Silbermann v CGU Insurance Limited Greaves v CGU Insurance Limited Rich v CGU Insurance Limited [2002] NSWSC 846

New South Wales Supreme Court

CITATION : Silbermann v CGU Insurance Limited Greaves v CGU Insurance Limited Rich v CGU Insurance Limited [2002] NSWSC 846 CURRENT JURISDICTION: Equity Division Commercial List FILE NUMBER(S) : SC 50141/01; 50096/02; 50150/02 HEARING DATE(S) : 26 August 2002 & 4 September 2002 JUDGMENT DATE : 18 September 2002

Mark Silbermann (Pltf) PARTIES : John Huyshe Greaves (Pltf) John David Rich (Pltf) CGU Insurance Ltd (Def) JUDGMENT OF : McClellan J

D L Williams (Pltf - Silbermann & Rich) COUNSEL : J B Simpkins SC/M A Jones (Pltf - Greaves) C Gee QC/A W Street SC (Def) J Rees ( ASIC) Piper Alderman (Pltf - Silbermann) SOLICITORS : Watson Mangioni (Pltf - Greaves) Ebsworth & Ebsworth (Pltf - Rich) Colin Biggers Paisley (Def) CATCHWORDS : INSURANCE - motion to strike out paragraphs of defence - construction of policy - former directors of a company in liquidation claim indemnity for defence costs in proceedings brought against them by ASIC - whether the use of particulars in defence was appropriate - principles applicable in strike out motion General Steel Industries Inc v Commissioner of Railways (NSW) (1964) 112 CLR 124 CASES CITED : Bruce v Odhams Press Ltd [1936] 1 KB 697 Sims v Wran [1974] 1 NSWLR 317 Banque Commerciale SA In Liquidation v Akhil Holdings Limited (1970) 169 CLR 279 DECISION : See para 90

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

McCLELLAN J

WEDNESDAY 18 SEPTEMBER 2002

50141/01 SILBERMANN v CGU INSURANCE LIMITED 50096/02 GREAVES v CGU INSURANCE LIMITED 50150/02 RICH v CGU INSURANCE LIMITED JUDGMENT 1 HIS HONOUR: The plaintiffs, who are former directors of One.Tel Limited, which is in liquidation, have brought proceedings against CGU Insurance Limited claiming an indemnity for the costs of defending themselves in proceedings brought against each of them by the Australian Securities and Investment Commission. CGU have filed a defence in each of the proceedings and the plaintiffs, by motion, seeks to strike certain paragraphs from that defence. In part, the success of the motion depends upon the construction of the insurance policy issued by CGU. The relevant provisions of the policy 2 The policy is a Directors and Officers Liability Insurance Policy. It provides that CGU will pay "any Loss for which the Directors and Officers may not be legally indemnified by (One Tel) arising out of any Claim, by reason of any Wrongful Act committed by them in their capacity as a Director or Officer." 3 "Wrongful Act" is defined by the policy to mean: "any actual or alleged breach of duty, breach of trust, neglect, error, misstatement, misleading statement, omission, breach of warranty of authority or other act done or attempted by or any other matter claimed against any Director or Officer or any of them wherever or whenever while acting in their individual or collective capacities as Directors or Officers." 4 "Loss" is also defined and includes Defence Costs. Cl 5.8 provides: "5.8 Loss 'Loss' shall mean: the amount payable in respect of a Claim made against the Directors and Officers for a Wrongful Act and shall include damages, judgements, settlements, interest, costs and Defence Costs. In respect of Section 2.5 (Insured vs Insured Cover) and 2.20 (Entity Cover for Employment Practices Liability) this Policy will include back-pay where reinstatement by a court is ordered but excludes any amount which the Insured is or was required to pay pursuant to a specific obligation imposed under a contract of employment, employment agreement, statute, award or otherwise. 'Loss' excludes a Claim arising from or by reason of or directly or indirectly caused by or arising from fines and penalties imposed by law, punitive, exemplary or aggravated or multiple damages, income tax, customs duties, excise duty, stamp duty, sales tax or any other State or Federal tax or duty." 5 The essence of the definition of Defence Costs is that they are the costs of "defending, investigating, attending or monitoring any Claim." The ASIC proceedings fall within the definition of a "Claim". It is defined as follows: "5.1 Claim 'Claim' shall mean: (1) any writ, summons, application or other originating legal (criminal, civil or otherwise) or arbitral proceedings, cross claim or counter-claim issued against or served upon any Director or Officer alleging any Wrongful Act; or (2) any written demand alleging any Wrongful Act communicated to any Director or Officer under any circumstances and by whatever means." 6 The policy includes various "Extensions". Clause 2.1 provides for the advancement of Defence Costs in the event that a claim is made. If the insurer has granted indemnity, it must meet the Defence Costs as they are incurred. If the insurer has not confirmed indemnity and elects not to take over the defence of a claim, it may, "in its discretion, pay Defence Costs as they are incurred and prior to the finalisation of the Claim." In the event that the insurer has paid costs under this provision, it may recover them if it is subsequently established that the Directors were not entitled to the costs which have been advanced. 7 In the present case, because One.Tel is in liquidation, cl 2.11 of the policy has come into operation and CGU may be obliged to indemnify the Directors. However, CGU has not confirmed indemnity and has not taken over the defence of any plantiff and has refused to pay any of the Defence Costs. 8 Section 3 of the Policy provides various exclusions. Clause 3.1 is the source of the present difficulties and I set it out in full: "This Policy does not provide an indemnify against any Claim made against any Director or Officer: 3.1 Dishonesty & Fraud brought about by, contributed to by or which involves: (1) the dishonest, fraudulent or malicious act or omission or other act or omission committed with criminal intent of such Director or Officer; (2) such Director or Officer having improperly benefited in fact from securities transactions as a result of information that was not available to other sellers and/or purchasers of such securities; or (3) such Director or Officer having gained in fact any personal advantage to which he/she was not legally entitled. However, this exclusion shall only apply to the extent that the subject conduct has been established by a judgment or other final adjudication adverse to the Director or Officer." The pleadings 9 Although there are some differences between the pleadings in each of the proceedings, they are not material for present purposes. The summons filed by the plaintiffs in each matter seeks a declaration that CGU is obliged to indemnify the plaintiffs in respect of their costs in defending the ASIC proceedings and in appearing in other proceedings, including the investigation conducted by ASIC and the liquidator's examination in the Federal Court. Orders are sought to the same effect. 10 The insurer has filed a defence which, in the Greaves proceedings, includes the following paragraphs: 35. Further and in the alternative, the defendant says that it was an express term and condition that the said policy does not provide any indemnity against any claim made against any director or officer brought about by, contributed to by, or which involves, the dishonesty or fraudulent act or omission of such director or acts or omissions brought about by, contributed to by, or which involve, criminal intent of such director. 36. The defendant says that the claim made against the plaintiff in proceedings number 5934 of 2001, the claim in relation to proceedings number 3028 of 2001, the claim in relation to the examination in proceedings number N3016 of 2001 and the ASIC investigations pursuant to Part 3 ASIC Law if otherwise within the terms of the cover under the said Policy, which is not admitted, are excluded from any obligation to indemnify the plaintiff by reason of being brought about by contributed to by or involving the dishonest and/or fraudulent acts and omissions by the plaintiff and/or by reason of acts or omissions being brought about by contributed to by or involving the plaintiff committed with criminal intent of the plaintiff. Particulars (a) the financial information that was withheld from the Board of Directors: (i) the management accounts were withheld from the Board of Directors; (ii) the management records revealing growth in overdue trade creditors was withheld from the Board of Directors; (iii) the records revealing the true cause and extent of difficulties in the collectability of debtors was withheld from the Board of Directors; (iv) the true Group losses were withheld from the Board of Directors and understated; (v) the true expected cash collections from debtors were withheld from the Board of Directors and overstated; (vi) the true earnings information in the management records was not provided to the Board of Directors; (vii) the management records to permit the Board of Directors to monitor management, properly assess the financial position and performance of the Group and to detect material adverse developments were withheld from the Board of Directors; (viii) the true cash balance at the end of each month was withheld from the Board of Directors; (ix) the extent of unpresented cheques and other cash unavailable for payment of creditors was withheld from the Board of Directors; (x) the reconciliation between the Flash Reports and Management Accounts was withheld from the Board of Directors. (b) the said financial information was necessary for the Board of Directors to fulfil its responsibility in respect of the Board procedure whereby the Board as a whole was to monitor compliance with statutory responsibilities and accounting and financial control procedures to ensure the accounts and other records are accurate and reliable; (c) the plaintiff knew that the said financial information was withheld from the Board of Directors and thereby intended to prevent the Board as a whole monitoring compliance with statutory responsibilities and accounting and financial control procedures to ensure the accounts and other records are accurate and reliable; (d) in the premises the withholding of the said information was dishonest and/or fraudulent acts by the plaintiff; (e) the plaintiff knew of or was recklessly indifferent to the withholding of financial information from the Board of Directors; (f) the plaintiff says that the withholding of information was committed recklessly or was intentionally dishonest and that the plaintiff failed to exercise his power and discharge his duties in good faith in the best interests of the corporation or for a proper purpose within the meaning of s 184 of the Corporations Act 2001. 37. For the purpose of application of the said exclusion the defendant seeks a judgment or final adjudication adverse to the plaintiff in relation to the said conduct in these proceedings." 11 CGU pleads other reasons which it says justify avoidance of the insurance or refusal to indemnify but they are not relevant to the present motion. The motion 12 The plaintiffs ask in their respective motions that paragraphs 35, 36 and 37 of the defence in the Greaves matter and the equivalent paragraphs in the Rich defence, be struck out. 13 In the Silbermann matter, the equivalent paragraphs to paragraphs 35-37 in the Greaves matter are contained in a Further Amended Points of Defence, which CGU has sought leave to file in court. The grant of leave is opposed by Silbermann for the same reasons that it is submitted the paragraphs in the defences already filed, should be struck out. Submissions on behalf of Greaves 14 Greaves submits that cl 3.1 requires that there be a "judgment or final adjudication" which establishes the relevant conduct before the exclusion will operate. As such a judgment or final adjudication has not been given, the exclusion is not presently available to CGU. It is submitted that the judgment or final adjudication contemplated in the clause is one given in proceedings, other than the present proceedings in which indemnity is claimed. Until such a finding is made in the ASIC matter, or some other relevant proceeding, it is submitted the plaintiffs are entitled to an indemnity. 15 It is submitted that cl 2.1 contains an express provision for the advancement of Defence Costs which includes a right in the insurer to recover those costs in certain circumstances. The practical operation of cl 2.1 in combination with cl 3.1 is that CGU has an obligation to:

(a) pay Defence Costs in respect of the relevant proceedings, as before judgment, the exclusion clause has no application;

(b) if the findings in the proceedings justify application of the exclusion clause, seek recoupment of the Defence Costs which have been advanced. 16 In relation to paragraph 36 of the defence, it is submitted that CGU has not pleaded any fact alleged to constitute the conduct characterised as "dishonest and/or fraudulent" or committed with "criminal intent". Accordingly, it is submitted that as the pleading is not saved by the particulars provided, at least paragraph 36 should be struck out. Submission by Rich and Silbermann 17 Both Rich and Silbermann join in the submission made on behalf of Greaves. However, they put a further argument, which Greaves does not seek to make in this motion. 18 In the further argument, Rich and Silbermann emphasise the fact that the exclusion in cl 3.1 is expressed so that the Policy does not provide an indemnity against any claim with the relevant characteristics. I have previously set out the definition of "Claim." The present proceedings are within that definition. Defence Costs are also defined in the following manner: "5.3 Defence Costs 'Defence Costs' shall mean: all reasonable costs, charges and expenses (other than regular or overtime wages, salaries or fees of any Director of Officer) incurred with the prior written consent of the Insurer in defending, investigating, attending or monitoring any Claim or proceedings, including but not limited to official investigations, examinations, inquiries and the like, or appeals therefrom, together with all reasonable costs of bringing any appeal." 19 It is submitted that as cl 3.1 only refers to a Claim, Defence Costs being separately defined, the exclusion is confined to financial obligations falling within the definition of a Claim. 20 CGU's response, as I understand it, is that as the policy provides indemnity in relation to any Loss, which relevantly means the amount payable in respect of a Claim, and includes costs and Defence Costs, cl 3.1 will operate to exclude Defence Costs associated with the relevant Claim. The submissions of the insurer 21 CGU submits that cl 3.1 must be construed according to its natural or ordinary meaning, read in the light of the contract as a whole. 22 CGU submits that to the extent that it is suggested that the application of the exclusion must be established by a judgment or other final adjudication in proceedings to which it is not a party, that is not the natural and ordinary meaning of the words used. The words used are clearly capable of catching a judgment or final adjudication raised in proceedings to which CGU is a party or raised in third party proceedings. If it had been intended to require such a judgment or final adjudication to be in third party proceedings, quite different language would have been required. Quite apart from the natural and ordinary meaning of the provision when read in light of the contract as a whole and, in particular, the understandable exclusion of liability for dishonesty or fraud, it creates an absurd construction that CGU, in the application of the exclusion, is at the whim and fancy of a third party in the bringing, form and adjudication of proceedings. It is an untenable construction that the exclusion clause has an operation which imposes an obligation to indemnify for fraudulent acts or omissions up until a point of time where they have been "established by a judgment or other final adjudication". The words of application "only apply to the extent that" create a condition precedent for the operation of the exclusion and do not have a temporal construction that imposes an interim obligation to indemnify. 23 It is further submitted that this is not the appropriate time for determining the proper construction of each provision of the Policy and it is sufficient for CGU to survive the strike out application that its construction is reasonably arguable, General Steel Industries Inc v Commissioner of Railways (NSW) (1964) 112 CLR 125. CGU does not invite the court to embark upon the determination of separate questions of construction that are not capable of finally resolving the matter prior to trial. 24 To the extent that the plaintiffs assert a mandatory obligation to indemnify for defence costs, it is misconceived and ignores the language found in cl 2.1: "provided always that indemnity in respect of such claim has been confirmed in writing by the insurer". No such confirmation has occurred. The second paragraph under cl 2.1 does not impose an obligation upon the insurer but rather a discretion, which has not been exercised in favour of the plaintiffs and the further requirement for consent in writing has not been satisfied and cannot be said, with the outstanding questions of liability, to be unreasonably withheld. 25 With respect to the alleged difficulty with the form of the pleading, CGU submits that it has adequately pleaded the relevant facts to make goods its defence. 26 CGU accepts that the plaintiffs are entitled to proper particulars to redress any lack of clarity so as to identify the nature of the case to be met. However, the control over pleadings and particulars should be exercised in the following manner: "To ensure that these procedures fulfil their function in a manner fair to the parties. Thus with regard to particulars the court has power to ensure that without unfairness to the party required to give particulars those supplied define the issues and notify the other party of the case he has to meet. To this can be added that the court has power to see particulars do fulfil this function and are not used for purposes of delay, confusion and embarrassment or some other spurious purpose." Dougherty v Nationwide News Pty Limited (1967) 86 WN 181 at 185. 27 CGU submits that the pieces of information which the plaintiffs complain are in reality "particulars" as opposed to being "material facts", and that all that is properly required of particulars is that information which it is reasonable to give the plaintiff in order to tell him the case he has to meet; Bruce v Odhams Press Ltd [1936] 1 KB 697 at 712. Moreover, it must be borne in mind that "it is not a question of whether one party has adequate knowledge of the actual facts; it is a question of whether he has adequate knowledge of what the other party alleges are the facts, for that is the case which he must meet"; Sims v Wran [1984] 1 NSWLR 317 at 321. 28 With respect to the further submission made only on behalf of Rich and Silbermann, CGU submits that the complexity of the argument, conceded by Greaves as justifying a refusal of the strike out application, makes plain that the application could not succeed. Conclusion 29 The application before the court is to strike out parts of the defences in the Greaves and Rich matter and refuse leave, applying the same test as that applied to determine the strike out application, to the filing of a further amended defence in the Silbermann matter. 30 The principles applicable in the event of an application to strike out part or all of a pleading are well known. See General Steel Industries Inc v Commissioner for Railways (NSW) at 125. The pleading will not be struck out if the matter complained of is reasonably arguable. The power to strike out should be exercised only in obvious cases and "care must be exercised to ensure that under the guise of achieving expeditious finality a plaintiff is not improperly deprived of his opportunity for the trial of his case by the appointed tribunal." Barwick CJ at 130. 31 In the present case, I am not persuaded that CGU's case with respect to the construction of the relevant clause of the policy is such that this part of its defence should be struck out. It seems to me, that although the proceedings may ultimately turn only upon the construction of the policy, those questions should be determined in a final hearing. 32 With respect to paragraph 36, I am of the opinion that it must be struck out with leave granted to the defendant to replead the paragraph in proper form. The appropriate pleading would include the facts from which it is said the court should conclude that the conduct contemplated by cl 3.1 has taken place. These must be stated with precision. See Banque Commerciale SA In Liquidation v Akhil Holdings Limited (1990) 169 CLR 279 at 285. 33 Although the pleader has attempted, by giving particulars, to identify the conduct complained of, having regard to the serious nature of the allegations, the material facts should be pleaded. In any event, the particulars which have been included in the defence are inadequate to identify, with the required precision, the facts alleged to constitute the conduct having the necessary character to call up the exclusion clause. 34 The orders which I make are:

(a) in the Greaves matter, paragraph 36 of the Points of Defence is struck out and leave is granted to the defendant to replead the matters raised by that paragraph.

(b) in the Rich matter, paragraph 37 of the Points of Defence is struck out and leave is granted to the defendant to replead the matter raised in that paragraph.

(c) in the Silbermann matter, refuse leave to file the further amended defence (it being noted that leave will be granted to file a further defence pleaded in proper form.).

In each matter the costs of this motion are to be costs in the cause. **********

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