Supreme Court allows appeal in 'Steigrad' decision on directors' defence costs

The decision reverses an earlier one by High Court.

Receivers of the Bridgecorp group of companies and an aggrieved Feltex investor have been granted leave to appeal the controversial ‘Steigrad’ decision about directors defence costs.

The Supreme Court has granted the receivers of Bridgecorp and its related companies and Feltex investor Eric Houghton leave to appeal against a Court of Appeal decision given late last year.

The Court of Appeal decision reversed an earlier one by High Court, which had held that third party claimants have a charge with priority over all insurance money payable under a policy with a single indemnity.

The long-running, complex series of claim and counter claim relates to section 9 of the Law Reform Act.

The High Court decision would have prevented insurers from paying defence costs if they formed part of one aggregate limit of cover. And as a result, many insurers amended their D&O policies to counter this effect.

The Court of Appeal disagreed with the High Court, ruling that the Bridgecorp D&O policy provided for a single, aggregated fund of $20 million from which two distinct liabilities can be met – liabilities to third parties and defence costs.

The court said that under section 9, a third-party only has a charge over “the balance that is available to meet third party claims after any defence costs liability has been met”.

The Court of Appeal also ruled that the purpose of section 9 of the Law Reform Act is not to “rewrite the bargain struck between the parties”. 

The court concluded that the section cannot operate to “interfere with or suspend the performance of mutual contractual rights and obligations relating to another liability”.

For more background on the Court of Appeal’s decision, read the commentary by Bell Gully partner Murray Tingey here.

Commenting on the practical effect of the Court of Appeal’s decision in February, Chapman Tripp’s Brief Counsel said it had returned the position to where it was prior to September 2011.

gbond@nbr.co.nz