Access to directors and officers’ policies - the emerging rights of shareholders
Jul 2011 |Introduction
Over recent years, there have been a number of applications by persons contemplating action against companies (or directors of those companies), seeking access to the liability insurance policies (including D&O policies) of those companies prior to commencing proceedings for negligence or breach of statutory duty against the company or its directors. The purpose of those applications is to determine whether the company is likely to be indemnified by an insurer before an action is commenced which may otherwise result in an empty judgment.
While not all such applications have been successful (see Wingecarribee Shire Council v Lehman Brothers Australia Limited (in liq) (No 2) [2009] FCA 532; and Kirby v Centro Properties Limited (ACN 078 590 682) [2009] FCA 695), applications brought by shareholders of a company seeking access to the insurance policies of that company pursuant to s 247A of the Corporations Act 2001 (Cth) (the Act) have had greater success than other applicants who cannot bring their application under that section.
Section 247A of the Corporations Act
Section 247A of the Act provides that a shareholder of a company may apply to the Court for an order allowing the shareholder to inspect the books of that company if the court is satisfied that the shareholder is acting in good faith and that the inspection is to be made for a proper purpose.
The case law
In July 2009, we reported on the decision of Merim Pty Ltd v Style Limited [2009] FCA 394 which was the first decision to grant access to policies of insurance held by a company to its shareholders who were considering action against the directors of the company. In that case, Goldberg J granted access to the then current directors and officers' insurance policies held by Style Limited, because the cover granted under those policies would be relevant to the decisions to be made by Merim Pty Ltd, after inspection of the other documents sought by it, whether to bring proceedings against the directors of Style Limited.
That trend has now continued with the decision of London City Equities Limited v Penrice Soda Holdings Limited [2011] FCA 674.
London City Equities Limited v Penrice Soda Holdings Limited
The Facts
The plaintiff, London City Equities Limited (LCE) is a shareholder of the defendant, Penrice Soda Holdings Limited (Penrice). LCE had concerns about the conduct of the directors of Penrice and believed that the directors had acted in breach of their statutory duties. LCE was considering bringing proceedings against one or more of the current or former directors of Penrice and possibly against Penrice. LCE sought access to certain books of Penrice to investigate and decide whether to bring a claim against Penrice's directors and, if it decided to bring a claim, to use the documents reviewed in the pursuit of that claim. LCE sought access to broad categories of documents including 'All documents recording, referring to or relating to Penrice's Directors and Officers policies for the periods from 1 July 2008'.
The Court accepted that, as LCE was considering bringing proceedings against one or more of the current or former directors of Penrice and possibly against Penrice, and it had previously attempted through correspondence to obtain access to certain of Penrice's books so that it could determine whether its concerns were well founded, the application was brought in good faith and for a proper purpose.
Penrice argued that, as a matter of discretion, production should be limited to documents concerning the investigation of the facts potentially in issue and not merely to the financial position of potential defendants noting there was a substantial difference between documents relevant to whether or not a potential claimant may have a cause of action and documents which went only to whether, in a practical or commercial sense, a matter was worth pursuing.
Robertson J agreed with the approach taken in Merim Pty Ltd v Style Limited and also referred to the following comments made by Le Miere J in the West Australian Supreme Court decision of Snelgrove v Great Southern Managers Australia Ltd (in liq) (receiver and manager appointed) [2010] WASC 51 at paragraphs 67 to 68:
It is a proper purpose to inspect the company's books for the purpose of investigating whether there are good grounds for seeking to bring a derivative action or a personal action against the company. The purpose of the plaintiffs in seeking access to the relevant insurance policies is to assist them in considering the economic viability of pursuing their proposed action against the company. That is a proper purpose.
… The nature and extent of the company's insurance cover is not in itself a matter in dispute in the action which the plaintiffs are contemplating commencing against the company. However that is not a condition for the exercise of the power under 247A. The disclosure of the existence and extent of the relevant insurance cover is likely to assist the plaintiffs in determining whether or not to commence or proceed with the proposed action. If the company does not have insurance which covers the plaintiffs' claims or the quantum of the cover is such that it is likely to be substantially exhausted in legal costs then the plaintiffs may well not proceed with the proposed action. That would prevent the resources of the parties and public resources being wasted. The thrust of the approach to litigation enshrined in the case management rules of this court and other superior courts in Australia is to avoid waste of time and cost and to ensure as far as possible proportionate and economical litigation. It is an appropriate exercise of the discretion of the court to make an order granting access to the plaintiffs to the company's relevant insurance policies.'
His Honour was of the view that unless he was persuaded that the approach taken in Merim and Snelgrove was clearly wrong, he should follow it. As he was not so persuaded, but considered that the category of documents sought by LCE was too broad in its terms, he granted access to Penrice's directors and officers' insurance policies for the period from 1 July 2008 to the present date.
Comment
It now seems clear that shareholders of a company who seek access to the directors and officers' insurance policies of the company for a defined period and for the purpose of considering the economic viability of pursuing a proposed action against the directors of the company pursuant to
s 247A of the Corporations Act, will be granted access to those policies.
This will be of particular importance to shareholders (and potential litigation funders of shareholders) in companies that have been placed into administration or liquidation and we anticipate more applications for access to directors and officers' insurance policies as companies fail in the current economic climate.
It is an important feature of these cases that they are based on the application of s 247A of the Act, and the entitlements under that section have not been extended to benefit potential litigants seeking access to insurance policies outside the scope of that statutory provision.
