In its recent decision in Steigrad v BFSL Ltd & Ors CA674/2011 the Court of Appeal threw a life-line to Peter Steigrad and other directors of the collapsed Bridgecorp group of companies. The directors concerned are facing claims by the Bridgecorp companies for alleged breaches of duties owed by the directors to the companies. As the companies are in liquidation, Bridgecorp’s claims are brought on behalf of creditors, including those who invested in Bridgecorp. As with most litigation, and especially complex litigation of this nature, the costs of defending Bridgecorp’s claims is significant. The directors have relied upon directors’ liability insurance policies held by Bridgecorp to financially assist their defences of the claims. A dispute arose because Bridgecorp asserted that section 9(1) of the Law Reform Act 1936 creates a charge in Bridgecorp’s favour over the insurance monies available under the policies. Section 9(1) enables a claimant who has been wronged by a liable party to claim directly against an insurance policy held by the liable party, but only where the policy provides cover for the particular liability in question. This is so even though the extent of the allegedly liable party’s liability is yet to be determined, so that the claim operates as a “charge” on the available insurance monies until a Court decision or agreement between the parties. The High Court had endorsed Bridgecorp’s charge over the directors’ liability insurance monies, meaning that the directors could not continue to rely on those funds for reimbursement of their defence costs. The Court of Appeal overturned the High Court’s decision and, in doing so, brought clarity to the effect of section 9(1) on the Bridgecorp situation and others like it. The Court arrived at its decision for two main reasons: firstly, that section 9(1) does not apply to defence costs; and secondly, that section 9(1) is not intended to interfere with contractual rights and obligations regarding insurance cover. Dealing with the first reason in respect of Mr Steigrad’s appeal, the Court found that the policy includes an obligation on the insurer to pay Mr Steigrad’s defence costs when it has not declined his claim for liability cover. Mr Steigrad’s liability to pay defence costs arises independently of the outcome of the claim against him. It is not, therefore, an amount which is or may become payable in respect of Mr Steigrad’s liability to Bridgecorp. In other words, section 9(1) does not create a charge in Bridgecorp’s favour over monies which are lawfully (contractually) payable to Mr Steigrad. The Court’s second reason is equally compelling – the wording of section 9(1) is not such that it suspends the performance of contractual rights and obligations relating to a separate liability. This decision might be hard to stomach for investors in Bridgecorp and other failed finance companies because, after all, Bridgecorp’s claims are brought to recover as much as possible for investors/creditors in the liquidations of the various companies. However, it is difficult to fault the Court of Appeal’s reasoning when considering the purpose and wording of section 9(1), especially in the context that the claims against the directors have not yet been proved.
By Chris Patterson