04 Aug 2010

Assigning your rights under a D&O policy: the High Court speaks

Assigning your rights under a directors' and officers' policy is a vexed issue, and this morning the High Court gave some welcome guidance on the issue (CGU Insurance Limited v One.Tel Limited (In Liquidation) [2010] HCA 26 - Clayton Utz acted for the successful respondent).

The director, the D&O policy, and the $20 million order

Mr Greaves had a problem - a $20 million-sized problem, to be precise. That was the size of the compensation order that had been made against him in favour of One.Tel, the company of which he'd been a director. He also was required to pay $350,000 to ASIC.

He then entered into a Deed of Arrangement under Part X of the Bankruptcy Act 1966, assigning to his Trustee, amongst other things, his rights in a D&O policy with CGU. There were three particularly important clauses in the Deed:

  • clause 9, which said that once the Trustee realised any assets under the policy he would issue a certificate to Mr Greaves;
  • clause 10, which said that once he had the certificate Mr Greaves would "be absolutely released and discharged from all liability in respect of the compensation and costs order"; and
  • clause 11, which said that neither the Trustee nor any creditor would take any steps to enforce the compensation and costs order against Mr Greaves before the certificate was executed.

Proceedings were commenced but unfortunately the Deed expired before the Trustee realised the assets from the policy. So now what?

CGU to insured and creditors: Not our problem

CGU argued that the Trustee couldn't continue trying to recover assets under the policy once the Deed has expired.

Even if he had the power, said CGU, the Trustee would still be disappointed because there was no "loss" to which the policy responded. This turned on clause 11 of the Deed - if no-one is going to enforce an order against Mr Greaves, what has he lost?

High Court to CGU: Yes it is

The Trustee did have the right to continue the action against CGU - he had taken the right to recover under the Deed, and that survived the end of the Deed. In fact, the Deed gave the Trustee the duty to vindicate any rights Mr Greaves held under the Policy. Once the Deed expired, the Trustee remained a bare trustee, and still had that duty.

As for the second argument, CGU again received bad news from the High Court. Clause 11 expired at the same time the Deed did - and even if it didn't:

  • clause 11 doesn't release Mr Greaves from the obligation of paying the compensation order - only a certificate under clause 9 would do that
  • a "loss" under the policy includes judgments and settlements, and the compensation order is in that category
  • even if the Trustee and creditors can't enforce the compensation order against Mr Greaves, that doesn't mean he still doesn't have to pay it
  • clause 11 can't extinguish Mr Greaves' obligation to pay because that would make clause 9 meaningless.

What does this mean for directors, officers and creditors?

For directors, officers, and their creditors, this is a good decision. Although the High Court did not expressly decide the assignment was valid at law, it accepted that it was valid in equity, which was good enough in this case.

It also accepted that the Trustee retains some rights and duties, even after the Deed has expired, which means that any recovery under a policy like this in the future is less likely to be bogged down or halted if the Deed expires.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.