In brief - Receiver accesses PI policies to determine if consultant advisor is worth suing
The Supreme Court of Victoria has granted the receiver and manager access to the PI policies of an external advisor of a company in receivership to determine whether it was worth pursuing the advisor in the event that the receiver's investigation uncovered some fault.
Court grants receiver access to more than just directors' and officers' (D&O) policies
It is now well established that as part of an examination process, an external administrator can get access to certain insurance policies of a company and its directors to work out whether it is worth suing.
In the case Banksia Securities Limited (Receivers and Managers Appointed)  VSC 416, the court used the same principles to allow the administrator to cast the net slightly wider than is usually seen to capture not just the D&O policies, but PI policies of external advisors as well.
Receivers investigate potential claims against advisors of company in receivership
On 25 June 2013, on application by the receivers and managers of Banksia Securities Limited, the Victorian Supreme Court ordered that a summons for examination of Michael Hall of MB+M Business Solutions ("MB+M") be issued. MB+M was previously a consultant advisor to Banksia Securities Limited ("Banksia"), which was placed in receivership in October 2012.
Receivers and managers were appointed in the normal course to conduct their examination of the company and its affairs. As part of this process, receivers were investigating potential claims against MB+M in respect of possible understatement of Banksia's financial position in 2008. Moreover, receivers were investigating whether MB+M failed to identify a possible breach by Banksia of the borrowing limitations placed on it by its trust deed.
Court orders advisors to produce all relevant insurance policies
Receivers sought, as part of their investigation, a copy of MB+M's professional indemnity insurance policy. The rationale for this request was to enable the receiver to determine whether it was worthwhile pursing MB+M in the event that the receiver's investigations uncovered some fault.
The court made orders requiring Mr Hall (vis-a-vis MB+M) to produce, amongst other things, "all documents relating to the existence and terms of any insurance policy providing MB+M and its partners with cover in respect of any potential liability arising out of the affairs of Banksia".
Mr Hall sought to challenge this order and was unsuccessful.
Existence and level of insurance cover held to be relevant
The court found in favour of the receiver and ordered production of the PI insurance policy.
In coming to its decision, the court relied on the oft-traversed authority of Re Interchase Corporation (No 2) (1993) 120 ALR 143 to conclude that a chose in action (that is, a right to bring a lawsuit) is property of the corporation and the existence and availability of insurance cover is relevant to the value of the chose in action.
The court reiterated that the purpose of the examination provisions in the Corporations Act 2001 (Cth) is to allow investigations about, inter alia, a company's property - including its choses in action.
Production of insurance policies to test likelihood of creditors receiving tangible benefit
The court expressed the opinion that the summons did not require an actual claim to be described and articulated. The production of insurance policies sought was specifically in regard to ascertaining the existence and level of insurance cover.
This conclusion rests on a broad interpretation of the power of the court to order the production of documents to test the likelihood of creditors in winding up proceedings receiving tangible benefit from a judgment.
Distinction between production of documents in examinations and in civil proceedings
Even though the court favoured a broad interpretation of the examination powers in this context, it is important to remember the distinction between production in examinations and production in ordinary civil proceedings.
In most jurisdictions, the test for production in civil claims requires that documents sought are "relevant to an issue in dispute". Examinations, on the other hand, can go beyond this test and seek documents regarding a company’s asset position and, as demonstrated in Banksia, which show the potential utility of running an action against a company’s external advisors.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2020.