Adam Cranston and Jason Onley launched the lawsuit against Lloyd's underwriter The Catlin Syndicate, claiming it breached an agreement to pay the defence bills of company directors accused of wrongful conduct.

The pair, charged with defrauding the Australian Tax Office of $144 million, allege the insurer broke its "pay now and claw back later" indemnity policy, barrister Rashelle Seiden SC told the Federal Court on Wednesday.

The Catlin Syndicate argues the duo failed to disclose the fraud with civil and criminal proceedings against them now underway.

But Ms Seiden, for Onley, said the allegations are still unproven and they "may yet be vindicated" in court.

Cranston's father Michael resigned from his role as ATO deputy commissioner after being caught up in the alleged multimillion-dollar fraud operation.

"We don't know yet whether there has been a failure to disclose because we don't know yet whether there has been wrongful conduct," Ms Seiden said.

She said her client's assets have been frozen and the lawsuit is about "who should bear the brunt of waiting".

"Should the insurer pay up now... and then claw back, or should the insured be shut out of his advance defence costs... and then challenge... which the applicant counts as too little, too late," Ms Seiden said.

Police say Cranston and his younger sister Lauren were part of a syndicate that stole from taxpayers to fund their lavish lifestyles.

The alleged scam involved accepting legitimate payroll claims through Plutus Payroll which funnelled them to second-tier companies, rorting millions from the commonwealth by withholding PAYG tax.

While it's not suggested the deputy tax commissioner had any knowledge of the scheme, he has been accused of unwittingly assisting it by providing information to his son, who owned Plutus.

Chief Justice James Allsop, Justice Michael Lee, Justice Roger Derrington have reserved their decision.

Australian Associated Press