FEDERAL COURT OF AUSTRALIA

Kaboko Mining Limited v Van Heerden (No 2) [2018] FCA 706

ORDERS

THE COURT ORDERS THAT:

1.    AIG Australia Limited ABN 93 004 727 753 be joined as a Fifth Defendant to the proceeding pursuant to Rule 9.05(1)(b)(i) and (ii) of the Federal Court Rules 2011 (Cth).

2.    The issue of AIG’s liability to indemnify each of the defendants, or any of them, on account of the alleged breaches of their statutory, fiduciary and common law duties, be listed for hearing on Friday, 27 July 2018 at 10:15am (the preliminary hearing).

3.    The Plaintiff and Fifth Defendant are to provide proposed orders programming the matter forward to the preliminary hearing as soon as practicable, including the filing of an amended Statement of Claim by the Plaintiff.

4.    Costs be in the cause.

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

REASONS FOR JUDGMENT

MCKERRACHER J:

THE APPLICATION

1    Kaboko Mining Limited (Subject to a Deed of Company Arrangement), applies to join the defendants' insurer, AIG Australia Limited ABN 93 004 727 753, as the fifth defendant in this proceeding. The application is made pursuant to r 9.05(1)(b) of the Federal Court Rules 2011 (Cth), which provides for joinder of a person whose cooperation might be required to enforce a judgment, whose joinder is necessary to ensure that each issue in dispute in the proceeding is able to be heard and finally determined, or who should be joined in order to enable determination of a related dispute and, as a result, avoid multiplicity of proceedings.

2    Section 21 and s 22 of the Federal Court of Australia Act 1976 (Cth) provide:

21    Declarations of right

(1)    The Court may, in relation to a matter in which it has original jurisdiction, make binding declarations of right, whether or not any consequential relief is or could be claimed.

(2)    A suit is not open to objection on the ground that a declaratory order only is sought.

22.    Determination of matter completely and finally

The Court shall, in every matter before the Court, grant, either absolutely or on such terms and conditions as the Court thinks just, all remedies to which any of the parties appears to be entitled in respect of a legal or equitable claim properly brought forward by him or her in the matter, so that, as far as possible, all matters in controversy between the parties may be completely and finally determined and all multiplicity of proceedings concerning any of those matters avoided.

(emphasis added)

3    Kaboko also seeks leave to file an amended statement of claim. That pleading will seek a declaration that AIG is liable to indemnify each of the defendants, or any of them, on account of the alleged (and currently pleaded) breaches of their statutory, fiduciary and common law duties (the Alleged Breaches).

BACKGROUND

4    The application is supported by the affidavit of Ms Fenton sworn 13 December 2017 (Fenton Affidavit). By originating process filed on 2 September 2016, Kaboko commenced these proceedings against four of its former officers in respect of the Alleged Breaches. It claims that the defendants failed in their duties by, in summary:

(a)    allowing Kaboko to breach its Offtake Agreement and Prepayment Facility Agreement (the Agreements) by failing to ensure the funds provided pursuant to the Prepayment Facility Agreement were used in accordance with the ‘Permitted Use Schedule’;

(b)    failing to ensure that Kaboko kept proper books and records;

(c)    failing to ensure that Kaboko complied with obligations imposed under the Corporations Act 2001 (Cth) in respect of written financial records;

(d)    failing to ensure that Kaboko complied with its constitution, the Corporations Act and any applicable accounting standards in respect of its financial records;

(e)    allowing Kaboko to breach the Agreements by failing to ensure that Kaboko (or its subsidiaries) was the registered owner of each of the relevant mining licences that it had warranted that it held and that were required to operate the mining projects; and

(f)    allowing Kaboko to breach the Agreements by allowing Kaboko to sell Product to third parties.

SHOULD THE INSURER BE JOINED?

5    Kaboko held an ‘Explorers Directors & Officers Liability’ insurance policy, issued by AIG (the Policy). Kaboko is named as the ‘Policyholder’ and is an ‘Insured Entity’ under the Policy. Kaboko apparently also paid the premiums under the Policy. Each of the defendants constitute ‘Insured Persons’ under the Policy.

6    Section 1 of the Policy provides:

1.    Individuals

The Insurer shall pay the Loss of each Manager arising from Management Liability ...

(emphasis in original)

7    In addition to the ‘Insurer’ (AIG), ‘Loss’, ‘Manager’ and ‘Management Liability’ are also subsequently defined in the Policy:

(a)    ‘Manager’ includes any natural person who was, is or during the Policy Period becomes, inter alia, a director or officer;

(b)    ‘Management Liability’ includes ‘any liability arising from any actual or alleged act, error, omission, breach of duty, breach of trust, misstatement, misleading statement or breach of warranty of authority of any Manager or arising solely because of any person's status as a Manager’; and

(c)    ‘Loss’ is defined to include ‘any amount which the Insured is legally liable to pay resulting from a Claim made against the Insured’.

8    Kaboko submits that, prima facie, AIG's liability to indemnify the defendants is engaged. AIG has declined indemnity to the defendants, but until shortly prior to the hearing of this application refused to provide any explanation of the basis of its declinature to Kaboko. AIG has now indicated that one basis of declinature will be that of an exclusion for solvent trading. There may be others. Although AIG had opposed joinder prior to this hearing, it took a neutral position at the hearing of the application. It is common ground, however, that if the application were determined favourably to AIG, then that would conclude its involvement in the litigation (subject to any appeal). Realistically, for reasons that follow, it would also render pursuit of the litigation by Kaboko far less attractive, commercially.

9    For reasons that follow, I permitted joinder of AIG and set down the preliminary issue, being AIG’s liability to indemnify each of the defendants for the alleged breaches, for hearing.

THE PRINCIPLES

10    The practical reason for the joinder is to ensure that all relevant controversies - which arise from the same factual substratum - are decided in the one case.

11    In JN Taylor Holdings Ltd (In liq) v Bond (1993) 59 SASR 432, King CJ, with whom Prior and Perry JJ agreed, considered whether the Court could grant a declaration, sought by liquidators of the plaintiff companies against the directors' insurer, obliging the directors’ insurer, relevantly, to indemnify the defendant directors. The Chief Justice described (at 438) the liquidators' interest in obtaining a declaration of the insurer's liability concurrently with that of the directors as being ‘undeniable’.

12    In Employers Reinsurance Corporation v Ashmere Cove Pty Ltd (2008) 166 FCR 398 per Heerey, Sackville and Siopis JJ), the Full Court dismissed an appeal from the judgment of French J (as his Honour then was) in Ashmere Cove Pty Limited v Beekink (No 2) [2007] FCA 1421. Their Honours said (at [52]-[53], [66]-[67] and [73]):

52.    The Investors plainly have a real interest in establishing, if they can, that the Insurers are liable to indemnify KMF against the claims made against it by the Investors. Certainly they have standing to claim declaratory relief against the Insurers: Aussie Airlines Pty Ltd v Australian Airlines Ltd (1996) 68 FCR 406. Even though the Investors are not at this point seeking orders directly against the Insurers (other than a declaration), they have a variety of steps open to them to secure the benefits of any indemnity available to KMF.

53.    One possibility is that the Investors could take advantage of s 562 of the Corporations Act, should the liquidator receive an amount from the Insurer pursuant to the Policy. A second is that the Investors may invoke s 601AG of the Corporations Act in the event that KMF is deregistered. That provision allows a person to recover directly from the insurer of a deregistered company if KMF had a liability to that person and the insurance contract covered the liability immediately before the deregistration. A third option is for the Investors to appeal to the Court, pursuant to s 1321 of the Corporations Act, against the liquidator's refusal to file a cross-claim or otherwise proceed against the Insurers.

…

66.    The primary Judge found that the joinder of the Insurers in the proceedings would have practical utility. In our view, there was no error in that finding. As we have discussed in dealing with the constitutional issue, if the Investors succeed in obtaining a declaration the fact that it would bind the Insurers (as between them and the Investors) would be likely to lead to the Investors being able to take advantage of the indemnity available to KMF under the Policy.

67.    If the view expressed by King CJ, with whom Prior and Perry JJ agreed, in JN Taylor Holdings Ltd v Bond 59 SASR 432, were followed in the present case, the declaration sought by the Investors would be binding as a matter of res judicata between the Insurers and KMF. This approach may be correct. However, it is not necessary to decide whether it is, or whether the contrary view of the Queensland Court of Appeal in Interchase [2000] 2 Qd R 301, is to be preferred.

…

73.    The reality is that the joinder of the Insurers, as directed by the primary Judge, will prove to be of practical utility. There are good reasons, explained by his Honour, for all the issues to be litigated in the one proceeding. The directions that have been made will facilitate the orderly, expeditious and just resolution of the justiciable controversy.

13    The ‘contrary view’ referred to in [67] of the Full Court's judgment quoted above arose in the Queensland Court of Appeal's decision in Interchase Corporation (in liq) v FAI General Insurance Co Ltd [2000] 2 Qd R 301. In that case, Byrne J (with whom McPherson JA agreed, Davies JA dissenting) declined to follow JN Taylor Holdings Ltd. However, more recently, in relation to Interchase, the plurality of the High Court (French CJ, Kiefel, Bell and Keane JJ) in CGU Insurance Limited v Blakeley (2016) 259 CLR 339 said (at [42]):

The difference between his Honour's [Davies JA's] approach and that of the majority reflected not so much a difference in principle as a different evaluation of the interest of the plaintiff in bringing the claim against the insurer and the utility of the declaratory relief sought. For the purposes of determining whether there is a "matter" attracting federal jurisdiction in such claims, the approach adopted by Davies JA is to be preferred. It reflected a recognition of the reality of the plaintiff's interest which was not to be confined by a requirement that the plaintiff demonstrate a claim for vindication of an existing legal right against the insurer.

See also the separate reasons of Nettle J (from [97]), discussed below.

14    In Ashmere Cove, French J discussed relevant passages from Davies JA's judgment (at [56]-[57]) saying:

56.    In dissent, Davies JA said (at 309):

I accept that there would be no point in making the order for joinder if the declaration did not, in practice, effectively determine the issue of FAl's liability to the valuers as between those parties. But I do not think it is sufficient, for the joinder to lack utility, that it is not binding between those parties at law if, in its practical effect, it is.

He agreed with Byrne J that Interchase and the valuers were not privies for the purposes of res judicata and issue estoppel. He also agreed that neither doctrine would operate to bind FAI and the valuers inter se in respect of that question. His Honour went on however to refer to the wider concept of estoppel enunciated in Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589, a case in which admittedly there was mutuality. His Honour said (at 310):

There was mutuality in Anshun and their Honours in the joint judgment to which I have referred did not find the abuse of process test, as elucidated in some of the English cases, of great utility. However, abuse of process is a similar mechanism designed "to protect against 'the scandal of conflicting decisions'," which can achieve that protection where mutuality is absent as it is here.

FAI and the valuers would have the full opportunity of contesting the question in respect of which the declaration was sought. Davies JA thought it would therefore be an abuse of process to permit either to litigate that question in subsequent proceedings. It followed that the declarations sought would effectively determine the question of FAl's liability to the valuers as between those parties.

57.    His Honour rejected the contention that the question was hypothetical. Despite the contingencies that Interchase might not succeed against the valuers or that the valuers and FAI might resolve their differences or that the valuers might never go bankrupt or into liquidation and that if they did their trustee or liquidator might not proceed against FAI, it was unnecessary to consider the likelihood of those contingencies. His Honour said (at 311):

There can be no doubt that, notwithstanding contingencies of a similar kind, the valuers could obtain a declaration as to FAI's liability to them before they are held liable to Interchase.

He then said (at 311):

Moreover, the factors I have mentioned - the insolvency of the valuers, their failure to seek an indemnity from FAI and the ineffectuality of any judgment by Interchase against the valuers unless FAI is liable to indemnify them - together combine, in my view, to give Interchase a real interest in the relief which it seeks.

15    Ultimately, in Ashmere Cove, French J concluded that he did not need to decide whether a declaration sought by a third-party plaintiff against an insurer would bind the insurer and the insured on the basis of res judicata or issue estoppel. Rather, his Honour decided that (at [58]) ‘JN Taylor 59 SASR 432 is supportable on a wider basis ... [as] enunciated by Davies JA’.

16    This analysis accords, in my view, with the approach later taken by the High Court in CGU Insurance Limited.

17    Another single judge decision prior to delivery of CGU Insurance Limited is also of assistance. In The Owners-Strata Plan 62658 v Mestrez Pty Ltd [2012] NSWSC 1259, Lindsay J helpfully summarised the principles which his Honour traced back to JN Taylor Holdings Ltd, Ashmere Cove and Anjin No 13 Pty Ltd v Allianz Australia Insurance Ltd (2009) 26 VR 148. His Honour said (at [54)):

The reasoning underlying Anjin, and its antecedents, can be summarised as follows in an NSW context:

(a)    When an insurer has denied indemnity, the insured can, uncontroversially, file a cross claim against it for the purpose of enforcing their contract.

(b)    It would be an abuse of the processes of the court if a third-party Plaintiff, without a cause of action against the insurer, simply sought to join the insurer as a co-defendant with an insured defendant against which the Plaintiff had a cause of action.

(c)    However, the interests of justice, and the convenient administration of justice, may authorise an order that an insurer be joined as a co-defendant with its insured, whether on the application of the third-party Plaintiff or otherwise, if:

(i)    the insurer has denied liability to indemnify the insured against the Plaintiff's claim.

(ii)    there is a bona fide dispute as to the entitlement of the insurer to deny liability.

(iii)    there is a substantial impediment (including insolvency on the part of the insured) standing in the way of the proceedings being conducted simply by the Plaintiff against the insured defendant, with a cross claim filed by the defendant against the insurer.

(vi)    the dispute as to the liability or otherwise of the insurer to indemnify the insured defendant can properly be made the subject of a grant of declaratory relief pursuant to the Supreme Court Act 1970 (NSW), s 75.

(v)    there is, in particular, a true legal controversy between the Plaintiff and the insurer such as would ensure that each of those parties might reasonably be relied upon by the court to serve as a contradictor for the other.

(vi)    joinder of the insurer as a co-defendant with its insured might reasonably be relied upon to avoid a multiplicity of proceedings, and to enable all matters in controversy between the parties (namely, the Plaintiff, the insured and the insurer) to be completely and finally determined.

(d)    A true legal controversy between the Plaintiff and the insurer may be taken to exist where, on the facts of the particular case, there is a realistic prospect of s. 562 of the Corporations Act having scope for operation.

(e)    A decision to allow joinder of the insurer as a co-defendant is one which is discretionary and fact-based, not available as of right.

18    Lindsay J's summary was adopted in CGU Insurance v Blakeley [2015] VSCA 153 per Ashley, Beach and McLeish JJA) (at [17]) and in this Court by Jacobson J in Austcorp Project No 20 Pty Ltd v LM Investment Management Ltd, in the matter of Bellpac Pty Ltd (receivers and managers appointed) (in liq) [2013] FCA 883 (at [25]).

APPLICATION OF THE PRINCIPLES

19    In JN Taylor Holdings Ltd, King CJ held that there were clearly overlapping questions of fact concerning, one the one hand, the directors' liability and the basis of the insurer's declinature (at 440). His Honour noted that the insurer's denial of liability was made on the basis that the defendant directors' conduct was such as to disentitle them to indemnity (at 441-442). Accordingly, the same conduct was central to the determination of both the plaintiffs' claim against the directors and the correctness of the insurer's declinature. That also seems inevitably so in this case.

20    Kaboko says that although not as yet the subject of quantification in evidence, it is likely that if the Alleged Breaches are proven, the loss suffered by Kaboko will be over USD $6 million. There is a proper basis for that submission on the pleading.

21    It is also argued, and I accept, that the defendants do not appear to have sufficient assets in the jurisdiction to discharge a judgment in favour of Kaboko:

(a)    The first defendant does not reside in the jurisdiction and a search of Landgate records for the first defendant's name, conducted on 15 December 2017, does not return any real property registered in the defendant's name in Western Australia.

(b)    A search of Landgate records, conducted on 15 December 2017, for the second defendant's name returns one property registered in her name, being Lot 187 on Deposited Plan 38736, Certificate of Title Volume number 2554 Folio 11, and having a street address of 8 lndica Court, Roleystone, Western Australia.

The Certificate of Title (extracted on 7 February 2018) shows a mortgage over the whole property to AMP Bank Ltd numbered L221696. The Mortgage document (which also covers another property) states that it is in relation to a principal loan amount of $944,000 plus interest.

Transfer number K634552 reveals that the property was purchased by the second defendant on 24 June 2008 for $720,000.

Caveat number N724767 reveals that the property is subject to a caveat registered by the second defendant's de-facto partner, lodged on the basis of a constructive trust over 50% of the property.

(c)    A search of Landgate records conducted on 15 December 2017 for the third defendant's name returns one property registered in her name, being Lot 13 on Strata Plan 33761, Certificate of Title Volume number 2122 Folio 553, and having a street address of Unit 13 / 62 Moondine Drive, Wembley, Western Australia.

The Certificate of Title (extracted on 7 February 2018) shows a mortgage over the whole property to Westpac Banking Corporation numbered L056529 and another mortgage to Berger Investments Fund Pty Ltd numbered N590228. The latter mortgage appears to be in relation to a loan agreement.

(d)    A search of Landgate records conducted on 15 December 2017 for the fourth defendant's name returns one property registered in his name, being Lot 101 on Diagram 94737, Certificate of Title Volume number 2127 Folio 381, and having a street address of 13 Nandina Avenue, Mount Claremont, Western Australia.

The Certificate of Title (extracted on 7 February 2018) shows a mortgage over the whole property to Australia and New Zealand Banking Group Ltd numbered M797775.

Transfer number M794745 reveals that the property was purchased by Mr Brewer on 10 August 2014 for $1,220,000.

22    Further, a search of the Commonwealth Courts Portal conducted on 8 February 2018 lists the following current actions in which the defendants are involved in the Federal Court of Australia:

(a)    Australian Securities and Investments Commission v Jane Rosemary Flegg WAD 293 of 2016; and

(b)    In the Matter of Kupang Resources Ltd (Subject to a Deed of Company Arrangement) NSD 1380 of 2017.

23    In respect of WAD 293 of 2016, the second defendant in these proceedings appears to be subject to an asset preservation order, which was varied by orders made by Barker J on 19 December 2017 to allow her to sell her property at 8 Indica Court, Roleystone, Western Australia. The proceeds of sale are to be distributed first in discharge of the mortgage, second in payment of reasonable costs of sale and the remainder into the trust account of the second defendant's solicitors, until further order of the Court.

24    In respect of NSD 1380 of 2017, the fourth defendant appears to have been summoned for examination and ordered to produce documents in relation to the action.

25    A search of the Supreme Court of Western Australia's records conducted on 8 February 2018 lists a discontinued action against the fourth defendant, Australia and New Zealand Banking Group Ltd v Jason Paul Brewer, CIV 1581 of 2016. The remedy type is listed as ‘possession of property’.

26    There is, accordingly, a real likelihood that one or more of the defendants will, upon the execution of any judgment in favour of Kaboko, become bankrupt.

27    The importance of this factor is that the bankruptcy of any of the defendants will invoke s 117 of the Bankruptcy Act 1966 (Cth), the analogue of s 562 of the Corporations Act, which vests, in the trustee in bankruptcy, a bankrupt's right to indemnity, under a contract of insurance, against liabilities to third parties such as Kaboko. A question arises as to whether, unless or until one of the defendants becomes bankrupt, the declaration sought is merely hypothetical. Davies JA's judgment in Interchase stands against such an argument (at 311). French J in Ashmere Cove, embracing the ‘wide basis ... enunciated by Davies JA’ summarised his Honour's reasons in the following way (quoted above at [19] but the relevant extract set out again for convenience):

His Honour rejected the contention that the question was hypothetical. Despite the contingencies that Interchase might not succeed against the valuers or that the valuers and FAI might resolve their differences or that the valuers might never go bankrupt or into liquidation and that if they did their trustee or liquidator might not proceed against FAI, it was unnecessary to consider the likelihood of those contingencies […]

28    In any cases where an insurer is sought to be joined by a third party, the relief sought is, at least in one sense, hypothetical: that is, the insurer's liability will always be contingent upon the plaintiff succeeding against the defendants (and then always subject to any defences the insurer may raise). However, as the authorities make clear, that contingency does not mean there is no ‘matter’. It does not stand in the way of joinder.

29    In Blakeley, Nettle J said (at [102]):

[T]he issue in this case is not theoretical but, even if it were, the court does not lack jurisdiction to make a declaration concerning a theoretical issue, in the sense of an issue that does not presently exist but which is likely to arise in future, where the issue is productive of a real and pressing dispute, is of real practical importance or is one in which the claimant has a real commercial interest. Thus, for example, it is now well established that, where a claimant intends to take action which would subject him or her to a "theoretical" possibility of being subjected to legal process, the risk of being so subjected to that process is sufficient to ground standing to claim a declaration that the basis of the process (in that case, the offence) is invalid and, co-ordinately, that in such cases there is a matter upon which the court has jurisdiction to adjudicate. Similarly, where a claimant has a real commercial interest in establishing the claimant's legal status or entitlement in relation to proposed commercial conduct and there is a real controversy with some contradictor as to the existence or extent of the claimant's legal status or entitlement, the claimant may have standing to obtain, and the court co-ordinately will have jurisdiction to grant, a declaration as to the existence or extent of the status or entitlement.

(citations omitted)

30    There is no doubt that Kaboko has a relevant interest in seeking the proposed declaration of indemnification against AIG.

31    Turning to the summary of the relevant principles collected in Mestrez by Lindsay J and adopted by the Court of Appeal in Blakeley, it can be seen that most are satisfied:

(a)    AIG has denied liability;

(b)    there is a bona fide dispute as to AIG's entitlement to decline indemnity;

(c)    the dispute can properly be the subject of declaratory relief pursuant to s 21 of the Federal Court of Australia Act 1976;

(d)    there is a true legal controversy between Kaboko and AIG such that each of those may be relied upon by the Court to act as the other's contradictor; and

(e)    joinder of AIG might reasonably avoid a multiplicity of proceedings and enable all matters in controversy between Kaboko, the defendants and AIG to be completely and finally determined.

32    There is a question concerning the third factor in Lindsay J's summary: whether there is a substantial impediment (including the insured's insolvency) standing in the way of the proceedings being constituted in the more orthodox way, namely by the defendants themselves cross-claiming against the insurer, rather than Kaboko, joining the insurer.

33    I accept Kaboko’s submission on this point, namely, that:

(a)    it can be inferred that the substantial impediment is really the defendants' reluctance to join AIG for in the hope that (amongst other things), without the prospect of a valuable judgment, Kaboko will see any potential victory as Pyrrhic and discontinue the proceedings. This reluctance to join AIG to the proceedings is sufficient for the purpose of satisfying this criterion; for how could it be that a defendant's refusal to join his or her insurer - for good reason or bad - should be determinative of whether a plaintiff and the Court is vexed by multiple proceedings when the litigation can be resolved in one?; and

(b)    this factor is not, in any event, a necessary condition for the grant of relief, but rather one of the matters that the Court must weigh in the exercise of its discretion. This particular factor does not find much voice in the relevant authorities. Davies JA, French J and Nettle J appear to take the view that a prospective liability at the conclusion of the trial is sufficient to ground a plaintiff's interest in joining the insurer.

34    The overarching purpose of this Court's civil practice and procedure provisions demands that disputes are determined as quickly, inexpensively and efficiently as possible.

CONCLUSION

35    To avoid the likely multiplicity of proceedings, and to give effect to the overarching purpose, leave to file an amended pleading joining AIG was granted.

Associate:

Dated:    18 May 2018

SCHEDULE OF PARTIES