Federal Court again refuses to order disclosure of class action respondents' insurance policies

In brief 6 min read

The Federal Court recently refused an application by class action applicants seeking access to the respondents' insurance policies.¹ Unlike other recent decisions, in this case access was sought by relying upon the general powers under the Corporations Act 2001 (Cth) (the Act) for a shareholder to inspect the books of a company.

In refusing the application the Judge held that:

• a shareholder seeking to inspect documents of a company to advance claims arising from alleged wrongs suffered in a capacity other than as a shareholder is not a proper purpose under s247A of the Act; and
• even if s247A were enlivened, Her Honour would have declined to exercise her discretion to permit access having regard to the six factors central to Justice Beach's reasoning in another class action where access to similar documents was refused.² (See our earlier Insight).

Key takeaways

• The court's power under s247A of the Act (to permit inspection of company books) is limited to inspection for a proper purpose. That purpose must be connected to the applicant's rights as a shareholder.
• An application seeking access in order to advance claims against a company concerning wrongs suffered in a capacity other than as a shareholder is not a proper purpose.
• The class action applicants alleged that wrongful conduct by Ardent Leisure Group Limited (ALGL) had induced them to become shareholders. Therefore, the alleged wrongs were held to have been suffered in the applicants' capacity as potential investors in ALGL and not as shareholders.
• There is now a series of Federal Court decisions where access to insurance policies and related documents has been sought by class action applicants (relying on a range of different powers) and refused. Insolvency of the respondent is, however, still likely to provide some exceptions.

The facts

The applicants were shareholders in ALGL and the representative applicants in a class action against ALGL, its subsidiaries, Ardent Leisure Limited (ALL) and Ardent Leisure Management Limited (ALML), along with the Chief Executive Officer of ALL and ALML’s Theme Parks Division, Mr Craig Davidson. The class action concerned events in October 2016 at Dreamworld, a theme park in Queensland, where an incident on the Thunder River Rapids Ride caused four fatalities.

The class comprised persons who acquired stapled securities in ALGL between June 2014 and October 2016 and alleged that the Ardent Leisure Group:

• made misleading or deceptive representations regarding the safety standards maintained at Dreamworld or did not have reasonable grounds for the representations made; and
• was aware of information that was not disclosed to the ASX and that created a material risk that a malfunction would occur on the Thunder River Rapids Ride that might cause serious injury or death and, if such an incident occurred, there was a material risk of an adverse impact on the Ardent Leisure Group’s profits with a consequential decline in the value of the stapled securities.

The applicants sought to inspect:

• the insurance policies of ALGL, ALML and ALL;
• copies of correspondence with the insurers notifying the insurers of the claims made against the respondents, and the insurers’ responses and communications concerning that notification; and
• an irrevocable intercompany guarantee given by ALGL to ALL and ALML.

Inspection was sought for the purpose of:

• confirming the commercial viability of the class action (owing to what the applicants submitted was a continuing worsening of the financial position of the respondents);
• conducting the litigation in a proportionate and efficient manner; and
• enhancing the prospects of a favourable settlement for the applicants and group members.

Inspection was sought relying upon s247A of the Act. That section relevantly provides that:

(1)        On application by a member of a company or registered scheme, the Court may make an order:

(a)        authorising the applicant to inspect books of the company or scheme; or

(b)        authorising another person (whether a member or not) to inspect books of the company or scheme on the applicant’s behalf.

The Court may only make the order if it is satisfied that the applicant is acting in good faith and that the inspection is to be made for a proper purpose.

Under the litigation funding agreement (LFA) in place with Woodsford Litigation Funding Ltd (Woodsford), funding of the class action was contingent on the applicants obtaining copies of all relevant insurance policies covering the respondents against all liabilities arising out of the claim.

If this condition was not satisfied, Woodsford would have a right to terminate the LFA. Justice Derrington accepted that there was a risk the LFA might terminate and no alternative funding might be available if inspection was denied.

Applying previous authority that had addressed the principles governing access under s247A of the Act, Justice Derrington held that:

• the requirement of good faith and proper purpose is a composite notion, to be assessed objectively³; and
• the purpose for which the documents are sought must relate to the applicants' rights as shareholders and those rights must arise in their capacity as shareholders.⁴

Justice Derrington distinguished the present circumstances from previous cases where access to insurance documents had been granted to shareholders relying on s247A. The distinction in this case was that the claim against the respondents arose from events unconnected with the applicants' rights and entitlements as shareholders, but instead concerned their rights as potential investors who alleged they were, in substance, misled into becoming shareholders.

The decision in Evans v Davantage Group (No 2)

Justice Derrington also considered Justice Beach's decision in Evans v Davantage Group (No 2), in which Justice Beach rejected an application by class action applicants to inspect the respondents' insurance policies. While Evans was decided having regard to the court's case management powers (and not s247A of the Act), Justice Derrington found that the six factors outlined in Evans were also relevant to the exercise of the court's discretion under s247A and would weigh against it being exercised:

1. Insurance documents are generally confidential between insurer and insured;
2. If an insurance policy responds to the claims made against a respondent in the proceedings, the respondent is likely capable of enforcing its own rights to coverage against the insurer;
3. Insurance documents are discoverable only where directly relevant to an issue in the pleadings;
4. An applicant has no right to examine the creditworthiness of a potential respondent ahead of commencing an action to ascertain the commercial viability of pursuing a matter against them;
5. The requirement for the court to approve a settlement of a class action does not support the disclosure of insurance policies to applicants. The court can satisfy itself using alternative methods at the appropriate time; and
6. The disclosure of an insurance policy will confer a not insignificant commercial advantage in settlement negotiations to the detriment of the respondents.

Her Honour also addressed the applicants' request to inspect correspondence between the respondent and the insured in relation to the notification of claims. As to this, Justice Derrington underscored the importance of the unique relationship between the insurer and the insured, in particular, its heightened duties of frankness and confidentiality, which her Honour considered might be severely and adversely affected if an order under s247A was extended to the inspection of those documents.

Implications

• There is now a growing body of case law that supports the proposition that class action applicants are unlikely to be able to obtain documents from a respondent (or insurer) concerning the respondent's insurance position for the purposes of informing litigation strategy, mediation or settlement, either under the court's broad case management powers in s 33ZF of the Federal Court of Australia Act or pursuant to s247A of the Act.
• This decision makes clear that the factors to be considered by the court for an application under s33ZF are likely also to be considered in assessing an application under s247A, meaning that s247A does not offer applicants a strategic alternative to s33ZF in order to obtain access to insurance documents.
• Furthermore, a condition precedent in litigation funding arrangements requiring applicants to obtain access to a respondent's insurance policies, and the potential termination of litigation funding if access is not granted, will not hold sway with the courts when considering whether to grant access to a respondent's insurance policies.
• Insolvency of the respondent is still likely to provide some exceptions.