Bfsl 2007 Ltd and Others ((in Liquidation)) v Steigrad

• Jurisdiction: New Zealand
• Judge: Glazebrook J
• Judgment Date: 23 December 2013
• Neutral Citation: [2013] NZSC 156
• Docket Number: SC 19/2013
• Court: Supreme Court
• Date: 23 December 2013

BETWEEN

BFSL 2007 Limited & ORS (In Liquidation)

First Appellants

Bridgecorp Limited & Bridgecorp Management Services Ltd (Both In Receivership And Liquidation)

Second Appellants

and

Peter David Steigrad

Respondents

BETWEEN

Eric Meserve Houghton

Appellants

and

Aig Insurance New Zealand Limited (Formerly Chartis Insurance New Zealand Limited)

First respondents

T E C Saunders, S J Magill, J M Feeney, P Thomas, C E Horrocks & P D Hunter

Second Respondents

[2013] NZSC 156

SC 19/2013

SC 21/2013

IN THE SUPREME COURT OF NEW ZEALAND

Appeals in relation to s9(1) Law Reform Act 1936 (“LRA”) which imposed a statutory charge on insurance money payable to an insured to indemnify the insured for damages or compensation payable to third party claimants — relevant insurance policies concerned directors’ liability insurance — insurance claims covered claims for losses resulting from breaches of duty as directors, and also the costs of defending any actions brought against the directors — whether the statutory charge allowed payments to be made under the insurance policy for defence costs before liability with regard to the charged claims was decided by way of settlement or judgment, where to do so would deplete the sum available to meet the claim with regard to the eventual liability to the third party.

Counsel:

M J Tingey and D J Friar for First and Second Appellants in SC 19/2013

B P Keene QC and J F Anderson for the Respondent in SC 19/2013

A J Forbes QC and P A B Mills for Appellant in SC 21/2013

M G Ring QC and B J Burt for First Respondent in SC 21/2013

A R Galbraith QC and A E Ferguson for Second Respondents in SC 21/2013

C T Patterson for Intervener G K Urwin in SC 19/2013

• A The appeals are allowed. The Court of Appeal's declaration in SC 21/2013 is set aside.

• B The respondent is to pay costs of $25,000 to the appellants in SC 19/2013 plus usual disbursements (to be set by the Registrar, if necessary). We certify for two counsel.

• C The respondents are to pay, jointly and severally, costs of $25,000 to the appellants in SC 21/2013 (to be set by the Registrar, if necessary). We certify for two counsel.

JUDGMENT OF THE COURT

REASONS

	Para No
Elias CJ and Glazebrook J	[1]
McGrath and Gault JJ	[125]
Anderson J	[196]

ELIAS CJ AND GLAZEBROOK J

(Given by Glazebrook J)

Table of Contents

	Para No
Background	[1]
Further background	[10]
The Bridgecorp appeal	[10]
The Houghton appeal	[17]
Structure of the judgment	[21]
The legislation	[24]
Wording of s 9(1)	[31]
Section 9(3) – priorities	[39]
Section 9(4) – direct right of action for third parties	[55]
Section 9(6) – payments made under the contract of insurance	[62]
Nature of the statutory charge	70]
Prior caselaw	[78]
Legislative history	[86]
The predecessor provisions	[86]
The Law Reform Act	[95]
Discussion	[99]
General policy arguments	[105]
Conclusion	[115]
Result and costs	[119]

Background

1 Section 9(1) of the Law Reform Act 1936 imposes a statutory charge on insurance money payable to an insured to indemnify the insured for damages or compensation payable to third party claimants. The issue in these appeals is the nature and effect of such a charge and inparticular:

• (a) whether the charge secures whatever is eventually held to be the full amount of the insured's liability to the third party claimant (subject to any insurance policy limit), with no payments under the policy able to be made that would deplete the insurance money available to meet the third party claim if it is established; or

• (b) whether the charge secures the insurance money that remains at the time of judgment on, or settlement of, the third party claim against the insured, allowing in the meantime the payment of other sums that fall due for payment under the policy, even if that depletes the sum available to meet the third party claim.

2 The insurance policies at issue in these appeals concern directors’ liability insurance taken out on behalf of the directors of the Bridgecorp group of companies (Bridgecorp) 1 and those of Feltex Carpets Ltd (Feltex). 2 The insurance policies in

both cases covered not only claims for losses resulting from breaches of duty as directors but also the costs of defending any actions brought against the directors. The limits of indemnity provided under the policies constituted combined policy limits, which applied to the aggregate of liability to third parties and defence costs

3 Mr Steigrad was a director of the Bridgecorp group of companies. The receivers of Bridgecorp have brought a claim against the directors, including Mr Steigrad, seeking to recover funds for the members of the public who invested in Bridgecorp. These claims exceed by a wide margin the policy limit in the relevant insurance policy with QBE Insurance (International) Ltd (QBE) held by Bridgecorp.

4 Mr Houghton bought shares in Feltex when it was floated in 2004. He has brought an action against a number of parties involved with the share issue, including the directors of Feltex. 3 He is suing on his own behalf and in a representative capacity for other shareholders. 4 Again, the aggregate amount of the claims exceeds the policy limit under the policy with AIG Insurance New Zealand Ltd (AIG).

5 The appellants in both appeals contend for the interpretation set out at [1](a), meaning that defence costs are not able to be paid under the policy if to do so would deplete the funds available to meet the directors’ liability as eventually established in the relevant proceedings. That interpretation was held to be correct by the High Court in the Bridgecorp proceedings. 5

6 The respondents argue for the interpretation set out at [1](b). They maintain that s 9 was not designed to interfere with the contract between the directors and their insurers and therefore that, until liability is established under the third party claim, payments for defence costs may be made as they fall due under the policies.

The respondents’ interpretation was upheld on appeal in both the Bridgecorp and Houghton cases by the Court of Appeal. 6

7 Leave to appeal to this Court was granted on 15 April 2013 on the question of whether the Court of Appeal interpreted s 9 of the Law Reform Act correctly. 7

8 For the reasons given in what follows, we allow the appeals. In short, we consider that the scheme, the text, the caselaw and the legislative history of s 9 make it clear that the statutory charge attaches at the time of the occurrence of the event giving rise to the claim for compensation or damages in respect of the liability to third parties which is covered by the policy. Reimbursement to the directors of their defence costs is not within the statutory charge.

9 It is immaterial under the statute that the contractual obligation to pay the directors’ defence costs arises when the costs are incurred and that liability on the claim for damages is not yet determined or payable. The effect of the charge is that payments on the contractual obligation to meet the directors’ defence costs can be met only at the peril of the insurer when there is insufficient insurance cover under the limit of the policy to meet both insurance obligations.

Further background

The Bridgecorp appeal

10 Mr Steigrad, along with several co-directors, 8 is being sued for damages in excess of $340 million on the basis that they breached duties owed to the Bridgecorp companies in their capacity as directors causing the companies loss. They have been convicted of offences under the Securities Act 1978 for breach of statutory duties.

11 There were two relevant insurance policies taken out by Bridgecorp with QBE. One was a statutory liability policy, which provided cover for the costs of defending claims based on breaches of statutory duty. The limit of the policy was $2 million and it was exhausted in the defence of the Securities Act proceedings. It is common ground that monies payable under the statutory liability policy are not susceptible to a charge under s 9. 9

12 The second policy is that which is in issue in these proceedings. It is a Directors and Officers Liability and Company Reimbursement Insurance Policy (the QBE policy) with a limit of indemnity of $20 million. 10 Under the policy, the directors are entitled to be indemnified against any liability arising out of their acts or omissions as directors 11. The policy also provides for payment of defence costs paid either by the insurer in defending a claim covered by the policy or by the directors. 12 QBE must give its written consent to the incurrence of such costs, which shall not be unreasonably withheld. 13 Neither QBE nor the insured is required to contest a claim unless mutually agreed legal counsel advises that it should be contested. 14

13 The QBE policy provides that QBE will advance defence costs as and when those costs are incurred if QBE has given its prior written consent. 15 The amount recoverable for defence costs is presumptively capped, unless QBE consents in

writing to advance a greater amount. 16 Claims arising from third party claims are payable under the policy at the time legal liability is established against an insured. 17

14 Bridgecorp gave QBE notice of its claims against the directors on 12 June 2009, specifically providing QBE with notice of the statutory charge under s 9. QBE then advised the directors, on 17 June 2009, that it would make no further payments towards defence costs pending agreement with Bridgecorp on the allocation of the proceeds of the policy. The directors had initially relied on the statutory liability policy to cover the costs of the criminal proceedings, but, after they had exhausted their entitlement under that policy, the directors sought indemnity under the...