Livingstone v CBL Corporation Ltd (in liq) [2021] NZHC 755

The High Court has recently issued a decision in the CBL litigation which concerned the territorial ‘location’ of a charge under s 9 of the Law Reform Act 1936 (the LRA). In so doing, the Court reinforced the necessity of using the correct procedure for any jurisdictional challenge.

Introduction

Following CBL Corporation Ltd (CBL) being placed into liquidation on 13 May 2019, Mr Livingstone filed representative proceedings against CBL on behalf of other shareholders.

Mr Livingstone’s first three causes of action alleged that CBL breached its obligations under both the Financial Markets Conduct Act 2013 and the Fair Trading Act 1986. His fourth cause of action alleged that CBL held insurance policies indemnifying CBL and its directors against claims of the type pleaded in the first three causes of action.

Mr Livingstone sought a declaration that by virtue of s 9 of the LRA, any monies payable to CBL under those policies are now subject to a statutory charge in his favour.

CBL sought a contribution from several third parties who were CBL’s directors during the period in which the events giving rise to the first three causes of action accrued.

The Court considered two interlocutory applications. The first was an application by CBL to strike out the fourth cause of action on the basis that it was not tenable in law. The second was an application by Mr Livingstone for an order requiring CBL to discover any insurance policies to which the proceeding related. The Court only needed to consider Mr Livingstone’s application if CBL’s application to strike out the fourth cause of action failed. As such, the strike-out application was the focal point of this decision.

Section 9 Law Reform Act

Section 9 of the LRA provides that where a person is insured against liability to pay any damages or compensation, the amount of their liability shall be a statutory charge on all insurance money that becomes payable in respect of that liability, even though such liability has not at that point been established. Every charge against an insured person in these circumstances shall be enforceable by way of an action against the insurer in the same way and in the same court as if the action were an action to recover damages or compensation from the insured.

The Court noted that “Section 9 was enacted to overcome the unfairness that ensued when insurance proceeds were paid to the general pool of creditors of an insolvent insured rather than to the party who had suffered the loss to which the policy responded.”

Key issue

CBL’s strike-out application was centred on the argument that its insurers are based overseas, not in New Zealand, and any debt arising under the policies would also be paid from overseas. CBL argued, therefore, that section 9 could not apply to monies to be paid out under the policies because the section does not have extraterritorial effect.

Insurance policies

Mr Livingstone alleged that CBL held two contracts of insurance – a Public Offering of Securities Insurance policy and a Directors and Officers Liability policy – under which it was indemnified against liability to pay damages or compensation in relation to claims against the company and/or its officers. Both sides filed affidavits on the issue of insurance.

Mr Dennet, a law firm partner acting for the underwriters of the two policies, filed an affidavit deposing that Dual Corporate Risks Limited (DCRL), a named underwriter of the two policies, is a company registered in England and Wales, and that any payment made under the policies would be made from London.

Mr Livingstone’s solicitor, Mr Kim, filed an affidavit in support of their position that the insurers were NZ-based, specifically by evidencing that DCRL is the principal entity in the UK for the DUAL Group, and that there is a New Zealand company called DUAL New Zealand Limited. Mr Kim also referred to an article announcing DUAL International’s opening of an Auckland office which would “write liability and financial products on behalf of Lloyd’s syndicates”.

High Court

The Court cited three principles derived from the New Zealand Supreme Court’s 2010 decision in Ludgater Holdings Ltd v Gerling Australia Insurance Co Pty Ltd:[1]

(1) s 9 does not have extraterritorial application;

(2) s 9 will only apply if the New Zealand courts have subject matter jurisdiction over any debt payable by underwriters under a policy; and

(3) subject matter jurisdiction will not be conferred if the debt is situated or located outside New Zealand (called the situs or situation of the debt).

The Court also cited the more recent Court of Appeal decision of Bridgecorp Ltd (in rec and in liq) v Certain Lloyd’s Underwriters where it was said that “if a New Zealand plaintiff wishes to have the benefit of an order that something shall be done with property whose situs is in another jurisdiction it will ordinarily have to apply directly to a court in that jurisdiction”.[2]

The Court’s enquiry then turned to determining the ‘location’ of the debt. While it viewed the evidence of Mr Dennett for CBL as being all but unassailable, given that both policies are underwritten and administered by entities having their places of business overseas, Lang J said it was not possible for him to make a finding regarding the location of the debt. The Court was obliged to proceed on the basis that Mr Livingstone’s allegations in the statement of claim were correct, unless Mr Dennett’s evidence was indisputable, which it was not. Lang J also noted Mr Dennett’s evidence was hearsay because he is a lawyer acting for the underwriters in Australia and New Zealand, and not an officer or employee of either underwriter.

The Court noted that, typically, cases in this area of the law arise out of applications by a claimant for leave to bring a proceeding under s 9 against the insurer of an insolvent insured, rather than via a strike-out application as was Mr Livingstone’s case. Lang J considered that CBL’s insurer, in this case the underwriters, should have been named as parties to the proceeding. The Court’s ability to make a determination as to jurisdiction in that context is much wider than in a strike-out application. Joinder of the underwriters as parties to the proceeding was therefore said to be appropriate.

The Court refrained from striking the fourth cause of action and directed Mr Livingstone to either apply to join the underwriters as parties to the proceeding or apply for leave to commence an action against them under s 9(4) of the LRA.

In the circumstances, the Court considered that Mr Livingstone’s application for discovery of the insurance policies was premature and to be considered once it was known what approach Mr Livingstone was going to take in relation to the underwriters.

Comment (Tom Pasley)

This decision, and Lang J’s conclusions, demonstrate the importance of following proper procedure in cases like this one. Mr Livingstone, in seeking to enforce a charge under s 9, should have at the outset obtained leave to file an action under s 9 of the LRA against the insurer in the same way as it filed an action against the insured. This would have allowed the insured to be heard and to file an appearance under protest to jurisdiction. The matter would then have been dealt with by either the insured applying to dismiss the proceedings on the basis of lack of jurisdiction, or Mr Livingstone applying to set aside the appearance.

[1] Ludgater Holdings Ltd v Gerling Australia Insurance Co Pty Ltd [2010] NZSC 49, [2010] 3 NZLR 713.

[2] Bridgecorp Ltd (in rec and in liq) v Certain Lloyd’s Underwriters Under Policy No B0701LS05809 [2014] NZCA 571, [2015] 2 NZLR 285 at [26].