Bridgecorp D&O decision: Three challenges under way

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23 April 2012

The fallout from the collapse of New Zealand finance company Bridgecorp continues, with legal cases under way on both sides of the Tasman to challenge the NZ High Court decision on directors’ and officers’ (D&O) cover.

The Bridgecorp decision is being appealed and the principle it established is being contested in two shareholder class actions, against failed carpet manufacturer Feltex in New Zealand and in NSW against the Centro property company.

In each case the plaintiffs suing the directors are seeking to prevent the directors’ defence costs being paid under the D&O policies to ensure the funds are preserved to pay any settlement.

The New Zealand Court of Appeal is being asked to hear the Bridgecorp and Feltex cases together as they concern the same issue, while the Centro action in the NSW Supreme Court seeks clarification on whether shareholders claiming $200 million have a priority claim on the D&O policy, ahead of the payment of any defence costs Centro or its directors and officers incur.

Last year’s NZ High Court decision in the Bridgecorp case has already changed D&O cover in Australia and New Zealand, with insurers restructuring D&O policies to ensure directors have access to funds for defence costs.

Bridgecorp was a property financier that funded its activities by issuing debentures to the public. It went into receivership in 2007 owing $NZ459 million ($362 million), and criminal and civil legal actions followed.

When directors Peter Steigrad, Bruce Davidson and Gary Urwin called on their D&O policy to fund their defence costs, Bridgecorp’s receiver asserted a charge over the policy, as the receiver intended to sue the directors for about $NZ450 million ($356 million).

Steigrad and Davidson took Bridgecorp and QBE, their D&O insurer, to the High Court. But the court last year ruled in favour of the receivers, preventing QBE from paying defence costs under the policy and reserving the proceeds for the receivers.

The Bridgecorp decision has prompted lawyers in other actions to ask courts to prevent D&O policies paying out defence costs and has drawn a response from Chartis to protect its insured directors.

Chartis has successfully applied to the NZ Court of Appeal to seek a declaratory judgement to review the implications of the Bridgecorp decision on D&O insurance. This is in response to an assertion by the Feltex plaintiffs that Chartis cease paying directors’ defence costs.

Feltex listed in 2004 but collapsed in 2006. A group of shareholders is suing the directors and float promoters, alleging the prospectus contained misleading information.

Chartis has also filed the application in the NSW Supreme Court seeking declarations intended to clarify whether the Bridgecorp decision would apply in the insurance policy issued to Centro. This follows an assertion by plaintiff lawyers Maurice Blackburn that Chartis should reserve the policy’s proceeds to help pay any settlement or finding against the directors, in light of the Bridgecorp decision.

Dates have not been set for the hearings. Whichever case goes first – Centro or Bridgecorp/Feltex – is likely to influence the case across the Tasman. The outcome of these cases should provide insureds, brokers and insurers with some certainty as to how the law operates and how D&O protection should be structured.