FEDERAL COURT OF AUSTRALIA

Kaboko Mining Limited v Van Heerden (No 3) [2018] FCA 2055

ORDERS

THE COURT ORDERS THAT:

1.    The answer to the preliminary question is ‘No’.

2.    The fifth defendant pay the plaintiff’s costs of this application, to be assessed if not agreed.

3.    Any party seeking an order different from the previous order file a minute, submissions (not exceeding 5 pages) and any affidavit(s) within 21 days, with any responding materials (not exceeding 5 pages) to be filed within 14 days.

4.    Costs be determined on the papers unless the Court otherwise orders.

5.    A consent minute as to directions be filed within 21 days, failing which a case management hearing be fixed for 10.00 am on 7 February 2019.

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

REASONS FOR JUDGMENT

MCKERRACHER J:

INTRODUCTION

1    The plaintiff, Kaboko Mining Limited ACN 107 316 683 (Subject to a Deed of Company Arrangement) and the fifth defendant, AIG Australia Limited ACN 004 727 753, raise a preliminary question for determination as to whether, in the agreed circumstances, an insolvency exclusion clause in an Explorers Directors’ and Officers’ Liability Policy operates to preclude cover for the defendant directors in relation to the claims made in this proceeding.

2    The main point of difference between the parties is whether the case brought by Kaboko, in any way technically or in real substance, turns on the insolvency of Kaboko. For the reasons set out below, in my view, the answer to the preliminary question is no (except to the extent of the external controller’s costs).

BACKGROUND

3    The facts set out in this section are agreed as between Kaboko and AIG for the purposes of addressing this preliminary question.

4    Kaboko was a listed public mining company until 4 August 2017. The first defendant, Mr Andries Tobias Van Heerden, has been a director of Kaboko since 14 January 2013. The second defendant, Ms Jane Rosemary Flegg, was Company Secretary of Kaboko from 1 September 2011 to 22 April 2016. The third defendant, Ms Shannon Jayne Robinson, was a director and Company Secretary of Kaboko from 1 September 2011 to 30 June 2014. The fourth defendant, Mr Jason Paul Brewer, was a director of Kaboko from 1 September 2011 to 14 January 2013. AIG is in the business of providing insurance.

5    On or about 26 July 2012, Kaboko entered into an Offtake Agreement with Noble Resources Limited (the Assignor) pursuant to which Kaboko agreed to sell, and the Assignor agreed to buy, manganese ore from a number of manganese deposits in the areas known as ‘Emmanuel’, ‘Peco’ and ‘Kanona’ in Zambia (the Mining Projects).

6    On or about 26 July 2012, Kaboko entered into a Prepayment Facility Agreement with the Assignor, by which the Assignor agreed to advance USD10,000,000 to Kaboko in two tranches referred to as the ‘Tranche A Facility’ and the ‘Tranche B Facility’ on the terms and conditions set out in the Prepayment Facility Agreement.

7    On or about 12 December 2012, the Assignor novated its rights and obligations under the Prepayment Facility Agreement to Noble Resources International Pte Limited.

8    The Prepayment Facility Agreement was amended on or about 18 September 2012, 26 October 2012, 20 December 2012 and 11 January 2013.

9    The amendment on 11 January 2013 was by way of a ‘warranty and waiver letter’ (Licences Warranty Letter).

10    Pursuant to the terms of the Prepayment Facility Agreement:

(a)    the funds advanced to Kaboko were only to be used in accordance with the Permitted Use Schedule (cll 2.2, 8.1(u)(i), 10(p) and Sch 2);

(b)    Kaboko represented and warranted that all licences and authorisations of every government authority required in connection with the Prepayment Facility Agreement had been obtained and were valid and subsisting (cl 7.1(e));

(c)     Kaboko undertook to maintain proper books of account in accordance with the Corporations Act 2001 (Cth) and other laws applicable to it (cl 8.1(e));

(d)    Kaboko undertook to ensure that its financial documents furnished to Noble were prepared in accordance with its constitution, the Act and any other applicable statute and accounting standards (cl 8.1(j)); and

(e)    Kaboko undertook not to, inter alia, sell or otherwise dispose of any Product produced that was to be sold to the Assignor under the Offtake Agreement without the Assignor’s prior written consent (cl 8.1(l)).

11    Between about July 2012 and August 2013, the Assignor and Noble advanced the total sum of USD5,950,000 to Kaboko pursuant to the Prepayment Facility Agreement (the Advances).

12    By notice dated 21 July 2014 (the Noble Default Notice), Noble wrote to the directors of Kaboko (and African Asian Mining Development Limited (AAMDL)), stating, amongst other things, that Kaboko was in default of the Prepayment Facility Agreement, including because:

(a)    certain conditions agreed between the parties in a warranty and waiver letter dated 8 March 2013 had not been met by Kaboko;

(b)    Kaboko had sold product to third parties without Noble’s written consent;

(c)    Kaboko had not prepared a ‘JORC Resource Statement’ by 30 September 2013; and

(d)    the representations and warranties to Noble in the Licences Warranty Letter were untrue.

The Noble Default Notice reserved Noble’s rights under the Prepayment Facility Agreement and at law, but did not demand repayment of the Advances.

13    On 1 August 2014, Clayton Utz, acting on behalf of Noble, wrote to the Board of Directors of Kaboko and AAMDL (the August 2014 Letter).

14    On 25 August 2014, Clayton Utz, acting on behalf of Noble, issued a statutory demand to Kaboko for the payment of a debt of USD5,950,000 (being equal to the Advances) (the Statutory Demand).

15    On 18 September 2014, Kaboko applied to the Supreme Court of Western Australia to set aside the Statutory Demand.

16    On or about 25 November 2014, Clayton Utz, acting on behalf of Noble, wrote a letter to each of the first, third and fourth defendants (November 2014 Letter).

17    The Statutory Demand was set aside by orders made by Master Sanderson on 24 February 2015. The Master’s reasons were given in Kaboko Mining Limited v Noble Resources International Pte Ltd [2015] WASC 67.

18    A monetary default occurred under the Prepayment Facility Agreement on 26 January 2015. On 9 March 2015, Noble sent a notice of demand dated 6 March 2015 to the Kaboko Board, the first, third and fourth defendants, and the AAMDL Board (Notice of Demand). There was no compliance with the Notice of Demand.

19    On 15 April 2015, Noble, as secured creditor, appointed Receivers and Managers to Kaboko. The Receivers and Managers retired on 4 January 2016.

20    On 20 April 2015, Kaboko’s directors appointed Administrators pursuant to section 436A of the Act.

21    The Minutes of the First Meeting of Creditors, held on 1 May 2015, record ‘…[t]he Chairman confirmed that the Administrators would investigate the reasons for the Company’s failure and report to the creditors as to the estimate of the Company’s financial position (which would effectively be a ‘Liquidation Scenario’…’.

22    The Minutes of the Second Meeting of Creditors, held on 25 May 2015, record that the Administrator’s Report had reported upon initial investigations of possible breaches of directors’ duties based on allegations by Noble and the Noble Default Notice.

23    On 9 June 2015, Kaboko entered into a Deed of Company Arrangement (DOCA).

24    On 30 June 2015, Clayton Utz wrote to the directors of Kaboko on behalf of the Receivers and Managers of Kaboko.

25    On the same date, 30 June 2015, Clayton Utz wrote to the directors of Kaboko referring to the November 2014 Letter and to the loan agreement dated 22 December 2011 between AAMDL and Kaboko.

26    On 2 September 2016, Clayton Utz wrote to the first to fourth defendants serving the Originating Process in this action.

27    On or about 5 September 2016, the first to fourth defendants made claims for indemnity under the Policy in respect of the claims made by Kaboko in these proceedings.

28    On or about 22 March 2017, AIG declined to indemnify the first to fourth defendants for Kaboko’s claims.

Kaboko’s claims in this proceeding

29    Kaboko seeks damages which it contends arise from alleged breaches by the first to fourth defendants of s 180 and s 181 of the Act, as well as a breach of the general law duty to act in good faith in the best interests of Kaboko and for a proper purpose. The claims are set out in full in the further amended statement of claim.

Insurance

30    On or about 11 November 2014, AIG issued an Explorers Directors’ & Officers’ Liability Insurance Policy (policy number 1023400146) to Kaboko for the period 9 September 2014 to 9 September 2015, however the ‘discovery period’ in the Policy was extended by 12 months to 9 September 2016.

31    The Policy had a Continuity Date of 31 August 2012.

32    The Policy relevantly provided:

(a)    the ‘Policy Holder’ is Kaboko;

(b)    the ‘Insurer’ is AIG;

(c)    the limit of indemnity is $10,000,000 for any one claim and in the aggregate;

(d)    the Policy is a severable policy covering each Insured for their individual interest;

(e)    the Policy extends coverage on a claims-made and notified basis;

(f)    AIG shall pay the Loss of each Manager arising from Management Liability;

(g)    ‘Claim’ includes:

(a)    a written demand;

(b)    a civil, regulatory, mediation, administrative or arbitration proceeding, including a counterclaim, seeking compensation or other legal remedy;

(c)    a criminal proceeding;

for a specified act, error or omission …;

(h)    ‘Manager’ includes, relevantly, any natural person who was, is or during the Policy Period becomes, a director or officer of Kaboko or any subsidiary, but only when and to the extent that such Manager is acting for and on behalf of Kaboko in that capacity; and

(i)    ‘Management Liability’ includes, relevantly, any liability arising from any actual or alleged act, error or 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 / or Statutory Liability.

33    The Policy also contained an endorsement with the following Insolvency Exclusion:

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 inability of the Company to pay any or all of its debts as and when they fall due.

(Emphasis in original.)

34    Each of the first to fourth defendants was a Manager under the Policy to the extent that each was acting for and on behalf of Kaboko as a director or officer.

PROPOSED PRELIMINARY QUESTION

35    The question for determination, as articulated by AIG, is:

Does the endorsement to the AIG directors’ and officers’ insurance policy number 102340014 (the Policy) titled Insolvency Exclusion operate to preclude the First to Fourth Defendants from an entitlement to indemnity under the Policy in relation to the claims made against them in this action?

RELEVANT PRINCIPLES

36    An insurance policy is a commercial contract and should be given a businesslike interpretation, paying ‘attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure’: McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 per Gleeson CJ (at [22]). Preference is to be given to a construction supplying a congruent operation to the various components of the whole: Todd v Alterra at Lloyds Ltd (2016) 239 FCR 12 per Allsop CJ and Gleeson J (at [42]) and per Beach J (at [72]).

37    There are no special rules of construction to be applied in relation to exclusion clauses: Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 per Mason, Wilson, Brennan, Deane and Dawson JJ (at 510). Exclusion clauses within insurance contracts should be interpreted according to their natural and ordinary meaning giving consideration to the contract as a whole and the context of the exclusion within the relevant policy. Regard must be had to the language used in an exclusion clause, however, such a clause must be read in light of the contract of insurance as a whole, ‘thereby giving due weight to the context in which the clause appears’: Darlington Futures (at 510). Whilst an exclusion clause should not be unreasonably constrained, the authorities favour a construction that is in line with the operation of the insurance policy as a whole: Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 per Gleeson CJ, McHugh, Gummow and Kirby JJ (at [16]).

38    If an exclusion clause is reasonably open to competing constructions, the preferred construction is the one that avoids capricious, unreasonable, inconvenient or unjust consequences (Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 per Gibbs J (at 109)), having regard to the risks covered by the policy and, therefore, the purpose of the policy: Major Engineering Pty Ltd v CGU Insurance Ltd (2011) 35 VR 458 per Bongiorno JA (at [45] with whom Hansen JA and Kyrou AJA agreed); Kyriackou v ACE Insurance Ltd [2013] VSCA 150 per Harper JA (at [89] with whom Tate JA agreed). There is also a general tendency to resolve exclusion clauses in favour of the insured where the clause allows it: Kyriackou (at [89]).

39    The notion that the commercial purpose of the insurance contract, and the probable intention of the parties, is a relevant consideration in construing an exclusion clause was observed in McCann by Callinan J (at [197]), quoting Australian Casualty Co Ltd v Federico (1986) 160 CLR 513 per Gibbs CJ (at 520):

…The ordinary rules of interpretation apply to a policy of insurance. As in the case of any other commercial contract, a court may depart from the strictly literal meaning of a particular expression to place upon it an alternative construction which is more reasonable and more in accord with the probable intention of the parties if the words will bear that construction ... Further ‘the trend is, if anything, to adopt a liberal interpretation in favour of the insured, so far as the ordinary and natural meaning of the words used by the insurers permit this to be done’ ...

40    Similarly, Barker J said in Ashmere Cove Pty Ltd v Beekink [2009] FCA 564 (at [104]):

... it is understood and accepted that a court will endeavour in construing an exclusion to construe it in a manner consistent with the commercial purpose of the contract of insurance and where possible to avoid the exclusion operating so as to substantially defeat the indemnity granted by the policy and render the policy “practically illusory”...

(Citations omitted.)

AIG’S CONTENTIONS

41    AIG refers to section 1 of the Policy, issued on or about 11 November 2014, which provides that the Insurer shall pay the Loss, being any amount which the Insured is legally liable to pay resulting from a Claim made against an Insured (including Defence Costs), of each Manager (including Director) arising from Management Liability.

42    The Insolvency Exclusion provides that AIG is not liable for any Loss in connection with any ‘Claim’ arising out of, based upon or attributable to:

(a)    the actual or alleged insolvency of the Company (Kaboko); or

(b)    any actual or alleged inability of the Company (Kaboko) to pay any or all of its debts as and when they fall due.

43    It is clear the ‘Claim’ is Kaboko’s Claim against the first to fourth defendants in this proceeding. AIG says (and it must be correct) that each of the words ‘arising out of’, ‘based upon’ and ‘attributable to’ are to be given work to do in the proper construction of the Insolvency Exclusion.

44    In Quintano v BW Rose Pty Ltd [2008] NSWSC 793, Brereton J held that (at [7]-[8]):

7    The words “arising from” required that there be some causal connection between the claim in a specified matter, but the requisite nexus is satisfied by a less approximate relationship than required by the phrase “caused by”.

8    It will satisfy the requirement that the claim “arise from” a matter, if it originates in, springs from, or has its foundation in that matter ...

(Emphasis added, citations omitted.)

45    Further, AIG points out that the phrase ‘arising out of’ in the Policy is wider than ‘arising from’ and requires less of a nexus than ‘arising from’. Consistent with Quintano, if the actual or alleged insolvency of Kaboko, or any actual or alleged inability of Kaboko to pay any or all of its debts is the springboard or foundation for the Claim, or if the loss in connection with the Claim is either based upon or attributable to such insolvency or inability to pay any or all of Kaboko’s debts, then AIG contends that is sufficient to attract the operation of the Insolvency Exclusion.

46    The phrase ‘attributable to’ was considered in McConnell Dowell Middle East LLC v Royal and Sun Alliance Insurance PLC [2008] VSC 501, where Hansen J analysed the words ‘can be attributed to’ in the context of a theft-related exclusion clause in an insurance policy. Hansen J there held that (at [63]):

… The word “attribute”, as a verb, is defined by the Concise Oxford Dictionary as “regard something as belonging to or being caused by”. Although this definition ultimately rests on the language of causation, there is nevertheless a difference between saying that a loss “can be attributed” to theft, as opposed to saying that a loss “was caused” by theft. The latter is more direct and implies a definite conclusion that theft has occurred. The former is less direct, and permits an inference (rather than a definite conclusion) that theft occurred ... it seems to me that the question is whether, regarding all the available evidence, and applying the civil standard of proof having regard to the seriousness of the allegation of wrongdoing, it can reasonably be inferred that there has been a dishonest appropriation of the relevant property with no intention of returning it to its true owner. If such an inference is open, that is both a necessary and sufficient condition for finding that the loss of the property can be attributed to theft.

47    AIG says, consistently with McConnell Dowell, that while the phrase ‘attributable to’ is broader than ‘attributed to’ and is something which is capable of being attributed, ‘attributable to’ has the same meaning as ‘can be attributed to’. Thus, if it can reasonably be inferred that the actual or alleged insolvency of Kaboko, or any actual or alleged inability of Kaboko to pay any or all of its debts gave rise to the Claim, then that is sufficient to attract the operation of the Insolvency Exclusion.

48    AIG contends if there had never been a failure by Kaboko to meet the Statutory Demand (due to the actual or alleged insolvency of Kaboko) there would never have been the Claim or this proceeding.

‘Claim’ - pleaded case or underlying facts?

49    It is an important principal that in determining whether or not and what the Claim ‘arises out of, is based upon or is attributable to’, it is not sufficient to look to the specific causes of action alleged. It is necessary to look at the underlying facts.

50    In Quintano, Brereton J said (at [9]):

BWR’s cross-claim ... did not explicitly refer to insolvency, but the craftiness or clumsiness of the claimant’s pleading is not determinative of the characterisation of the claim for the purposes of the professional indemnity policy. Both parties accept that whether a claim falls within an exclusion depends on the facts that give rise to the claim, and not its formulation by the claimant . . . Those cases establish that, for the purposes of a professional indemnity policy, the manner in which a claimant formulates its case against the insured cannot be decisive of the rights and liabilities of the parties to the insurance policy, for which purpose the claim is characterised by its underlying facts, and not the form in which the claimant propounds it. Thus, if the facts underlying a claim amount in substance to fraud, the circumstance that the claimant eschews fraud and pleads its case in negligence, does not allow the insured to evade a fraud exclusion ...

(Emphasis added, citations omitted.)

The underlying facts which led to the claim

51    AIG argues that the facts giving rise to the Claim by Kaboko against the first to fourth defendants the subject of this proceeding are that:

(a)    in July 2014, Kaboko received the Noble Default Notice stating that Kaboko was in default of the Prepayment Facility Agreement with Noble. Importantly that letter alleged that the directors of Kaboko had made a number of representations and warranties to Noble regarding the ownership of specified licences and those representations and warranties have proven to be untrue in a material respect at the time that they were made.

(b)    In the August 2014 Letter, Noble’s solicitors, Clayton Utz, wrote to the board of directors of Kaboko. This letter referred to the Noble Default Notice and stated:

As you would be aware, the Sellers may only act through their directors, employees and agents. If the Sellers are found to have misled Noble (for example, regarding the “misstatements regarding ownership of licences default”) then the directors of the Sellers may be found to be accessorily liable. In this regard, we have been instructed to fully investigate this issue, and in the event evidence is identified which demonstrates that directors of the Sellers had been accessories to any misleading statements then Noble will bring proceedings against those directors. ...

Noble will allow the Sellers 14 days to make the payment of USD $6,300,000 (plus accrued interest) failing which Noble will take enforcement action, which may include a winding up application or an action in the Supreme Court of Western Australia against the Sellers and/or its directors and officers.

(c)    On 20 April 2015, Kaboko’s directors appointed Administrators pursuant to section 436A of the Act. The Minutes of the Second Meeting of Creditors, held on 25 May 2015, record that the Administrator’s Report had reported upon initial investigations of possible breaches of directors’ duties based on allegations by Noble and the Noble Default Notice.

(d)    On 2 September 2016, Clayton Utz, acting for the Administrators, wrote to the first to fourth defendants serving the Originating Process in this action.

52    AIG notes that the further amended statement of claim is replete with allegations of breaches by the first to fourth defendants, the directors of Kaboko, to ensure that Kaboko complied with its obligations under the Offtake Agreement and the Prepayment Facility Agreement. It is expressly pleaded that the directors knew that a failure of Kaboko to comply with its obligations under these agreements ‘... constituted a risk of causing serious financial harm to Kaboko ...’ (at para 39), a risk of insolvency which subsequently materialised.

53    AIG says para 42 of the further amended statement of claim and the facts set out in the particulars of loss are of significance to the determination of the application of the Insolvency Exclusion. When particularising loss, Kaboko relies upon the Event of Default under the Prepayment Facility Agreement. That is, the failure by Kaboko to pay one of its debts as and when it fell due. Further, Kaboko relies upon the making of and failure by Kaboko to meet the Statutory Demand being for USD5,950,000.

54    AIG also argues that the Statutory Demand, and the failure to meet that demand, established the actual insolvency of Kaboko. Such insolvency led directly to the claimed costs of receivership and administration in insolvency, part of the damages claimed. AIG says that, by definition, no such costs would have been incurred but for the insolvency of Kaboko.

CONSIDERATION

55    On 5 September 2018, Kaboko filed a further amended statement of claim which alleges that the first to fourth defendants, its former officers, breached their statutory, fiduciary and common law duties. While the underlying facts are fundamental to determination of the issue, it is also necessary to examine how the claim against the defendants by Kaboko is framed and, similarly, how it suffered the loss.

56    Kaboko claims that the first to fourth defendants contravened s 180 and s 181 of the Act, as well as breached their general law duties to act in good faith in the best interests of Kaboko, and for a proper purpose.

57    In particular, Kaboko claims that the first to fourth defendants failed in their duties by:

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

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

(c)    allowing Kaboko to breach the Agreements by failing to ensure that Kaboko or its subsidiaries held all the relevant mining licences that it had warranted that it held; and

(d)    allowing Kaboko to breach the Agreements by allowing Kaboko to sell Product to third parties,

(together, the Alleged Breaches).

58    AIG’s case that the Insolvency Exclusion is engaged is essentially based on the argument that the Alleged Breaches led to the demand for repayment of the Advances made under the Prepayment Facility Agreement which, in turn, ultimately led to Kaboko’s insolvency. Accordingly, it is said the loss claimed in this proceeding ‘arises out of’ Kaboko’s insolvency or its actual or alleged inability to pay its debts as and when they fell due because had Kaboko been able to meet Noble’s demand for repayment there would never have been a claim under the Policy.

59    There is no doubt that the Alleged Breaches ultimately led to Kaboko’s insolvency. Kaboko concedes this. However, in my view, the relevant loss does not ‘arise out of’ nor originate in, or spring from, or have its foundation in Kaboko’s insolvency. Rather the relevant loss, not just as pleaded but as demonstrably established by the underlying facts (if proven), was the loss of Kaboko’s opportunity to exploit a valuable commercial opportunity to develop the Mining Projects.

60    This view is reinforced by consideration of the Insolvency Exclusion in the context of the Policy as a whole and with particular regard to the commercial purpose of the Policy. The rationale behind providing directors’ and officers’ indemnity insurance is well established. In Australia, company directors and officers may be held personally liable for breaches of a broad range of statutory and common law duties arising from a wide number of complaints, including from their company, creditors, shareholders and ASIC. In the absence of insurance individuals would be unwilling to act as directors, or would become excessively risk-adverse in their role, to the detriment of the company. This point was reinforced in Oz Minerals Holdings Pty Ltd v AIG Australia Ltd [2015] VSCA 346, where Kyrou JA said (at [8]-[9] with whom Maxwell P agreed):

8    D & O [directors’ and officers’] insurance is a specialist form of insurance with many unique features. Those features arise from the fact that the primary insureds are directors and officers (collectively ‘directors’) of companies who, in the performance of their functions, are subject to a wide range of onerous common law and statutory duties and face a large array of potential claims giving rise to civil and criminal liability for breaching those duties. Directors may incur civil liability for damages or civil penalties to a multiplicity of claimants, including their company, a fellow director, a shareholder, employee, creditor or customer of the company or a regulator. The liability can involve many millions of dollars.

9    Due to the broad scope of the liabilities to which directors are potentially subject, the wide range of potential claimants and the scale of the financial exposure, it is not surprising that D & O policies contain a large number of exclusions. The subject matter of the exclusions may be defined by reference to matters such as the type of liability incurred by a director, the cause of the liability, the time at which — or the place in which — the Wrongful Act giving rise to the liability occurred, or the identity of the claimant.

61    The general approach in such policies is to protect directors and officers from those customary risks borne by directors in performing their role. That approach is reflected in the terms of the Policy where it is provided that the Policy protects from, inter alia, ‘Management Liability’, which is defined, relevantly, as:

(i)    any liability arising from any actual or alleged act, error or 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 ...

(Emphasis in original.)

The Policy also provides that AIG will pay the Statutory Liability of any Insured Person (which term is defined to include a ‘Manager’). ‘Statutory Liability’ is defined in the Policy to include ‘any fine or pecuniary penalty pursuant to any Statute’, but does not include Statutory Liability for breaches of, inter alia, s 182 and s 183 of the Act.

62    In Kyriackou, the Victorian Supreme Court of Appeal expressed a view that an ancillary connection to insolvency was not sufficient to engage the wording ‘arising out of or in any way connected with’ in an insolvency exclusion clause (at [109]). In that case, Harper JA considered (in obiter) whether claims made by ASIC against an insured and his group of companies for contraventions of s 601ED of the Act (operating a managed investment scheme which required registration but was not registered) would fall within the ambit of an insolvency exclusion clause which provided that the insurer was not liable to make payment for ‘Loss directly or indirectly caused by, arising out of or in any way connected with: ... the insolvency ... of any person or entity, including the Insured’. ASIC sought relief in its originating process in the form of orders for the appointment of a provisional liquidator and winding up of certain of the defendant companies. Ultimately, one of the defendant companies was wound up and a liquidator appointed to it. On the question of casual nexus, Harper JA said (at [109]-[110]):

109    The reason for the winding up is, however, irrelevant. The question here is whether the ASIC claim was based in whole or in part upon the ‘the insolvency ... or liquidation of any ... entity, including an insured’. In my opinion, it was so based only in the most ancillary way. That it seems to me, is not enough.

110    In my opinion, exclusion clause 3. 27 would not therefore exclude the insurer from being liable for defence costs.

(Emphasis added.)

63    The approach adopted by Harper JA, which requires that the relevant claim be ‘based in whole or in part’ upon the insolvency of the company, appears to be consistent with the position adopted in the United Kingdom: see Timothy Crowden v QBE Insurance (Europe) Ltd [2017] EWHC 2597 (Comm) (at [84]).

64    Although AIG has expressly excluded liability for Statutory Liability arising from violations of s 182 and s 183 of the Act, it has not excluded Statutory Liability arising from violations of s 180 and s 181 of the Act.

65    The provisions not excluded from cover are in these terms:

180    Care and diligence—civil obligation only

Care and diligence—directors and other officers

(1)    A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a)    were a director or officer of a corporation in the corporation’s circumstances; and

(b)    occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

Note:    This subsection is a civil penalty provision (see section 1317E).

Business judgment rule

(2)    A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:

(a)    make the judgment in good faith for a proper purpose; and

(b)    do not have a material personal interest in the subject matter of the judgment; and

(c)    inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and

(d)    rationally believe that the judgment is in the best interests of the corporation.

The director’s or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.

Note:    This subsection only operates in relation to duties under this section and their equivalent duties at common law or in equity (including the duty of care that arises under the common law principles governing liability for negligence)—it does not operate in relation to duties under any other provision of this Act or under any other laws.

(3)    In this section:

business judgment means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.

181    Good faith—civil obligations

Good faith—directors and other officers

(1)    A director or other officer of a corporation must exercise their powers and discharge their duties:

(a)    in good faith in the best interests of the corporation; and

(b)    for a proper purpose.

Note 1:    This subsection is a civil penalty provision (see section 1317E).

Note 2:    Section 187 deals with the situation of directors of wholly-owned subsidiaries.

(2)    A person who is involved in a contravention of subsection (1) contravenes this subsection.

Note 1:    Section 79 defines involved.

Note 2:    This subsection is a civil penalty provision (see section 1317E).

66    The provisions excluded from cover are these:

182    Use of position—civil obligations

Use of position—directors, other officers and employees

(1)    A director, secretary, other officer or employee of a corporation must not improperly use their position to:

(a)    gain an advantage for themselves or someone else; or

(b)    cause detriment to the corporation.

Note:    This subsection is a civil penalty provision (see section 1317E).

(2)    A person who is involved in a contravention of subsection (1) contravenes this subsection.

Note 1:    Section 79 defines involved.

Note 2:    This subsection is a civil penalty provision (see section 1317E).

183    Use of information—civil obligations

Use of information—directors, other officers and employees

(1)    A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:

(a)    gain an advantage for themselves or someone else; or

(b)    cause detriment to the corporation.

Note 1:    This duty continues after the person stops being an officer or employee of the corporation.

Note 2:    This subsection is a civil penalty provision (see section 1317E).

(2)    A person who is involved in a contravention of subsection (1) contravenes this subsection.

Note 1:    Section 79 defines involved.

Note 2:    This subsection is a civil penalty provision (see section 1317E).

67    Of course the mere fact that a pleading has been carefully drawn would not lead to a conclusion as to whether or not an exclusion applies. But there is no challenge for present purposes to the contention that the Policy would respond but for the exclusion. Kaboko submits, correctly in my view, that the claims under s 180 and s 181 of the Act for breach of duties are the exact class of risk the Policy is intended to insure against in light of those provisions not being the subject of an express exclusion.

68    Factors that are relevant to the determination are the purpose of the Policy, the risks it is designed to insure against and the mischief sought to be excluded by the Insolvency Exclusion.

69    Importantly, to construe the reach of the words in the Insolvency Exclusion in the manner AIG proposes would result in the Insolvency Exclusion operating to exclude from cover under the Policy claims against directors of any nature whatsoever if the relevant conduct of the directors giving rise to the claim also played some part in the eventual or alleged insolvency of the company. This would be contrary to the objectively viewed commercial purpose of such a policy and the objectives of the parties in entering into it. It would, in the words of Barker J in Ashmere Cove, ‘substantially defeat the indemnity granted by the policy and render the policy “practically illusory”’. It would result in a construction ‘repugnant to the purpose of the insurance contract’ of the type Lord Hodge in Impact Funding Solutions Ltd v Barrington Support Services Ltd [2017] AC 73 (at [7] with whom Lords Mance, Sumption and Toulson JJSC agreed) cautioned against.

The Loss – and the Statutory Demand

70    By its further amended statement of claim, Kaboko particularised the measure of loss as the loss of the valuable commercial opportunity to exploit the Mining Projects as follows:

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.

71    The particulars of loss also include:

(a)    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 opportunity in particular (a) (see above); and

(b)    the costs of Kaboko’s receivers and managers and administrators.

72    Kaboko’s further amended statement of claim excludes the Statutory Demand. It does so on the basis that the Event of Default under the Prepayment Facility Agreement, which led to the Statutory Demand to repay USD5,950,000, is not, ‘upon reflection by Kaboko’, a proper measure of Kaboko’s loss. A loss is occasioned when, after the relevant event, the subject is in a worse position than it was prior to that event. Kaboko says Noble’s Statutory Demand for repayment is not such an event. Under the Prepayment Facility Agreement, Kaboko was liable to repay to Noble the Advances that it had been paid to that date (whether in cash if an Event of Default occurred, or otherwise in kind by way of product under the Offtake Agreement). Noble’s Statutory Demand seeking repayment crystallised that liability, but cannot be said to have caused Kaboko any loss. Rather, Kaboko says, the true measure of Kaboko’s loss caused by the Alleged Breaches was the loss of the valuable commercial opportunity to exploit the Mining Projects and turn a profit.

73    There is no direct evidence of the loss beyond the fact that it is pleaded. However, it is an entirely reasonable inference that if the pleaded breaches occurred (which I assume to be the case for present purposes only) the loss as pleaded would naturally have followed and, indeed, be an immediate consequence absent some other intervening factor.

External controller’s costs

74    Kaboko does, however, concede that the loss it has incurred by reason of the external controllers’ costs does ‘arise out of’, is ‘based upon’ and is ‘attributable to’ Kaboko’s insolvency. Accordingly, the Insolvency Exclusion is engaged to deprive the first to fourth defendants of indemnity in respect of that particular head of loss.

CONCLUSION

75    In my view, the Insolvency Exclusion does not operate to preclude the first to fourth defendants from indemnity by AIG under the Policy in relation to Kaboko’s claims in this proceeding other than Kaboko’s claims for the costs and disbursements of the external controllers.

Associate:

Dated:    19 December 2018

SCHEDULE OF PARTIES