D&O decision boosts investor action launched in High Court

D&O decision boosts investor action launched in High Court | Insurance Business

D&O decision boosts investor action launched in High Court
This morning sees the start of a $180m damages case taken by 3600 shareholders in failed carpet-maker Feltex.

In what’s been described as a ‘David and Goliath’ story, the representative action led by Eric Houghton will finally be heard in Wellington’s High Court by Justice Robert Dobson.

Houghton filed his action in February 2008 against the directors of Feltex, the sellers of the Feltex shares and the promoters of the issue of Feltex shares to the public in mid 2004, Fairfax Media reported.

The defendants include former Feltex directors Tim Saunders, Sam Magill, John Feeney, Craig Horrocks, Peter Hunter, Peter Thomas and Joan Withers.

Broking firms Credit Suisse First Boston, First NZ Capital and Forsyth Barr were also defendants in the trial which is earmarked to last 9-10 weeks.

Austin Forbes QC is senior lawyer for the investor action which has received a boost following December’s Supreme Court ruling on how directors’ liability insurance can be used.

The Supreme Court ruled the three former directors of failed financier Bridgecorp could not use the group’s insurance to defend themselves against a damages claim.

The court also found that Feltex’s Chartis Insurance – now called AIG Insurance – policy could not be used to pay the directors’ defence bills in this case.

The court said the policy limit for the AIG policy was understood to be $50m.

It found a statutory charge over insurance money indemnifying the insured for damages or compensation payable to third-party claimants was imposed by the Law Reform Act of 1936.

This meant the policy money was reserved for paying the third-party claim and any money left over would go towards defence costs.

In the Feltex case the amount being claimed by third parties vastly exceeds the policy limits.

Insurance law commentator Jeremy Johnson, partner with Wynn Williams, told Insurance Business a lot would depend on which side gains momentum during the trial.

"The Feltex case will be one to watch as it is the first major claim involving D&O policies since the Supreme Court decision in Steigrad v Bridgecrop," he said. 

"That decision means that either the defendants will be funding their defence for the sixteen week trial, or their insurers are paying for it without reducing the amount available for investors under the policy.

"Besides the legal issues around the liability of directors when issuing prospectuses it will be interesting to see if the defendants and insurers decide to cut their losses during the trial and pay the investors instead of their lawyers. 

"That will depend on which side has the momentum during the trial."