BFSL 2007 Ltd & Ors (In Liquidation) v Steigrad

This Supreme Court case brought together two high-profile disputes involving failed companies and claims against directors. One concerned Bridgecorp, where receivers sued former directors to recover funds for investors. The other concerned Feltex, where shareholders sued over the company’s float and later collapse.

In both disputes, the claims against the directors were much larger than the insurance limits. That mattered because the policies did not just cover liability to third parties. They also covered defence costs. The same overall limit applied to both, so every dollar spent on lawyers could reduce the amount left to satisfy any successful claim.

The claimants relied on s 9 of the Law Reform Act 1936. That section creates a statutory charge over insurance money payable in respect of liability to pay damages or compensation. The directors and insurers argued that defence costs should still be payable as they were incurred, at least until liability to the claimants was finally established by judgment or settlement.

The Supreme Court had to decide which interest came first under the statute: preserving the insurance fund for claimants, or allowing the insured directors to keep using the same fund for their defence.

The dispute was not about whether the directors had insurance. They did. It was also not about whether the policies, on their wording, included defence-cost cover. They did. The real fight was about what happened once a third-party claimant gave notice of a statutory charge under s 9.

Section 9 says that where a person is insured against liability to pay damages or compensation, the amount of that liability becomes a charge on insurance money that is or may become payable in respect of that liability. Importantly, the section says the charge arises on the happening of the event giving rise to the claim, even if the amount of liability has not yet been determined.

The claimants said that meant the insurance fund had to be preserved from that point for the eventual liability claim, subject to the policy limit. On that view, defence costs could not be paid if doing so would reduce the money available to meet the claim. The directors and insurers argued for a different reading: that the charge only effectively attached to whatever remained payable for liability after defence costs had been paid under the policy in the ordinary course.

The legal issue was the nature and effect of the statutory charge created by s 9 of the Law Reform Act 1936. More specifically, the Court had to decide whether the charge secured the full amount of the insured’s eventual liability to third-party claimants, up to the policy limit, from the time of the event giving rise to the claim. If so, payments under the policy that would deplete that fund could not safely be made after notice of the charge.

The competing view was that the charge only attached to the insurance money remaining at the time liability was established by judgment or settlement. On that approach, defence costs could continue to be paid under the policy before liability was fixed, even if those payments reduced the amount left for claimants. The issue therefore sat at the intersection of statutory protection for claimants and the contractual rights between insurer and insured.

The Supreme Court allowed the appeals. The majority held that the scheme, text, case law and legislative history of s 9 showed that the statutory charge attaches at the time of the event giving rise to the claim for damages or compensation. It was not necessary for liability to have already been quantified by judgment or settlement.

The Court said the charge was over insurance money that is or may become payable in respect of the insured’s liability to the third party. Defence costs themselves were not within the charge, because they were not a liability to pay damages or compensation. But that did not solve the directors’ problem.

Where the same policy limit covered both liability and defence costs, payments of defence costs after notice of the charge could be made only at the insurer’s peril if there was not enough cover to meet both obligations.

In practical terms, the majority rejected the Court of Appeal’s view that the charge remained merely contingent in a way that allowed defence costs to keep being paid first. The Court set aside the Court of Appeal declaration in the Houghton matter and restored the claimant-protective interpretation of s 9.

For most business owners, the case is less about litigation theory and more about insurance design. Many directors assume that if a policy says it covers defence costs, those costs will be funded as the case unfolds. This decision shows that assumption can fail where a statute gives claimants a charge over the same insurance pool.

The risk is sharpest where your policy uses a combined aggregate limit. If a major investor, shareholder, creditor or governance claim arrives and the likely exposure exceeds the limit, the business may face a hard conflict. The directors want access to defence funding. The claimants want the fund preserved. Under this decision, the statutory protection for claimants can prevail.

That does not mean insurance is pointless. It means the structure matters. Separate limits, separate policies, or cover designed to avoid one claim type consuming all available protection may materially change the commercial outcome. It also means governance failures can create personal stress for directors even where insurance was bought in good faith.

If your company has directors, outside investors, lenders, or a realistic risk of governance claims, this case is a prompt to review your risk settings before a dispute starts. The best time to fix insurance architecture is at renewal, not after a collapse, capital raise dispute, or insolvency event.

Boards should treat insurance as one part of a wider governance system. Good minutes, conflict management, disclosure discipline, and clear approval pathways can reduce the chance of a claim and improve the company’s position if one is made. If a serious claim or warning sign appears, move early on legal and insurance advice so notice is given properly and strategic decisions are documented.