On 19 April 2024, the Supreme Court of Victoria handed down its judgment in the case of Fitzgerald, in the matter of Tempo Holidays Pty Ltd (in liq) v Tully & Berkley Insurance Australia.[1]
In a striking decision where a liquidator and defendant agreed on a $30 million settlement in the liquidator’s favour, and the liquidator had high hopes of recovering that amount from an insurer, the Court held that the settlement amount was unreasonable and unrecoverable from the insurer.
Key Facts
Tempo Holidays Pty Ltd (“Tempo”), a travel company, was part of an international corporate group. To manage seasonal cash flow, the group engaged in an informal financial arrangement known as the Global Treasury Arrangement (“GTA”) which involved the exchange of unsecured, undocumented loans between group members.
After financial difficulties, some GTA loans between the group members became unrecoverable and Tempo was placed into voluntary administration, and subsequently liquidation.
In December 2021, the liquidator instituted proceedings against Patrick Tully (“Tully”), a former non-executive director of Tempo. In effect, the liquidator alleged that Tully had breached his duties as a director by failing to sufficiently monitor the inter-group transfer of funds by Tempo under the GTA, causing Tempo to suffer loss in the amount of $5,862,429. Further, the liquidator alleged Tully had failed to prevent Tempo from incurring debts whilst insolvent in the amount of $26,069,536.90.
Tully sought indemnity under a Management Liability Policy issued by Berkley Insurance Australia (“Berkley”)(“Policy”) for the breach of director’s duties claim. Berkley declined to indemnify Tully, for reasons the liquidator did not accept. Ultimately, the liquidator joined Berkley as a party to the proceeding and claimed declaratory relief to the effect that Berkely was liable to indemnify Tully pursuant to the Policy.
The settlement
In December 2023, shortly before trial, the liquidator settled the proceeding against Tully. Pursuant to the terms of settlement executed between the parties, Tully consented to judgment against him in the amount of $5,862,429 on the breach of director’s duties claim, and $24,223,940.89 on the insolvent trading claim. However, in consideration of the payment of $500,000 security by Tully, the liquidator agreed to enforce the judgment first against any proceeds recovered pursuant to the Policy, and only then against the $500,000.
The decision
The central question before the Court in the proceeding was whether the liquidator had established a claim for loss within the meaning of the Policy, such that that Berkey was liable to indemnify Tully for the breach of director’s duties claim. In considering this question, the Court considered: (1) whether the settlement deed was sufficient to establish Tully’s liability for loss within the meaning of the Policy; and (2) in the alternative, whether Tully breached his duties as a director causing loss within the meaning of the Policy.
Generally speaking, to recover the amount of any settlement pursuant to a contractual indemnity, the settlement must be reasonable. This was the only issue that divided the parties in relation to the first question.
Ultimately, the Court held that the settlement was not reasonable, and that Tully had agreed to the full amount sought by the liquidator without any attempt to negotiate a discount.
Further, while there was some evidence that Tully had received legal advice that he had a 30% chance of success, and would have incurred $160,000 in costs to defend the proceeding, no written communication was tendered to the Court which articulated the basis of that advice.
In all the circumstances, the Court found Tully had simply “capitulated”. Accordingly, the Court concluded the liquidator had failed to discharge the onus of proving the reasonableness of the settlement as the basis for establishing the claim against Berkley.
In relation to the second question (i.e. whether the liquidator had proved the breach of duties claim), the Court found the liquidator had failed to identify Tully’s powers and duties as a non-executive director with sufficient precision, and that there was insufficient evidence to establish his contended obligations in the circumstances of the case. Further, the plaintiffs had ignored the division of responsibility within Tempo between Tully, Mr Kerkar (the managing director) and Mr Madan (the CFO). In particular, there was no evidence to support a finding that it was unreasonable, in all the circumstances, for Tully to place reliance on Mr Kerkar.
Further, the Court was unable to reconcile the liquidator’s position that Tully was not in breach of his duties by failing to sufficiently monitor the GTA before April 2019, but was in breach thereafter.
Finally, the Court was not satisfied that any inaction on Tully’s part caused the loss complained of. In particular, the Court was not persuaded that, as a non-executive director, Tully would have been able to stop the impugned transactions from occurring in any event.
Accordingly, the Court found the liquidator had failed to establish the liability of Berkley under the Policy, and the proceeding was dismissed.
While it was not necessary for the Court to consider Berkley’s additional arguments regarding Tempo’s alleged non-disclosure, the Court found that Tempo had failed to disclose crucial details prior to the policy’s commencement in March 2019 regarding Tempo’s dire financial position. Accordingly, the Court found that Tempo had breached its duty of disclosure, thereby reducing any liability of Berkley under the Policy to nil in any event.
Key Takeaways
The decision of Fitzgerald v Tully underscores the importance of fulsome investigations prior to the commencement of Court proceedings, and of adducing cogent evidence of the reasonableness of any settlement reached if recovery is sought under a contractual indemnity.
While the liquidator in this instance would not have been able to recover against the insurer in any event, given the breach of Tempo’s duty of non-disclosure, a recovery may otherwise have been available had these issues been addressed.
[1] [2024] FCA 391.
