Allens

Insurance & Reinsurance

Focus: Further support for shareholder access to D&O insurance policies

4 July 2011

In brief: Public companies, their boards and their insurers should be aware of a recent Federal Court decision that has again confirmed that aggrieved shareholders may use section 247A of the Corporations Act 2001 (Cth) to apply for access to a company's insurance policies to help them decide whether to pursue litigation against it. Partner Michael Quinlan , Senior Associate Philip Hopley and Lawyer Laura Johnston report.

How does it affect you?

  • This decision – London City Equities Limited v Penrice Soda Holdings Limited1 – confirms that members are entitled to inspect a company's insurance policies in order to assess the commercial viability of commencing proceedings against the company or its directors. It is the third reported successful application using this provision in the past two years.2 
  • An insurer wishing to challenge the use of section 247A in this way will now have to be willing to seek appellate review of the validity of this growing line of authority.
  • Any company that becomes aware of a possible application by its members to access details of its insurance arrangements will need to consider carefully, and comply with, its policy notification obligations.

Background

London City Equities Ltd (LCE) is an institutional investor in Penrice Soda Holdings Limited. LCE decided to investigate the viability of seeking compensation from the directors of Penrice for suspected deficiencies in the discharge of their statutory duties. LCE applied for orders to access certain categories of documents, including its directors' and officers' (D&O) liability insurance policies, under s247A of the Corporations Act 2001 (Cth).

Under this provision, a court has the discretion to order the inspection of a company's books if it is satisfied that the applicant is acting in good faith and the request is made primarily for a proper purpose. One recognised purpose of s247A is to enable shareholders to determine both whether to commence legal proceedings against directors and their likely prospects of success.

Until 2009, this statutory provision had not been used to access a company's insurance policies. Its use in this way is contentious because it is well established that a defendant's insurance policy is irrelevant to any cause of action that is pleaded against it, and so is not discoverable in proceedings.

Consistent with this established position, Penrice argued that access to documents under s247A should be limited to those relevant to investigating the facts potentially in issue. Therefore, access should not extend to its insurance policies as these were relevant only to the commercial issue of whether a cause of action was worth pursuing economically.

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The decision

Justice Robertson granted the application for access to Penrice's D&O policies. In doing so, he referred to the previous decisions in Merim and Snelgrove, where it was held that allowing a potential plaintiff to inspect a company's insurance policies to determine whether it is economically viable to commence litigation is a 'proper purpose' that prevents the waste of public and private resources.

Justice Robertson expressed understanding of Penrice's position but took the view that, unless he was persuaded the approach of both courts was clearly wrong, he should follow it.

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Comment

This decision further establishes the position that aggrieved shareholders are entitled to apply to seek access to their company's D&O policies under s247A. It is, however, worth bearing in mind that the court's powers under s247A are discretionary; a court may grant access, but it is not obliged to do so.

Insurers will be disappointed at this latest ruling, although it is not clear whether it will be appealed. Certainly, it is difficult to see any change in the courts' approach to similar applications until such time as there is appellate court authority that alters the current interpretation of s247A.

Once again, companies and their current and former directors should remain alert to the possibility of an application under s247A being made, so that they can comply with their policy notification obligations.

Footnotes
  1. [2011] FCA 674.
  2. Merim v Style (2009) 255 ALR 63; Snelgrove v Great Southern Managers Australia Ltd (in liq) (receiver and manager appointed) [2010] WASC 51.

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