisions, or other provisions preventing the policy disclosure, or requiring the insurer’s consent to disclose the policy. There is also the insured’s duty to act in good faith and avert loss, the boundaries of which are not closed: AFG Insurances Ltd v Brighton City (1972) 126 CLR 655.

A cautious insolvency practitioner is therefore unlikely to provide a copy of the policy to the creditor.

Providing the creditor with a copy of the communications between the insurer and the liquidator about the company’s claim would also arguably breach the insured’s good faith duty to the insurer.

In the first case, the creditor had a court action on foot at the administration date. It sought the court’s leave to proceed against the company under a DOCA. It issued a notice to produce and subpoena for a copy of the policy.  The DOCA administrator consented to the leave being given. There was known to be a policy. Other creditors were not affected by leave being given. The court refused to allow that production: Commonwealth Bank of Australia v ACN 076 848 112 Pty Limited [2015] NSWSC 666. This decision is being appealed by the bank.

In the second case, the creditor brought a court application to terminate the DOCA on various grounds, including for the failure of the administrator to provide it with a copy of the terms of the policies. In this case the judge noted that he did not think the administrator had acted unreasonably in refusing to provide a copy of the policy to the affected creditor: Tasmanian Water & Sewerage Corporation Pty Ltd v Hayes [2015] FCA 506.

 

James Hamilton

Lawyers

(02) 9318 6423

james.hamilton@surrypartners.com.au

 

July 2015