‘Court procedure rules overcome Section 6 LR(MP) Act Problem’

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In Austcorp Project No 20 Pty Ltd v LM Investment Management Ltd (In Liq); in the matter of Bellpac Pty Ltd (receivers and managers appointed) (in Liq) [2013] FCA 883, the Federal Court of Australia granted leave to join the professional indemnity insurers of LM Investment Management Ltd (in Liq) (LM) pursuant to Rules 9.02 and 9.05 of the Federal Court Rules 2011. In the course of its judgment, the Court identified a number of elements which had to be satisfied before any order to join insurers pursuant to those rules would be made. The elements do not set a high bar and will be difficult for insurers to resist.

Austcorp and Compromise Creditors, the Plaintiffs, brought proceedings against a number of parties, including LM, for amongst other reasons, knowing involvement in the breaches of equitable duties and duty of care in exercising a power of sale over certain land in Bellambi, in contravention of section 420A of the Corporations Act 2001 (Cth). The Plaintiffs alleged that the Bellambi land was sold at gross under value.

The Plaintiffs sought to join LM’s professional indemnity insurers pursuant to rule 9.02 and 9.05 of the Federal Court Rules 2011. The essential thrust of those rules is to allow joinder of parties to prevent a multiplicity of proceedings. The Plaintiffs did not seek to invoke the provisions of section 6 of the Law Reform Miscellaneous Provisions Act 1946 (NSW) because they conceded that they would fail in such an application.

The professional indemnity insurers submitted that their joinder to the proceedings would be futile because the policy did not respond to the Plaintiffs’ claim. The Court concluded that the professional indemnity insurers should be joined to the proceedings pursuant to either rule 9.02 and/or 9.05, but subject to the condition that the policy interpretation issues be determined as a separate question. The reason for this was because there was insufficient evidence before the Court to determine the question.

In coming to that conclusion, the Court identified the following elements for a successful joinder application of insurers pursuant to rules 9.02 and 9.05:

  1. The applicant must show an arguable case at least to the standard of being able to resist an application for summary judgment.
  2. The insurer must have made a declinature.
  3. There is a bona fide dispute as to the entitlement of the insurer to deny liability.
  4. There is a substantial impediment in the way of proceedings continuing (eg: insolvency on the part of the insured).
  5. The dispute as to the liability of the insurer can properly be made the subject of interlocutory relief.
  6. There is a true legal controversy between insured and insurer.
  7. Joinder of the insurer may be relied upon to avoid a multiplicity of proceedings.