Insurance Proceeds and Bankruptcy
Persons seeking to recover funds from the insurer of a company in liquidation usually have to apply for leave from the Court to sue the company, under s 471B or s 500(2) of the Corporations Act, depending on whether the company is in voluntary or compulsory liquidation. In such cases, a Court will generally grant leave.
In Permanent Custodian Limited v KCRAM Pty Limited (in liq)  FCA 1083, a claim was made for damages arising out of alleged incorrect valuations of land. The company had a professional indemnity policy which provided cover in relation to their valuation services.
The court gave leave to sue the company. If the claim were to be successful, s 562 of the Corporations Act – application of proceeds of contracts of insurance – would apply so that any insurance monies paid to the liquidator would be then paid directly to the insured party in priority to all unsecured and other debts listed in s 556.
A similar arrangement applies under s 117 of the Bankruptcy Act where a claimant makes a successful damages claim on a bankrupt’s insurance policy – the trustee is to pay the money direct to the claimant: see JN Taylor Holdings Limited (in liq) v Bond (No 11)  SASC 3692.
The existence and availability of a bankrupt’s insurance policy is generally a significant factor in favour of the grant of leave by the Court to continue proceedings against the bankrupt under s 58(3)(b) of the Bankruptcy Act: see for example Tapp v Official Trustee in Bankruptcy  FMCA 1264.