By Ariel Borland, Partner and Jennifer O’Farrell, Associate

In CGU Insurance Limited v Blakeley [2016] HCA 2 (Blakeley), the High Court of Australia dismissed an appeal from the Court of Appeal of the Supreme Court of Victoria, and held that the federal jurisdiction invested in the Supreme Court of Victoria (Supreme Court) authorises State Supreme Courts to grant declarations in favour of a plaintiff that the defendant’s insurer is liable to indemnify the defendant.

The decision will be of particular importance to liquidators who pursue claims against directors who are prima facie indemnified by an insurance policy.  If there is any dispute with the insurer about its obligation to indemnify director defendants, a declaration can be sought in the substantive proceedings against the director defendants.

Facts

The first respondents, Ross Blakeley, Michael Ryan and Quentin Olde (the Liquidators), are liquidators of the second respondent, Akron Roads Pty Ltd (In Liquidation) (Akron).  On 9 April 2013, the Liquidators commenced an insolvent trading claim against Akron’s directors (the Directors) under sections 588G and 588M of the Corporations Act 2001 (Cth) (the Act).

On 4 December 2013, the Directors made a claim for professional indemnity under a policy of insurance with the appellant, CGU Insurance Ltd (CGU) in relation to the Liquidators’ insolvent trading claim.  CGU denied that they were liable under the policy due to the operation of various exceptions in the policy.

On 20 August 2014, the Liquidators filed an interlocutory process seeking:

1. an order pursuant to rule 9.06(b) of the Supreme Court (General Civil Procedure) Rules 2005 that CGU be joined to the proceeding as a defendant;  and
2. leave to seek a declaration that CGU was liable to indemnify the Directors under the policy in respect of any judgment and costs order in favour of the Liquidators.

At first instance, his Honour Justice Judd made the orders sought by the Liquidators.  The Court of Appeal dismissed CGU’s appeal and CGU appealed to the High Court.  Before the High Court, CGU asserted that the Supreme Court lacked jurisdiction to join CGU and to grant the declaratory relief sought by the Liquidators due to the private contract of insurance between CGU and the Directors and in circumstances where the Directors were not themselves entitled to pursue a claim against CGU.

The High Court’s Decision

On 11 February 2016, the High Court dismissed the appeal and held that the Liquidator’s claim for relief fell within the subject matter of the federal jurisdiction of the Supreme Court.

The federal jurisdiction of the Supreme Court was invoked because the claim related to federal legislation.  In particular:

1. the Liquidators relied upon section 562 of the Act as a sufficient basis for the joinder of CGU, (and an analogous provision in section 117 of the Bankruptcy Act 1966 (Cth) which vests, in the trustee of bankruptcy, the right of a bankrupt to indemnify, under a contract of insurance, against liabilities to third parties); and
2. CGU in its defence relied on section 21(1) of the Insurance Contracts Act 1984 (Cth).  In light of these pleadings, the jurisdiction invoked in the Supreme Court was federal jurisdiction.

The High Court noted that the Supreme Court had jurisdiction to determine matters arising under federal legislation by reason of section 39(2) of the Judiciary Act 1903 (Cth) (Judiciary Act).  The power to make the declaration in respect of CGU’s liability arose under section 36 of the Supreme Court Act 1986 (Vic) which was “picked up” by section 79 of the Judiciary Act, allowing the Supreme Court to make the declaration when exercising federal jurisdiction.

Conclusion

The Blakeley decision confirms that the federal jurisdiction invested in the Supreme Court of Victoria authorises it to make:

1. orders joining an insurer to a proceeding in which the insurer may be liable to indemnify the defendants; and
2. declarations that the insurer is liable to indemnify the defendants.

The decision is of particular utility to insolvency practitioners who sue a party (typically directors) in circumstances where an insurance policy may respond to the claim.  If the insurer disputes liability to indemnify the defendants, it is now clear that the practitioner can join the insurer to the proceeding and seek the appropriate declaration, even in circumstances where the claim is in State Supreme Courts.