Supreme Court New South Wales

• Medium Neutral Citation: Toongabbie Collision Pty Ltd (In Liquidation) (Trading as Autoworks Collision Centre) v CGU Insurance Limited [2013] NSWSC 1409
• Hearing dates: 5 February 2013
• Decision date: 25 September 2013
• Jurisdiction: Common Law
• Before: Hidden J

Decision

Leave granted to second plaintiff to conduct the proceedings issued on behalf of the first plaintiff in the name of the first plaintiff.

• Catchwords: CORPORATIONS - company in liquidation - proceedings commenced against insurer without liquidator's consent - second plaintiff a director of the company - whether leave should be granted to second plaintiff to pursue proceedings on behalf of the company
• Legislation Cited: Insurance Contracts Act 1984
• Cases Cited: - Carpenter v Pioneer Park Pty Ltd [2008] NSWSC 551, 71 NSWLR 577; - Vouris, as liquidator of Cadima Express Pty Ltd v Deputy Commissioner of Taxation [1999] NSWSC 1143
• Category: Interlocutory applications
• Parties: Toongabbie Collision Pty Ltd (In Liquidation) (Trading as Autoworks Collision Centre) v CGU Insurance Limited (1st Plaintiff); Jorge Antonio Viera (2nd plaintiff); CGU Insurance Limited (defendant)
• Representation: Counsel: S McCarthy & K James (2nd plaintiff/applicant); SJ Walsh (defendant/respondent); Solicitors: George Draca, Norwest Lawyers (1st & 2nd plaintiffs); Jan Willem Van de Poll, Holman Webb Lawyers (defendant)
• File Number(s): 2012/179931

Judgment

1 In the early hours of 20 May 2010 premises at Mulgrave leased by the first plaintiff, Toongabbie Collision Pty Ltd ("Toongabbie") were destroyed by fire. The company had carried on a smash repair business at the premises and its tools of trade and assets were also destroyed, as were some vehicles owned by third parties which were on the premises for repair. At the time the second plaintiff, Jorge Viera, was the sole director of Toongabbie.

2 Toongabbie held two insurance policies with the defendant, CGU Insurance Limited ("CGU") which responded to the fire, a business policy and a motor vehicle policy. However, CGU denied indemnity on the basis of an alleged failure on the part of Toongabbie to disclose relevant information bearing upon its decision to extend the cover for which the policies provided. Hence the present proceedings, brought against CGU by Toongabbie for breach of contract and by Mr Viera for the intentional or negligent infliction of harm, being psychological injury and economic loss.

3 The proceedings were commenced by a statement of claim filed on 7 June 2012. However, in the meantime, on 12 August 2011, a liquidator of Toongabbie had been appointed. His consent to the commencement of the proceedings had not been obtained. I was provided with an explanation of the circumstances in which the statement of claim was filed without that consent, but it is unnecessary to refer to them as no point is taken about that matter.

4 Before me is a motion seeking leave nunc pro tunc for Mr Viera to conduct the proceedings on behalf of Toongabbie and in its name. To understand the issues raised it is necessary to sketch briefly the background to the matter.

5 When Toongabbie was incorporated in 2009, the directors and shareholders were Mr Viera and Mr Luis Perez. (Apparently, this person is known to CGU as Perez Abet, but nothing turns on this. I shall refer to him as Mr Perez.) The two men had had an association in an earlier business of the same kind. In the course of that business Mr Perez incurred a debt to one Michel Stephan, who was said to be affiliated with an outlaw motorcycle club.

6 It seems that the financial management of Toongabbie was primarily the responsibility of Mr Perez, while Mr Viera attended to the repair of the vehicles, for which he was highly qualified. For reasons which are not immediately relevant, Mr Perez resigned his directorship in October 2009, although he maintained a minor shareholding and continued for some time in his administrative role, albeit in a reduced capacity. Some time in 2010 he became bankrupt.

7 Mr Perez's debt to Mr Stephan remained outstanding, and early in May 2010 two men whom Mr Viera did not know came to the Toongabbie premises looking for Mr Perez in relation to the debt, and making threats towards him. On 11 May 2010 a private vehicle of Mr Viera, parked outside the premises, was set alight by unknown persons. Police investigation established that the fire at the premises of 20 May was deliberately set, again by persons unknown. It is not suggested that Mr Viera was involved in it.

8 There is no need to recite the history of the two insurance policies, initially taken out in July 2009. It is sufficient to say that as at 12 May 2010 the motor vehicle policy had been cancelled because of irregularity in payment of the premiums. On 12 May it was reactivated. The business policy had remained in force, but, also on 12 May, it was amended to add cover for damage to stock and contents. It was in the days preceding 12 May that the two men attended the Toongabbie premises demanding payment of the debt from Mr Perez to Mr Stephan, and Mr Viera's vehicle was set on fire.

9 CGU refused coverage under the policies on the basis of Toongabbie's alleged failure to disclose those matters, and relevant matters antecedent to them, on 12 May. Toongabbie is said to be in breach of its duty of disclosure under s 21 of the Insurance Contracts Act 1984. Subsection (1) of that section provides:

"The insured's duty of disclosure

(1) Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that:

(a) the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or

(b) a reasonable person in the circumstances could be expected to know to be a matter so relevant."

10 In a letter from its solicitors to Toongabbie of 25 June 2010, CGU asserted that at the time of its request for cover on 12 May 2010 the company had failed to disclose Mr Perez's intention to declare bankruptcy, his resignation as a director of Toongabbie, his debt to Mr Stephan, Mr Stephan's pursuit of that debt, Mr Stephan's affiliation with the motorcycle club, the attendance of the two men at the company premises demanding that debt with threats, and the setting of the vehicle on fire. These were said to be material matters, the non-disclosure of which entitled CGU to refuse cover.

11 It is apparent from an affidavit of Mr George Draca, the solicitor acting for Mr Viera, who had also acted for Toongabbie before the appointment of the receiver, that the factual issues bearing upon CGU's refusal of indemnity are in contest. It is not necessary for the purpose of determining the present application to examine the nature and extent of that contest. Counsel for CGU, Mr Walsh, accepted that the case raises issues fit for trial.

12 Authorities bearing upon an application of this kind were considered by Barrett J (as he then was) in Carpenter v Pioneer Park Pty Ltd [2008] NSWSC 551, 71 NSWLR 577. At [34] (586-7) his Honour summarised the position as follows:

"The criteria to be applied

[34] The decided cases thus cause attention to be focused on three main matters when the court is invited to exercise its discretion upon an application such as the present:

1. The question whether the proceedings proposed to be pursued have some solid foundation, in that they exhibit such a degree of merit as to be neither vexatious nor oppressive and to present reasonable prospects of success.

2. The attitude of the liquidator to the question whether the proceedings should be pursued.

3. The question whether "practical considerations support the initiation of the proceedings", with particular reference to financial protection of the liquidator and the estate of the company by means of indemnity and, if indicated, security.

..."

The reference in the third matter to "practical considerations" supporting "the initiation of the proceedings" is derived from the judgment of Austin J in Vouris, as liquidator of Cadima Express Pty Ltd v Deputy Commissioner of Taxation [1999] NSWSC 1143 in a passage at [49] (referred to by Barrett J at [32] (586)).

13 As to the first matter, as I have said, Mr Walsh did not argue that the present proceedings lacked foundation.

14 As to the second matter, the attitude of the liquidator, I received in evidence a letter from the liquidator's solicitors of 2 November 2012 conveying his consent to the order sought, subject to certain conditions. Those conditions were:

"1. [T]he liquidator and the Company

1.1. have no liability for any costs of or incidental to the Proceedings; and

1.2. are protected against any adverse costs order, or order for security for costs, or any liability otherwise arising by reason of the conduct of the Proceedings;

2. Mr Viera will submit to an order, or provide an undertaking to the Court, to the effect that he shall pay and bear, and indemnify the Company against, all costs, charges, expenses of and incidental to the bringing and continuation of the Proceedings brought by him on behalf of the Company (including any adverse costs order or any orders requiring the provision of security for costs);

3. Mr Viera acknowledges and agrees ... that, in the event that the Proceedings are successful vis-à-vis the Company's claim(s), any proceeds will be paid to and received by the Company (although Mr Viera would be entitled to make application to the Court for reimbursement of the expense he has borne in relation to conduct of the Proceedings) ... .

4. that Mr Viera pay the liquidator's costs of and incidental to the Notice of Motion and Mr Viera's request for authorisation to conduct the Proceedings on behalf of the Company (whether as a derivative action or otherwise)."

15 Annexed to an affidavit of Mr Viera is a copy of an undertaking he provided to the liquidator, on 11 September 2012, in the following terms:

"1. I agree that I am solely responsible for the cost of the proceedings (including any adverse costs orders or order for security of costs);

2. I agree that you, as the liquidator of Toongabbie Collision Pty Ltd ... , have no liability whatsoever for the cost of the proceedings and that the company has no such liability except to the extent that in the event of a successful outcome (ie there is a judgment in the company's favour or a favourable settlement of the proceedings), then the company may be required to reimburse me for costs expended in pursuit of the company's claim."

16 That undertaking was provided after negotiations between Mr Viera and the liquidator, and it will be seen that it predates the letter from the liquidator's solicitors setting out the conditions upon which he would consent to the order sought. Mr Walsh submitted that the undertaking does not meet those conditions. In particular, he referred to condition 1.2, requiring the protection of the liquidator and the company from any adverse costs order, order for security for costs, or any other liability arising from the conduct of the proceedings, and argued that that protection is not to be found in the undertaking.

17 However, I am persuaded by the submission of counsel for Mr Viera, Mr McCarthy, that the undertaking, while not expressed in the precise terms of the conditions set out in the letter from the liquidator's solicitor, is sufficiently comprehensive to embrace their requirements. Mr McCarthy referred, in particular, to clause 1 of the undertaking, by which Mr Viera assumes sole responsibility for the costs of the proceedings, including any adverse costs orders or an order for security for costs.

18 The primary concern raised by Mr Walsh was the third matter referred to by Barrett J, whether practical considerations support the commencement of proceedings, particularly by reference to the financial protection of the liquidator and the estate of the company. As Barrett J observed in Carpenter v Pioneer Park at [57] (591), it is "proper to look to the capacity of an applicant to provide the company with financial protection when considering whether it is in the interests of the company for the applicant to be allowed to bring proceedings on its behalf."

19 Toongabbie has debts of the order of $100,000 and has no assets (apart from the prospect of a substantial award of damages in the event of success in these proceedings). Mr Viera's affidavit discloses that he himself has no assets (again apart from the prospect of an award of damages to him). However, he deposes that it is his "understanding" that his parents, aged 77 and 78 years, both own real estate, and he is a beneficiary under their wills. In addition, he has a large, supportive network of family and friends, from whom he could seek to borrow funds. He adds that he is under treatment for depression and, if that treatment is successful, he intends to obtain employment. If so, he would be able to borrow money if necessary, having always been successful in applications for finance in the past.

20 In her affidavit CGU's solicitor, Ms Margot Toniato, provides an estimate of the costs CGU would be likely to incur in the proceedings in an amount of around $320,000. She estimates that 35% to 50% of that amount would be referable solely to the claim by Toongabbie, as opposed to the costs of Mr Viera's claim and costs common to the claims of both plaintiffs. Mr Walsh questioned Mr Viera's capacity to provide the company with the financial protection sought by the liquidator. He pointed out that the value of Mr Viera's indemnity depends on his ability to pay, and that there is no evidence that he has sufficient assets to fund the litigation or to meet an adverse costs order if he were unsuccessful. He noted that Mr Viera does not offer any form of security.

21 Mr Walsh also foreshadowed an application by CGU for security for costs, should the present application be granted. Such an application, he argued, would involve much the same considerations in relation to the plaintiff's' inability to pay. Accordingly, he submitted that the application for leave should be refused but that, if it is granted, it should be on the condition that Mr Viera pay into court an appropriate amount as security for CGU's costs.

22 For his part, Mr McCarthy expressed confidence in the outcome of these proceedings. Quite apart from any damages Mr Viera might recover in his personal capacity, the property damage claimed on behalf of Toongabbie amounts, in round figures, to $524,000. This valuable chose in action, Mr McCarthy said, is the company's only asset. He argued that if the company were successful in the proceedings, that amount would be more than adequate to meet its debts and any costs of the proceedings not recoverable from CGU. He also relied upon the material in Mr Viera's affidavit about his borrowing capacity and the prospect of an inheritance.

23 I have given this aspect of the matter careful consideration, and have concluded that it should be resolved in Mr Viera's favour. One would hope that his expectation of an inheritance is not likely to be realised in the near future, and it must be said that the evidence of his borrowing capacity is rather spare. Nevertheless, that evidence stands unchallenged and, more importantly, the successful prosecution of these proceedings would result in a substantial award of damages. The limited material before me does not enable me to predict the outcome with the confidence displayed by Mr McCarthy but, plainly enough, the claim is not without merit.

24 In all the circumstances, I am satisfied that Mr Viera's application should be granted. I shall not make the grant of leave conditional upon Mr Viera's providing security for CGU's costs. It remains open to CGU to apply for such an order. While it is true that such an application is likely to turn upon the material already before me, it may require a closer examination of Mr Viera's financial position and prospects and, in any event, it may turn upon different discretionary considerations.

25 Accordingly, I make an order in terms of par 1 of the amended notice of motion, that is, I grant leave nunc pro tunc to the second plaintiff to conduct the proceedings issued on behalf of the first plaintiff in the name of the first plaintiff. If necessary, I shall hear the parties on the costs of this motion.

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Decision last updated: 25 September 2013