FEDERAL COURT OF AUSTRALIA

AIG Australia Limited v Kaboko Mining Limited [2019] FCAFC 96

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The appellant pay the costs of the appeal to be assessed if not agreed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT:

1    This appeal concerns the meaning of an insolvency exclusion endorsed on an insurance policy covering directors and officers liability. The policy was issued by AIG Australia Limited (AIG) to cover directors and officers of Kaboko Mining Limited (Kaboko).

2    Kaboko, now subject to a deed of company arrangement, has commenced proceedings in this Court against four of its former directors and officers (Former Officers). It claims that the Former Officers breached duties to act with due care and diligence in managing the affairs of the company and to act in good faith in the best interests of the company. The Former Officers have made a claim to indemnity under the policy. AIG does not accept that it is liable to indemnify them. In particular, it says that an insolvency exclusion endorsed on the policy applies. By reason of that position, AIG has been joined as a respondent to the proceedings.

3    The primary judge ordered that the issue of the operation of the endorsement to the policy be listed for determination as a preliminary question at a separate hearing. The parties agreed facts for the purposes of the separate hearing. In written submissions on the hearing of the preliminary issue, the question for determination was expressed by both AIG and Kaboko as being:

whether the endorsement … operates to preclude AIG's obligation to indemnify [the Former Officers] in respect of the claims made by Kaboko in this action.

4    The primary judge found that the insolvency exclusion did not preclude cover under the insurance policy for the claims made by Kaboko. His Honour ordered that the preliminary question be answered in the negative. AIG now brings an appeal against the decision on the preliminary issue.

5    For the following reasons the appeal should be dismissed with costs.

The factual context

6    AIG relies upon the circumstances in which the proceedings came to be commenced and the nature of the claims made in the proceedings. Based on the facts as agreed and the documents that were before the primary judge on the hearing of the preliminary issue those matters may be summarised as follows.

7    In July 2012, Kaboko entered into agreements with Noble Resources Limited. The rights under one of the agreements were novated to a related entity Noble Resources International Pte Limited in December 2012. For present purposes the distinctions between the entities are of no significance and we will refer to them both as Noble.

8    In broad terms, the agreements provided for Noble to buy from Kaboko at least 1,769,000 wet metric tons of manganese ore from certain mines in Zambia. They also provided for Noble to advance US$10 million to Kaboko in two tranches, A and B. Specified amounts of the advances were to be used only for mining operations as specified in the agreement (relating to exploration, plant and equipment, infrastructure and working capital for the mines), including for the purposes of supplying manganese from the mines to Noble. Otherwise, they were to be used for general corporate purposes of Kaboko. Tranche A of the advances was repayable on 26 January 2015 (although the repayment obligation could be accelerated in the event of default by Kaboko). The advances were to be treated as provisional payment for the manganese. As manganese was delivered to Noble under the agreements the delivery of the product was to be treated as repayment of the advances in a manner provided for under the agreements.

9    There were also provisions by which (a) Kaboko warranted that it had all licences and authorisations that were required; (b) Kaboko undertook to maintain proper books of account; and (c) Kaboko undertook not to sell manganese from the mines to a third party without the prior written consent of Noble.

10    In July 2014, Noble claimed that Kaboko was in default under the agreements because, amongst other things, Kaboko had sold manganese from the mines to third parties without the consent of Noble and had breached contractual warranties.

11    On 1 August 2014, solicitors acting for Noble made demand for the payment of US$6,300,000 on the basis that liability to repay the amount had been accelerated by reason of unremedied default. Noble then issued a statutory demand to Kaboko for US$5,950,000.

12    On 11 November 2014, AIG issued the policy with the insolvency exclusion. (It was not claimed that the context of the demands by Noble was known to the parties to the policy when it was issued such that they might form part of the context in which the policy was to be construed).

13    On 25 November 2014, solicitors acting for Noble sent letters to three of the Former Officers putting them on notice of insolvent trading claims under s 588G(1) of the Corporations Act 2001 (Cth) against each of them personally.

14    An application to set aside the statutory demand was heard on 20 January 2015 and on 24 February 2015 the demand was set aside: Kaboko Mining Ltd v Noble Resources International Pte Ltd [2015] WASC 67.

15    On 26 January 2015, Tranche A was due to be repaid (irrespective of any claim to acceleration). In March 2015 Noble made demand for repayment by Kaboko. When payment was not forthcoming, Noble appointed receivers to Kaboko. Shortly thereafter Kaboko appointed administrators under s 436A of the Corporations Act. There was then a deed of company arrangement.

16    In September 2016 the proceedings in this Court were commenced. The Former Officers made claims to indemnity under the policy.

17    The statement of claim as originally formulated alleged breaches of duties by the Former Officers in failing to use the advances for the purposes permitted under the agreements and failing to keep proper financial records. It pleaded the extent of the indebtedness of Kaboko to Noble and sought damages being the amount owed to Noble.

18    Thereafter, the statement of claim was substantially revised by amendments.

19    Noble is providing the funds to the administrator to be able to pursue the action against the Former Officers.

The claims now made by Kaboko in the action

20    By its further amended statement of claim, Kaboko makes the following claims against the Former Officers.

21    It says that Kaboko had a commercial opportunity to develop the mines in Zambia. It says that in breach of the agreements with Noble (a) the advances were not used for the mining operations as specified; (b) Kaboko was not the registered owner of the mining interests; and (c) Kaboko did not keep proper financial records.

22    Kaboko then says that each of the Former Officers breached their duties to Kaboko by (a) failing to maintain proper financial records; (b) failing to use the advances as permitted; (c) failing to cause Kaboko to be registered as the holder of the mining interests; and (d) being involved in the sale of manganese from the mines to third parties.

23    It is also pleaded in very general terms that if each of the above matters had not occurred then Kaboko would have had the commercial opportunity to develop the mines and realise a profit. In other words the breaches of duty are alleged to have caused the loss of the opportunity to profitably exploit the mining interests in Zambia.

24    All of the above matters are brought together in a rolled up way in pleadings to the effect that Kaboko has suffered loss and damage by reason of the breach of duties by the Former Officers. The plea as to how the failure to keep proper records caused loss and damage to Kaboko is particularised in para 42 as follows:

(a)    As a consequence, Kaboko's funds were not applied and utilised to develop the Mining Projects for the overall commercial benefit of the company and in particular the funds were not used to advance the development of the Mining Projects thereby causing the company loss and damage in that it forfeited the commercial opportunity to exploit the manganese ore deposits.

(b)    Further, as a consequence of Kaboko's failure to comply with the provisions of the Offtake Agreement and the Prepayment Facility Agreement (including the Proper Books of Account Obligation and the Accounting Standards Obligation) an Event of Default arose pursuant to clause 10(b) of the Prepayment Facility Agreement.

(c)    By notice dated 21 July 2014, Noble notified Kaboko and AAMDL that an Event of Default had occurred and was continuing.

(d)    By letter dated 1 August 2014, Noble declared, pursuant to clause 11(c) of the Prepayment Facility Agreement, all amounts advanced to Kaboko and AAMDL under or in connection with Prepayment Facility Agreement, interest and all other money the payment and repayment of which forms part of the obligations immediately due and payable.

(e)    The termination of the Prepayment Facility Agreement by Noble deprived Kaboko of the balance of the funds it would otherwise have been entitled to receive under the Prepayment Facility Agreement and thereby contributed to the loss of the commercial the [sic] opportunity particularised at (a) above.

(f)    The costs and disbursements incurred by the receivers and managers and the administrator of Kaboko.

25    There are similar pleas to support each of the claims for loss claimed to flow from other conduct said to have been in breach of the duties of the Former Officers (see paras 47, 52 and 57). With those pleas are further particulars that also claim the costs incurred by the receivers and managers and the administrator of Kaboko as loss and damage resulting from the failure to apply the advances as permitted under the agreements (para 47).

The preliminary issue

26    It was in the above circumstances that the parties proceeded with the determination of the preliminary issue. They did so notwithstanding the obvious limitations of the pleading in articulating with precision the conduct of the Former Officers and the manner in which that conduct was alleged to have caused the loss claimed. The question stated was whether the insolvency exclusion precluded 'the claims made by Kaboko in this action'. It is a question that is confined to the claims of the kind pleaded. It is to be determined on the basis of the facts as agreed.

The terms of the insolvency exclusion

27    The insolvency exclusion endorsed on the policy is expressed in the following terms:

The Insurer shall not be liable under any Cover or Extension for any Loss in connection with any Claim arising out of, based upon or attributable to the actual or alleged insolvency of the Company or any actual or alleged liability of the Company to pay any or all of its debts as and when they fall due.

28    Each of the emboldened expressions is separately defined. Loss is defined in some detail. However, at this point it is sufficient to note that it is an amount which the Insured is legally liable to pay resulting from a Claim made against Kaboko or a subsidiary or a Manager and would include a claim made in this Court.

29    The term Claim is defined by reference to matters such as a written demand or proceeding, an investigation or an extradition proceeding. It is a term that focusses upon the means by which claims of various kinds may be initiated or commenced and identifies a point at which the Claim occurs. The definition of Claim is not expressed in terms of the act of bringing the Claim or the reasons or motivations for the Claim. The definition identifies documents (such as a written demand or a court proceeding seeking compensation) or an event (an investigation or a raid or on-site visit by a regulator). Importantly, the definition speaks in terms of a demand or a civil proceeding 'for a specified act, error or omission'. In such instances, a Claim is defined by reference to the identified act, error or omission, not some aspect of the reasons motivating the making of the demand or the bringing of the proceedings.

30    The policy itself is in a standard form with six sections each of which deals with a different type of cover. Relevantly for present purposes, section 1 deals with directors and officers liability. Amongst other things, it covers the Loss of each Manager (a term defined to include directors and officers acting in those capacities) arising from Management Liability, except where the Manager has been indemnified by Kaboko for the loss. The extent of coverage in section 1 is expressed as follows:

1.    Individuals

The Insurer shall pay the Loss of each Manager arising from Management Liability, except to the extent that the Manager has been indemnified by the Company for such Loss.

2.    Investigations

The Insurer shall pay the Investigation Costs of each Insured Person arising from an Investigation except to the extent that the Manager has been indemnified by the Company for such Investigation Costs.

3.    Outside Entity Directors

The Insurer shall pay the Loss of each Outside Entity Director arising from Management Liability, except to the extent that the Outside Entity Director has been indemnified for such Loss.

4.    Company Reimbursement

The Insurer shall reimburse or pay on behalf of a Company any:

(i)    Loss for which it has indemnified a Manager arising from Management Liability; and

(ii)    Investigation Costs for which it has indemnified a Manager arising from Investigation.

31    It can be seen that section 1 covers Loss in certain circumstances and Investigation Costs in certain circumstances. The insolvency exclusion is concerned with exclusion of the cover for Loss. The relevant cover for present purposes obliges AIG to pay the Loss arising from Management Liability which is defined in a manner that includes any liability arising from any actual or alleged act, error or omission or breach of duty arising solely by reason of a person's status as Manager. Although there is separate cover for Investigation Costs arising from an Investigation, the definition of Loss also includes Investigation Costs.

32    Loss is defined in terms of any amount which Kaboko or its officers 'is legally liable to pay resulting from a Claim'. It has express inclusions and exclusions that are described in some detail. However, for present purposes, it is significant that the Loss as defined is not the loss that might be identified in a Claim, but an amount for which there is a legal liability to pay resulting from a Claim. The legal liability might arise from an adjudication or a settlement or an exercise of statutory power, but it is the ultimate liability that is the Loss. Of course, the scope of the ultimate liability will be marked out by the extent of the losses that are the subject of a Claim because the Loss must result from a Claim.

33    The other sections of the policy deal with cover for:

(1)    loss arising from a claim alleging a violation of a law regulating debt or equity interests in companies (section 2);

(2)    loss arising from liability for employment practices (section 3);

(3)    certain types of loss consequent upon criminal conduct (section 4);

(4)    loss arising from liability for acts with respect to superannuation (section 5); and

(5)    a fine or pecuniary penalty (section 6).

34    The insolvency exclusion is an endorsement to the whole of the policy. However, the policy as issued only provides cover under section 1. It is endorsed 'Not Insured' as to all other policy sections. In those circumstances, given that the insolvency exclusion is a specific exclusion endorsed on the policy and does not form part of the standard policy instrument, it is difficult to see how the terms of the other sections (which were not intended to apply) might be called in aid in the construction of the insolvency exclusion. No such contention was advanced by AIG or Kaboko.

35    The policy provides coverage on a claims-made and notified basis. It applies to Claims first made and notified during the policy period. The preliminary issue was approached on the basis that the claim made by the proceedings had been made and notified in accordance with the policy.

Competing contentions as to the meaning of the insolvency exclusion

36    AIG identified four stages in the course of events that might lead to a liability to indemnify for Loss under the policy:

(1)    an act, error or omission by an Insured;

(2)    consequent loss or damage to a third party;

(3)    the bringing of a Claim by the third party; and

(4)    the determination of the Loss of each Manager arising from Management Liability which the insurer must indemnify.

37    The purpose of the distinction between the four stages was to emphasise that the question as to what caused the loss or damage claimed by the third party was separate from the question as to what caused the bringing of a Claim and separate again from the question whether the Loss which the insurer was said to be obliged to indemnify itself arose out of, was based upon or was attributable to the actual or alleged insolvency of Kaboko or its actual or alleged inability to pay any or all of its debts when they fell due.

38    The submissions for AIG focussed upon the use of the terms Loss and Claim in the insolvency exception. It was noted that the exception was not stated by reference to the nature of the Management Liability that may give rise to a claim to indemnity for Loss. Nor was it stated by reference to the act, error or omission of the Insured or the consequent loss or damage to a third party. Rather, it was any Loss in connection with any Claim arising out of, based upon or attributable to the specified insolvency events that was excluded. Therefore, so it was submitted, the exception applied if there was the requisite insolvency connection with either the bringing of the Claim or the nature of the Loss for which indemnity was sought (irrespective of whether the liability for the Loss was itself established by reference to a cause of action that depended upon demonstrating insolvency or a head of loss that was alleged to have been caused by insolvency).

39    On the basis of the chronology of events leading up to the commencement of the proceedings in this Court (described above), AIG submitted that the bringing of the proceedings arose out of, was based upon or was attributable to the insolvency of Kaboko or its inability to pay its debts. There would have been no proceedings if Kaboko had repaid Noble the Tranche A advances when they were due and the reason the proceedings had been brought was because of the insolvency of Kaboko. The bringing of the proceedings against the Former Officers with the funding support of Noble was the final step, it was said, in a course of events consequent upon the failure to repay the Tranche A advances and the insolvency of Kaboko. Amongst other things, reliance was placed upon the fact that when the proceedings were commenced the damages claimed for the alleged breaches of duty by the Former Officers was simply the amount of the Tranche A advances that Noble had been seeking to recover for some time.

40    AIG also claimed that, in any event, the particulars as to how the loss was alleged to have been suffered by Kaboko (as stated in para 42 quoted above) showed that the loss of opportunity arose out of, was based upon or was attributable to the insolvency of Kaboko and also that the claim for receivership and administration costs was of that character. Therefore, even if it had to be shown that the claims the subject of the proceedings or the loss claimed in the proceedings arose out of, was based upon or was attributable to the insolvency of Kaboko or its inability to pay any or all of its debts before the insolvency exclusion would apply, the claim as to how the loss of opportunity occurred had that character.

41    For Kaboko it was submitted that the exclusion only applied if insolvency was one of the underlying facts that, if established, would justify the claim or the loss claimed. So, for the insolvency exclusion to apply, the merits of the claim itself or the causal pathway for the loss claimed in the proceeding must be shown to depend upon demonstrating the insolvency of Kaboko or its inability to pay any or all of its debts.

Principles as to the proper construction of the insolvency exclusion

42    The principles to be applied when construing the policy are well-established and were summarised by the primary judge: Kaboko Mining Limited v Van Heerden (No 3) [2018] FCA 2055 at [36]-[37]. The applicable principles were shortly stated in Onley v Catlin Syndicate Ltd as the Underwriting Member of Lloyd's Syndicate 2003 [2018] FCAFC 119 at [33]. No error is alleged as to the statement of the principles. It was accepted that it was for AIG to demonstrate that the exclusion applied.

43    In addition it must be recognised that usually definitions do not have substantive effect. They are not to be construed outside of the operative provisions to which they apply. Where there is an issue as to the proper construction of an operative provision in a commercial instrument then the provision should be read by inserting the definition into the provision. The same principles as to construing definitional provisions as stated in the context of the proper construction of statutes (Kelly v The Queen [2004] HCA 12; (2004) 218 CLR 216 at [84], [103]) apply to the construction of commercial instruments: Bond v Chief Executive, Department of Environment and Heritage Protection [2017] QCA 180; [2018] 2 Qd R 112 at [11] (and cases there cited); see also Halford v Price [1960] HCA 38; (1960) 105 CLR 23 at [32]-[33] and Rexel Electrical Supplies Pty Limited v Mentha (Administrator) in the matter of ACN 004 410 833 Limited (formerly Arrium Limited) [2018] FCAFC 229 at [143], [151].

The use of both the terms Loss and Claim in the insolvency exclusion

44    As noted above, the insolvency exclusion uses both the terms Loss and Claim. Three points as to those definitions are of significance for present purposes. First, the definition of Loss itself incorporates the term Claim. Second, the definition of Claim is concerned with the occurrence of an event, not the reasons why that event occurred. For example, it includes a demand or a civil proceeding for compensation. There is no suggestion in those terms that Claim is confined to particular types of demands or proceedings identified by the circumstances that motivated or caused the demand to be made or the proceeding to be commenced. Nor is there any indication to that effect when the term Claim is used in the insolvency exclusion. Third, to the extent that the definition of Claim refers to a demand or a proceeding it is not simply defined as the demand or proceeding as a whole, but refers to a demand or proceeding 'for a specified act, error or omission'. So, although there may be a single demand or proceeding, where the demand or proceeding concerns a number of specified acts, error or omissions each of those is a separate Claim. Further, a single proceeding may comprise a number of Claims. Whether an amount which the Insured must pay results from a Claim (and is therefore a Loss for the purposes of the policy) is a matter to be considered in respect of each specified act, error or omission referred to in the demand or proceeding. An amount for which judgment is entered in a proceeding may be a Loss as to the part that is in respect of one act, but not another. The policy provides coverage as to each Loss that results from a Claim arising from Management Liability.

45    The insolvency exclusion could have been expressed as applying to any Loss arising out of, based upon or attributable to Kaboko's insolvency or inability to pay debts. Had it done so then the specified insolvency link (arising out of, based upon or attributable to) would have to be evaluated by reference to an amount which AIG was otherwise liable to pay under the policy. The focus would be upon the character of the amount (being the loss for which liability was imposed upon the insured) and whether the amount arose out of, was based upon or was attributable to Kaboko's insolvency or inability to pay its debts. An exclusion expressed in those terms may not capture instances where the amount itself did not have the specified insolvency link, but the claim that gave rise to the liability to pay the amount did have that link. It would require the amount of the loss itself to arise out of, be based upon or be attributable to the insolvency of Kaboko.

46    Alternatively, the insolvency exclusion could have been expressed as applying to any Claim with such an insolvency link (without any reference to Loss). However, an exclusion expressed in that form would not make sense because liability under the policy does not arise in respect of Claims, it arises in respect of a Loss (being an amount the Insured is legally liable to pay resulting from a Claim) where the Loss itself arises from Management Liability. It is not liability for Claims that is to be excluded, but rather liability for Loss. Therefore, an exclusion that is to apply where the Claim itself arises out of, is based upon or is attributable to Kaboko's insolvency or its inability to pay its debts must be expressed as an exclusion for any Loss in respect of any Claim.

47    For those reasons, the qualifying words that specify the insolvency link should not be read as applying to the Loss. Such an approach would give the words 'in connection with any Claim' no work to do. Rather, the insolvency link qualifies the types of Claims for which indemnity for Loss must be provided. If the Loss (liability to pay) is 'in connection with' any Claim with the specified insolvency link then it is excluded.

The key question

48    The key question is whether it is the subject matter of the Claim that must have the specified insolvency link or whether the link is also established where, by reason of the circumstances that have led to the bringing of the claim, it can be said that the Claim arises out of, is based upon or is attributable to the actual or alleged insolvency of Kaboko or its inability to pay its debts when due.

49    Before turning to that key question, we note that if the defined terms in the insolvency exclusion are replaced with language from their definitions that is relevant to the circumstances of the present case, the insolvency exclusion states:

AIG shall not be liable for any amount which Kaboko or any of its Managers is legally liable to pay resulting from a proceeding seeking compensation for a specified act, error or omission where that amount is in connection with any demand or civil proceeding seeking compensation for a specified act, error or omission, arising out of based upon or attributable to the actual or alleged insolvency of Kaboko or its actual or alleged inability to pay any or all of its debts when they fall due.

50    For the following reasons, for the purposes of the insolvency exclusion, a Claim does not arise out of, is not based upon and is not attributable to the insolvency of Kaboko or its inability to pay its debts unless the subject matter of the Claim has that character (being a character derived in the case of civil proceedings from the acts, errors or omissions that are the subject of the proceedings and the associated loss that may become the Loss if the proceedings are successful). The exclusion is not to be read as applying where the insolvency of Kaboko or its inability to pay its debts might be said to have motivated or led to the Claim being brought (for reasons other than providing a material part of the basis of the Claim).

51    First, there is no language in the definition of Claim nor in the terms of the insolvency exception that directs attention to the reasons why the Claim was brought. So, the nature of a Claim, as defined, does not depend upon why it came to be brought.

52    Second, as noted above, the definition of Claim when referring to demands and proceedings is referring to such demands and proceedings 'for a specified act, error or omission'. At least to that extent, the focus of the definition is upon the character of the Claim (that is, its content, source and nature).

53    Third, there is no language in the insolvency exclusion itself that directs attention to the reasons why the Claim was brought. The clause does not refer to a Claim that is brought because of the insolvency of Kaboko. Rather, it refers to the Claim itself 'arising out of, based upon or attributable to' Kaboko's insolvency or inability to pay debts. Given the nature of a Claim and the stated connection with Loss (resulting from a Claim) the language is more apt to direct attention to the subject matter of the Claim than the reasons why it was brought.

54    Fourth, the indemnity for Loss afforded by the policy is for Loss arising from Management Liability. The extent of cover is not defined by reference to the particular motivations that may lie behind the bringing of a Claim. In that context, it would be strange if the extent of cover for Management Liability depended upon why a particular claim was brought (as distinct from an aspect of the subject matter of the claim). Loss for which cover may be provided will arise from a Management Liability. Its character has nothing to do with the reasons why a Claim may have been brought. There is no evident commercial rationale for the extent of coverage for a particular claim to be dependent upon the motivations behind the bringing of the claim rather than the nature of claim and the loss it seeks to recover.

55    Fifth, if the scope of the exclusion depended upon an inquiry into the reason for bringing a claim then there would need to be an objective or subjective inquiry into the state of mind of those bringing the Claim. In this case, the Claim is brought by the administrator, but AIG seeks to rely upon the motivations of Noble as the party funding the proceedings. In a different case, there could be a third party funder supporting a claim that is being brought in the interests of a few creditors who have not been paid. It can be seen that there would be complexity in an inquiry as to whether the proceedings were in some way said to be ultimately the result of an effort to recover amounts that a creditor could not pay and for that reason they had the specified insolvency link.

56    Finally, the qualifying words which specify the insolvency link describe a Claim 'arising out of, based upon or attributable to' the insolvency of the company the subject of the policy or the company's ability to pay its debts. The words used, especially 'arising out of' and 'based upon' indicate a focus upon the subject matter of the Claim.

57    It was submitted for AIG that the breadth of the phrase 'Loss in connection with any Claim arising out of, based upon or attributable to' Kaboko's insolvency or inability to pay its debts was not apt to describe a link only with the subject matter or foundation of the claims and supported the contention that the words included cases where the specified insolvency matters were reasons for bringing or making the Claim. This was especially said to be the case for the phrases 'arising out of' and 'attributable to'. However, having regard to the definition of Claim, where the Claim is said to be constituted by a demand or a civil proceeding for compensation it comprises 'the specified act, error or omission'. These aspects of the definition mean that the subject matter of a Claim may be described as 'arising out of' or 'attributable to' Kaboko's insolvency or inability to pay debts. In short, the words used do not manifest an intention that the scope of the exception depends upon the reasons behind the bringing of the Claim.

Alleged insolvency link with the subject matter of the proceedings

58    Kaboko's claims are not founded upon any allegation of insolvency. Each of the claims made could be advanced irrespective of whether Kaboko was placed in administration. They are not claims that are based upon insolvent trading. They are not claims of breaches of fiduciary duty by directors that only arise in a context where the company is insolvent or cannot pay debts when they fall due. Therefore, it cannot be said on the basis of the specified acts, errors and omissions as pleaded and the agreed facts on the preliminary issue that any of the alleged breaches of duties by the Former Officers are of a character that they arise out of, are based upon or are attributable to Kaboko's insolvency or its inability to pay debts when due.

59    However, there are two respects in which the nature of the loss claimed in the proceedings might be described as arising out of, based upon or attributable to the insolvency of Kaboko or its inability to pay debts. The first is the claim to the costs of the receivers and managers and the administrator. The second is the claim in the particulars as to how the loss of the opportunity was caused (see the particulars to para 42 of the pleading as quoted above).

60    As to the first, it is a loss which would not have occurred if Kaboko had not been insolvent and could have paid the Tranche A advances when they were due for repayment. Put another way, inherent in the claimed loss is an allegation that the breaches of duty caused the insolvency of Kaboko or its inability to repay to Noble the Tranche A advances when they were due for repayment because the nature of the loss claimed could not have arisen if Kaboko was solvent and able to repay the Tranche A advances when due. To that extent, the subject matter is properly described as arising out of Kaboko's insolvency or inability to pay its debt to Noble. Therefore, if the claim to that loss is upheld and it thereby becomes a Loss for the purposes of the policy then it will be a Loss that is in connection with a Claim of the kind described in the insolvency exception. Therefore, the policy precludes that part of the claims made by Kaboko in the action.

61    It appears that Kaboko conceded this position before the primary judge: at [74]. Therefore, even though the claim stands in the further amended statement of claim the preliminary issue was to be answered on the basis that the claim to the external controller's costs was accepted as being within the exception.

62    As to the second, it cannot be said on the basis of the case as pleaded and the agreed facts on the preliminary issue that the way the alleged breaches of duties by the Former Officers are said to give rise to the loss of the commercial opportunity means that the claims arise out of, are based upon or are attributable to Kaboko's insolvency or inability to pay its debts. What is said is that the various breaches by the Former Officers meant that the advances available from Noble were not applied and utilised to develop the mines in Zambia and the termination of the agreement with Noble contributed to those funds not being available. It was submitted for AIG that this claim included, in substance, a plea that the failure by Kaboko to pay its debt to Noble (namely the Tranche A advances when they were due to be repaid) was part of the cause of the loss of the opportunity. However, what is alleged is that it was the lack of further advances under the agreement with Noble that contributed to the loss of the commercial opportunity. There is a difference between a claim that Kaboko lost the opportunity because it could not pay Noble and a claim that Kaboko lost the opportunity because the funds it had secured were not applied for that purpose and, as a result, its right to receive further funds for that purpose was terminated. On the latter case, if the directors had not breached their duty then Kaboko would have the benefit of its funding from Noble and would have been able to exploit its opportunity to develop the manganese mines. Rather than the claim to loss depending upon insolvency and inability to pay debts when due, it depends upon the opposite claim, namely if the duties of the Former Officers had not been breached then the opportunity would have been able to be exploited. The claim does not arise out of, is not based upon and is not attributable to Kaboko's insolvency or inability to pay its debts. It follows that the Loss which might arise from a favourable determination of the claims made in the proceeding for loss of the commercial opportunity would not be in connection with a Claim of the kind described in the insolvency exclusion.

The appeal grounds

63    The appellant advanced five appeal grounds. The merits of each turned upon the merits of its argument as to the proper construction of the insolvency exclusion in the policy.

64    Ground 1 was to the effect that the primary judge failed to look to the agreed facts when determining whether there was a Claim of the kind described in the insolvency exception, but instead focussed upon the terms in which the claims were pleaded in the proceedings. This complaint is predicated on the correctness of the contention for AIG that it was relevant to consider all of the facts as to the reasons and motivation for the bringing of the proceedings. For reasons already given, those matters are not relevant in determining the scope of the insolvency exception.

65    Ground 2 alleged error in the construction by the primary judge in failing to distinguish between the role and meaning to be given to the terms Claim and Loss in the exception. Expressed in that way the ground fails to identify an error of a kind that might infect the decision of the primary judge. The real issue concerned the significance of the distinction. For reasons already stated, though there are distinct roles to be given to those terms, the nature of those roles does not mean that there was error in the conclusion reached by the primary judge.

66    Ground 3 alleged error by the primary judge in failing to look at the underlying facts to determine what the Claim was 'arising out of, based upon or attributable to'. This ground is also predicated on the correctness of AIG's contention that the insolvency exclusion applies if a reason for the bringing of the claim in the proceedings was Kaboko's insolvency or inability to pay its debts. For reasons already given, AIG's contention should not be accepted. Therefore, the ground fails.

67    Ground 4 concerned the scope of the phrase 'attributable to'. It was submitted, in effect, that those words meant the exclusion had to be given a wider scope that included instances where the reasons behind the bringing of the Claim were insolvency related and the primary judge erred in not proceeding on that basis. For reasons that have been given, the premise on which the ground is based has not been established. Therefore, the ground should not be upheld.

68    Ground 5 claimed that the primary judge erred in his construction of the insolvency exclusion. To some extent the arguments as to the proper construction of the provision appear to have been refined and developed in the course of the appeal. However, it has not been shown that the primary judge was wrong in the conclusion that the preliminary question should be answered in the negative.

Conclusion and costs

69    It follows that the appeal should be dismissed. No matter was advanced as to why costs should not follow the event. As matters presently stand, AIG should pay Kaboko's costs of the appeal. In case there is some matter of which the Court is not aware that bears upon costs, provision should be made for liberty to apply to vary the costs order within 14 days.

Associate:

Dated:    14 June 2019