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A warning to liquidators against compromising claims where a D&O policy exists

Re Akron Roads Pty Ltd (in liq) (No 3) [2016] VSC 657

AN INSURER ESCAPED LIABILITY from indemnifying claims against its clients in liquidation proceedings. The Victorian Supreme Court found that the insurers’ liability was limited by the deed of settlement entered by its client, and that the client’s non-disclosure ultimately avoided all liability.

Factual Background

Mr Crewe was a director for Akron. He admitted insolvent trading of $12 million. Mr Crewe entered into a deed of settlement with the liquidators, limiting his personal liability to $125,000. The terms of the deed of settlement allowed the liquidators to first seek a claim against the insurers.

CGU Insurance Limited issued a professional indemnity policy of insurance to Crewe Sharp. Mr Crewe, as director of Crewe Sharp, was also insured under that policy. Crewe Sharp made a claim on the policy for indemnity in relation to the claim brought against it by the liquidators of Akron.

CGU denied that the policy covered the liability asserted by the liquidators. CGU relied on an exclusion clause that excluded liability that arose from any act, error or omission by a director or officer, or for trading debts, trade debts, or the repayment of the loan.

The Decision

Even though the insurer, CGU, was on the hook for $12 million (as it was the director’s indemnity policy), the insurer was limited in their liability to the loss suffered by the insured i.e. the director, Mr Crewe.

CGU avoided all liability to indemnify Crewe Sharp, as a ‘shadow director’, and Mr Crewe on the basis of their non-disclosure. This was because Crewe Sharp and Mr Crewe did not inform CGU that they would take up directorship. It was held that such information was relevant to the policy CGU would agree to provide. As such, the liability of CGU was reduced to zero.

Source: skitterphoto.com

This case serves as a warning against settling against directors if there is a possibility of recovery against an insurer as the insurer might only be liable to indemnify what is owed by the director.

To access the full judgment, follow this link – http://www8.austlii.edu.au/cgi-bin/viewdoc/au/cases/vic/VSC/2016/657.html

Key Words

  • Liquidation
  • Director
  • Insurance
  • Indemnity Policy
  • Non-disclosure