Duty of Disclosure & Director Duties: Tempo Holidays Pty Ltd (In Liq) v Tully & Berkley Insurance Australia [2024] FCA 391 - An Outline

On April 19, 2024, Justice McElwaine delivered a significant judgment in the case of Tempo Holidays Pty Ltd (In Liq) v Tully & Berkley Insurance Australia. This legal battle sheds light on the application of the Duty of Disclosure in Insurance Contracts and has implications for directors, insurers, and liquidators.

Background

• Tempo Holidays: Tempo Holidays, a part of the international corporate travel group Cox & Kings, faced seasonal cash flow challenges. To manage this, they participated in the Global Treasury Arrangement (GTA), providing unsecured loans to the GTA during periods of excess cash reserves.

• Directors: Patrick Tully, a non-executive director, was not involved in Tempo’s day-to-day operations. The CFO, Sudarshan Madan, signed the proposal for renewal of Tempo’s Management Liability Policy with Berkley Insurance Australia (BIA).

What is the Duty of Disclosure?

• The Duty of Disclosure is a fundamental principle in insurance contracts. It requires the insured party (in this case, Tempo Holidays) to provide all relevant information to the insurer (BIA) during policy negotiations.

• Accurate and complete disclosure ensures that insurers can assess the risk accurately and set appropriate terms and premiums.

1. Tempo’s Breach of Duty of Disclosure:

   • Tempo breached its duty of disclosure by failing to provide relevant information about the GTA arrangement and its financial situation.

   • BIA relied on the information provided during policy renewal. The undisclosed details impacted BIA’s ability to assess the risk adequately.

2. Implications:

   • Tempo’s breach affected the insurance coverage. BIA declined indemnity based on an Insolvency exclusion.

   • Directors and companies must be diligent in disclosing material facts during insurance negotiations to avoid coverage disputes.

The Legal Proceedings

1. Breach of Directors’ Duties:

   • Tempo’s liquidator brought claims against Tully for breach of statutory and fiduciary duties. Tully failed to monitor the inter-group transfer of funds within the GTA, resulting in unsecured debts that became unrecoverable.

   • Key duty breached: Section 180 of the Corporations Act, requiring directors to exercise care and diligence in the corporation’s best interests.

2. Insolvent Trading Claim:

   • Tully faced allegations of insolvent trading under section 588M of the Corporations Act. The liquidator asserted that Tully engaged in such trading during a specified period.

   • The insurer declined indemnity for the director’s duty claim (but not for the insolvent trading claim).

3. Settlement and Implications:

   • The proceedings settled with Tully consenting to judgment: approximately $6 million for breach of director’s duty and about $24 million for insolvent trading.

   • The liquidator agreed to enforce the judgment first against the insurer and later against a security sum of $500,000 provided by Tully.

Analysis

1. Duty of Disclosure and Breach of Duty:

   • Tempo breached its duty of disclosure under the Insurance Contracts Act by failing to provide relevant information to BIA during policy negotiations.

   • Insufficient evidence supported the breach of duty cases against Tully under sections 180 and 181 of the Corporations Act.

   • Tempo failed to prove that Tully’s actions caused damage to the company.

2. Insolvent Trading and Financial Recovery:

   • Tully’s liability for insolvent trading was established, emphasizing the need for directors to avoid trading while insolvent.

   • The settlement capped Tully’s liability at $500,000, but the insurer did not contest its liability.

   • The liquidator’s evidence regarding the reasonableness of the settlement was insufficient, preventing a claim against the insurer.

3. Lessons for Directors and Liquidators:

   • Directors must exercise due diligence, disclose relevant information, and avoid insolvent trading.

   • Liquidators should carefully assess claims, gather robust evidence, and consider the reasonableness of settlements.

Conclusion

The Tempo Holidays case underscores the complexities of insurance coverage, directors’ duties, and insolvency. 

Disclaimer: This article provides general information and does not constitute legal advice. Consult legal professionals for specific guidance related to your circumstances.