Amaca Pty Limited (under NSW administered winding up) & Ors v Messrs A G McGrath & C J Honey

Judgment 1The Plaintiffs in these proceedings are Amaca Pty Limited (under NSW administered winding up) ("Amaca"), Amaba Pty Limited (under NSW administered winding up) ("Amaba") and ABN 60 Pty Limited (under NSW administered winding up). The Plaintiffs are each regulated by the James Hardie Former Subsidiaries (Winding Up and Administration) Act 2005 (NSW) and are currently owned by the Asbestos Injuries Compensation Fund Limited ("AICF"), a public company limited by guarantee, as trustee of the AICF Charitable Fund. Two of the Plaintiffs, Amaca and Amaba, were involved in the manufacture and distribution of a variety of products containing asbestos until 1987. The Defendants are Messrs A G McGrath and C J Honey as liquidators of the HIH Group of Companies and HIH Casualty & General Insurance Limited (in liquidation and subject to scheme of arrangement) ("HIH C&G"). 2By Originating Process filed on 26 August 2011, the Plaintiffs seek orders under s 562A(4) of the Corporations Act 2001 (Cth) that ss 562A(2)-(3) of the Corporations Act do not apply to the receipt of specified monies in respect of policy years commencing 31 March 1989, 31 March 1990, 31 March 1991 and 31 March 1992 (which have been referred to in these proceedings as the "Mid-Clator" years) and that that those monies should be paid by the Defendants to the Plaintiffs. The differing interests at stake in this case are essentially those of the Plaintiffs and other insurance creditors of HIH C&G. Although no representative of those other creditors is a party, I am satisfied that the Defendants have adequately identified the arguments against the making of the orders that the Plaintiffs seek and I am grateful for their assistance in that regard. Application of s 562A of the Corporations Act 3Section 562A(1) of the Corporations Act provides that the section applies where: "(a) a company is insured, under a contract of reinsurance entered into before the relevant date, against liability to pay amounts in respect of a relevant contract of insurance or relevant contracts of insurance; and (b) an amount in respect of that liability has been or is received by the company or the liquidator under the contract of reinsurance." The term "relevant contract of insurance" is defined as "a contract of insurance entered into by the company, as insurer, before the relevant date" and that term can include contracts of reinsurance: Asset Insure Pty Ltd v New Cap Reinsurance Corporation Ltd (in liq) [2006] HCA 13; (2006) 225 CLR 331 at [86]-[87]. 4The operation of this section was considered in detail by Barrett J in his decision in Re HIH Casualty & General Insurance Ltd [2005] NSWSC 240 and I gratefully adopt his Honour's analysis. His Honour there notes that the section is an exception to the general rule laid down in s 555 of the Corporations Act that all debts and claims proved in a winding up rank equally and, if the company's property is insufficient to meet them in full, they must be paid proportionately. Section 556 overrides s 555 of the Corporations Act and s 562A overrides both s 555 and s 556 by directing that the specified assets be applied towards the claims with which it is concerned: HIH Casualty & General Insurance Ltd v Building Insurers' Guarantee Corporation [2003] NSWSC 1083; (2003) 202 ALR 610 at [70]; Amaca Pty Ltd v McGrath (as liquidators of HIH Underwriting & Insurance (Australia) Pty Ltd & Anor [2011] NSWSC 90; (2011) 82 ACSR 281 at [9], [70]. 5The requirements of s 562A(1)(a) of the Corporations Act are satisfied since HIH C&G was insured under contracts of reinsurance entered into before the relevant date (being the day on which the winding up of HIH C&G is taken to have begun under Pt 5.6 Div 1A of the Corporations Act , namely 27 August 2001) in respect of its liability to pay amounts in respect of contracts of insurance which it had entered in favour of the Plaintiffs. 6Section 562A(1)(b) of the Corporations Act requires that, first, an amount "in respect of that liability" is received by the insurer. The Defendants have properly drawn attention to the question whether this requirement is satisfied where the payments in issue in this application concern the settlement by commutation of past and future liabilities, by contrast with the position considered in Amaca v McGrath which concerned reinsurance amounts received in respect of damages claims made by injured persons. 7It was common ground between the parties, and I accept, that the reference to "that liability" in s 562A(1)(b) must be to the liability referred to in s 562A(1)(a), being HIH C&G's liability to pay amounts in respect of contracts of insurance in respect of the Plaintiffs. In my view, the phrase "that liability" in s 562A(1)(b) extends to a contingent liability of the insurer which has the benefit of contracts of reinsurance to pay amounts in respect of a relevant contract of insurance, and not only an established or admitted liability. As the Defendants point out, the "liability" referred to in s 562A(1)(b) is necessarily contingent at the time the contract of insurance and contract of reinsurance are entered into. There is no reason to read s 562A(1)(b) as limited to an established or admitted liability of the reinsured to pay amounts in respect of a relevant contract of insurance, since the policy of the section would be equally applicable in respect of an amount received by an insurer from a reinsurer in respect of a settlement made without admission of liability as to the same amount received from a reinsurer in respect of an admitted claim or a claim which has been the subject of a judicial determination. In the present case, the Plaintiffs had made claims against HIH C&G and the amount received by HIH C&G was, in identifiable parts, paid in respect of HIH C&G's actual or potential liability in respect of those claims. 8In a somewhat different context in McGrath & Anor; Re HIH Insurance Ltd [2008] NSWSC 9 at [16]-[17], Barrett J observed that: "... the evidence contains no suggestion that FAI or HIH C&G ever became subject to a "liability", under a contract of insurance written by it, which became the cause or occasion of any payment by Swiss Re. No claim by FAI or HIH C&G (or by HIH as their agent) was ever made upon Swiss Re by reference to some insurance liability of FAI or HIH C&G. There was thus no liability of either of them, as insurer, "in respect of" which the payment provided for by the agreement of 27 June 2001 was made." I do not understand that observation to be inconsistent with the view I have expressed above. That observation was directed to a situation where no claim was made upon Swiss Re by reference to any insurance liability of FAI or HIH C&G, rather than the situation where a claim in fact was made albeit that there may be dispute as to its validity and his Honour there appears to have contemplated that an amount paid in commutation of established rights would be within the scope of the section. 9The evidence establishes that the payments that have been received by HIH C&G and are the subject of this application were received from the reinsurers in respect of HIH C&G's actual or contingent liability to the Plaintiffs. That is, in my view, plainly evident from the terms and structure of the settlements reached between the reinsurers and HIH C&G and between HIH C&G and the Plaintiffs. Thus: By Deed of Settlement and Release dated 22 September 2006, a settlement was reached between Prudential Assurance Company Limited ("Prudential"), HIH C&G and other HIH Group companies in respect of, inter alia, Prudential's prudential liabilities under the contracts of reinsurance in favour of HIH C&G in respect of the cover provided to the James Hardie Group. The parties to that agreement acknowledged that the settlement sum being paid by Prudential was intended to be paid to the relevant HIH companies "under the contracts of reinsurance" specified in the schedule to that deed as that phrase is used in s 562A of the Corporations Act . While that provision is not conclusive, so far as the Court's determination of that issue is concerned, it can properly be taken into account in determining the parties' intentions, and there is nothing to suggest that it did not accurately record those intentions. The Scheme Administrators of HIH C&G have received a settlement sum under that deed and the parties had agreed that $1.3 million of that settlement was attributable to Prudential's potential liabilities under the reinsurance contracts in respect of the James Hardie Group's cover in the Mid-Clator years. By a Commutation and Release Deed dated 26 November 2010, a settlement was reached between HIH C&G, Portman Insurance Limited ("Portman") and the James Hardie Group in respect of Portman's potential liabilities under relevant contracts of reinsurance and certain other reinsurance liabilities that are not relevant to these proceedings. That deed referred to the claims made by the Plaintiffs against HIH C&G in respect of the relevant years and to HIH C&G's claim for indemnity under the relevant reinsurance agreements in respect of those claims. The parties agree that the amount of $143,549.49 was attributable to the reinsurance contracts in respect of the James Hardie Group's cover in the Mid-Clator years. By a further Deed of Settlement and Release, HIH C&G reached agreement to release certain other reinsurers ("the London Market Insurers") from any liability arising under relevant reinsurance contracts by reason of the relevant claims. That deed also specifically referred to the claims made by the Plaintiffs and it was a condition precedent to the parties' obligations under that deed that an agreement between HIH C&G and the Plaintiffs (to which I will refer below) had been executed. By a further Deed of Commutation and Settlement, the Plaintiffs agreed to release HIH C&G in respect of liabilities in relation to the claims; HIH C&G agreed to issue the Plaintiffs an "acknowledgement of Creditor Claim" in respect of specified sums under the HIH Scheme including the aggregate of the settlement sums received from the London Market Insurers, the agreed portion of Prudential's potential exposure under relevant reinsurance contracts, the agreed portion of the amount received from Portman, and a "net settlement amount" attributable to other claims that were not reinsured. That deed recognised the Plaintiffs' intention to make an application under s 562A(4) of the Corporations Act in respect of these amounts, which is the origin of this application. 10Section 562A(1)(b) of the Corporations Act requires that, second, an amount is received by the insurer under the contract of reinsurance. The Defendants draw attention to the question whether that requirement is satisfied where the payments were made in commutation of rights under the contracts of reinsurance. In my view, a payment is made under a contract of reinsurance where the amount represents a discharge of payment obligations created by the agreement, including by a commutation of rights under that agreement. That approach is consistent with the meaning given to the word "under" in Chan v Cresdon Pty Ltd [1989] HCA 63; (1989) 168 CLR 242 at 249, where Mason CJ, Brennan, Deane and McHugh JJ treated a reference to monies "under this lease" to referring to an obligation "created by, in accordance with, pursuant to or under the authority of, the lease". By contrast with the position in McGrath & Anor; Re HIH Insurance Ltd [2008] NSWSC 9 at [20], the rights in the issue here cannot be said to be new rights which have arisen under a new contract, as distinct from the compromise of obligations or rights arising under the contracts of insurance between the Plaintiffs and HIH C&G. When operation of s 562A(2)-(3) can be varied 11The usual position is that a liquidator must distribute reinsurance proceeds among the insured creditors in the manner specified in s 562A(2)-(3) of the Corporations Act . Section 562A(3), which would be applicable in the present circumstances absent an order under s 562A(4), relevantly provides for the liquidator to provide each insured a proportion of their claim calculated in the manner specified. 12The Court may make an order providing for a different allocation of reinsurance proceeds under s 562A(4) which relevantly provides that: "(4) The Court may, on application by a person to whom an amount is payable under a relevant contract of insurance, make an order to the effect that subsections (2) and (3) do not apply to the amount received under the contract of reinsurance and that that amount must, instead, be applied by the liquidator in the manner specified in the order, being a manner that the Court considers just and equitable in the circumstances." That subsection allows the Court to displace whichever of s 562A(2) or (3) applies in the circumstances and, by its order, substitute a method of application of the amount of reinsurance proceeds which is different from that which would otherwise have applied under the provision which is displaced: Amaca v McGrath at [10]. 13The "just and equitable" criterion adopted in that subsection requires the court to proceed in a way to which Barrett J referred in Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd [2004] NSWSC 273 at [45]-[47] in a passage which his Honour quoted in Amaca v McGrath . As Lord Shaw of Dunfermline observed in Loch v John Blackwood Ltd [1924] AC 783 at 791, adopting observations of Neville J in Re Bleriot Manufacturing Aircraft Co (1916) 32 TLR 253 at 255: "The words "just and equitable" are words of the widest significance and do not limit the jurisdiction of the Court to any case. It is a question of fact, and each case must depend on its own circumstances." See also Thomas v Mackay Investments Pty Ltd (1996) 22 ACSR 294 at 302; Cominos v Cominos [1972] HCA 54; (1972) 127 CLR 588; Stephenson v State Bank of New South Wales (1996) 39 NSWLR 101 at 113; Sullman v Sullman [2002] NSWSC 169. In Amaca v McGrath at [67], Barrett J also noted that s 56 2A(4) of the Corporations Act must therefore be seen as conferring a discretion that, while wide, can only be exercised judicially in the light of the whole of the circumstances surrounding the relevant subject matter. 14Certain matters which the Court may take into account in considering whether to make such an order are specified, in an inclusive manner, in s 562A(5) as follows: "(5) The matters that the Court may take into account in considering whether to make an order under subsection (4) include, but are not limited to: (a) whether it is possible to identify particular relevant contracts of insurance as being the contracts in respect of which the contract of reinsurance was entered into; and (b) whether it is possible to identify persons who can be said to have paid extra in order to have particular relevant contracts of insurance protected by reinsurance; and (c) whether particular relevant contracts of insurance include statements to the effect that the contracts are to be protected by reinsurance; and (d) whether a person to whom an amount is payable under a relevant contract of insurance would be severely prejudiced if subsections (2) and (3) applied to the amount received under the contract of reinsurance." 15In my view, the factor specified in s 562A(5)(a) of the Corporations Act is present in this case in that it is possible to identify particular relevant contracts of insurance as being the contracts in respect of which the contract of reinsurance was entered into is satisfied. There is compelling evidence that the relevant reinsurance contracts were obtained by HIH C&G in respect of the cover sought by the James Hardie Group and the Plaintiffs. The Defendants accept that s 562A(5)(a) is satisfied in this case, in that it is possible to identify particular contracts of insurance as being the contracts in respect of which the contracts of reinsurance were entered into. 16The Plaintiffs led substantial evidence in these proceedings as to the history of their dealings with the HIH Group, including evidence that had also been led in the earlier proceedings before Barrett J, which were the subject of his Honour's judgment in Amaca v McGrath . In earlier years, entities within the CH Heath (and later HIH) Group facilitated insurance from the London reinsurance market for the James Hardie Group and it did not retain any significant part of the risk. During the 1980s, those entities "fronted" (a term which does not have any pejorative connotation in this context) for any portion of insurance for the James Hardie Group that was facultatively reinsured with the London market and did not charge a premium but obtained a commission on placing the risk. 17The Plaintiffs also led additional evidence in these proceedings in relation to the Mid-Clator years. First, the Plaintiffs rely on an affidavit of Ms Narreda Grimley dated August 2011 which sets out the reinsurance arrangements for the insurance cover held by the James Hardie Group during the Mid-Clator years and exhibits relevant documents. The policy written by HIH C&G in the 1989/90 policy year was reinsured through the London market, except for a 10% line on the primary layer of $2 million and a 10% line on the $3 million in excess of $2 million layer retained by HIH C&G. The policy written by HIH C&G in the 1990/91 policy year was wholly reinsured through the London market by a primary and 5 excess layers, apart from a 10% line on the primary layer of $5 million held by HIH C&G. The policies written by HIH C&G in the 1991/92 and 1992/93 policy years were wholly reinsured by way of a primary and 5 excess layers. The Plaintiffs also read an affidavit of Mr Christopher Honey, one of the liquidators of HIH C&G, dated 21 October 2011, which indicates that Ms Grimley's evidence as to the dealings between the James Hardie Group and HIH C&G is supported by the result of inquiries made by Mr Honey's staff. 18The Plaintiffs also rely on the affidavit of Mr David Royle dated 5 October 2011. Mr Royle was employed by Minet Australia Limited, an insurance broker, in the relevant period and was responsible for the day-to-day management of the James Hardie Group account during that period. His evidence that, from 31 March 1989, HIH companies including HIH C&G wrote insurance for the James Hardie Group on the basis that reinsurance was arranged by Minet London for the risk to be assumed by HIH C&G, in advance of and as a precondition to, HIH C&G's agreement to accept the risk. His evidence is that the vast majority of the risk assumed by HIH C&G had been reinsured in advance to the London and overseas insurance market. (As noted above, in two of the Mid-Clator years, a small part of the risk in two layers of the policy was retained by HIH C&G). 19Mr Royle gives evidence of direct dealings between the James Hardie Group and the reinsurers including briefings of the reinsurers in each year to assist in placing the reinsurance cover; that agreement was reached between Minet (as James Hardie Group's insurance brokers) and the two leading London reinsurers as to the policy wording which was then adopted by HIH C&G; the premium payable was negotiated by Minet London with the London reinsurers; and the premium paid by the James Hardie Group to HIH C&G and the premium paid by HIH C&G to the reinsurers were the same, with the exception of a $10,000 difference in the 1992/93 year. Mr Royle's evidence is that it was necessary for such reinsurance to be effected due to HIH C&G's limited capacity to write such risks of the magnitude involved in the James Hardie Group's cover. The documents exhibited to Ms Grimley's affidavit also include examples of agreement as to a premium for reinsurance between Minet London and the London reinsurers being advised to HIH C&G and an identical premium then being quoted by HIH C&G to the James Hardie parties. 20Thus, as in Amaca v McGrath , the insurance contracts under which HIH C&G provided cover to the Plaintiffs can therefore readily be matched with the reinsurance contracts in favour of HIH C&G. The evidence establishes that HIH C&G entered into those reinsurance contracts for the purpose of providing cover for the Plaintiffs which HIH C&G would not have been able to provide without that reinsurance and in circumstances where the reinsurers could not insure the Plaintiffs directly. The premiums paid by the Plaintiffs to HIH C&G were identical (with the immaterial difference to which I referred above) to the premiums paid by HIH C&G to the reinsurers with HIH C&G in turn receiving a commission from the reinsurers. In this case, as also in Amaca v McGrath , the James Hardie Group and its broker were active in assisting HIH C&G to obtain the reinsurance cover in the London market. The Plaintiffs were aware, through their broker, that substantially the whole of the risk nominally undertaken by HIH C&G had in fact been placed in the London market by facultative reinsurance contracts obtained for that purpose. 21The Plaintiffs contended that it was also possible to identify them as persons who had "paid extra" in order to have the relevant contracts of insurance protected by reinsurance for the purposes of s 562A(5)(b) of the Corporations Act . I do not think that it is, strictly, possible to say that the Plaintiffs paid "extra" to have particular contracts protected by reinsurance, in the sense that, for example, they paid an additional premium for the benefit of reinsurance. I would conclude that the Plaintiffs made the relevant payments of premiums to HIH C&G by reason of the existence of the reinsurance, in the sense that the arrangements would not have proceeded in the form that they took had such reinsurance not been available. I do not regard this as strictly satisfying the requirements of s 562A(5)(b), but it is a matter that I consider is relevant to whether it is just and equitable to make the order sought by the Plaintiffs under s 562A(4) and tends to support such an order. 22Both parties accepted, and I would myself have found, that the question whether the Plaintiffs would be "severely prejudiced", for the purposes of s 562A(5)(d) of the Corporations Act if s 562A(2)-(3) applied in this case raised issues which correspond to those considered by Barrett J in Amaca v McGrath . The prejudice to which s 562A(5)(d) is directed is the prejudice flowing from the operation of s 562A(2)-(3), if left unaltered by the Court, rather than any prejudice flowing from the alteration of that section pursuant to s 562A(4). That paragraph therefore directs attention to the prejudice to the person seeking the alteration of the order of distribution under s 562A(2)-(3) if that order is declined, rather than the prejudice to other parties if that order is made: Amaca v McGrath at [73]. Barrett J there took the words "severely prejudiced" in s 562A(5)(d) to mean that a person will suffer prejudice or disadvantage that is severe, in the sense of harsh or unpleasantly extreme (at [74]). 23The Plaintiffs accepted that the particular circumstances relevant to their financial position are not relevant prejudice for the purposes of the section, as Barrett J had found. However, the Plaintiffs would here be prejudiced if they did not receive the direct benefit of the reinsurance monies for which they had bargained, where they would not have contracted for cover from HIH C&G without that reinsurance. Such prejudice is real, particularly in circumstances that the amount involved is $6,777,684.09 (less an adjustment agreed between the parties in respect of dividends previously paid to the Plaintiffs). I would myself have considered that it is strongly arguable that the prejudice of being deprived of an amount of that magnitude is "severe". In any event, as Barrett J noted in the earlier judgment, a finding that the Plaintiffs are "severely prejudiced" is not essential to the exercise of the discretion conferred by s 562A(4) in their favour, and the real and significant prejudice which they would suffer by being deprived of the reinsurance proceeds is a matter which also supports the making of an order under s 562A(4) in their favour. Other matters relevant to whether the orders sought are just and equitable 24There are, in my view, several additional factors which make it just and equitable to make the order sought by the Plaintiffs. These factors include the limited role played by HIH C&G in insuring the risk, the unusually direct relationship between the Plaintiffs and the reinsurers and the fact that the Plaintiffs, in a substantive sense, paid their premiums to HIH C&G for cover to be afforded by the reinsurers rather than HIH C&G. I have referred to the evidence in that regard above. A further factor which strongly supports a conclusion that it is just and equitable to make the orders sought is that, as I have observed above, the payments which have been received by HIG C&G and are the subject of this application were directly linked to the reinsurance arrangements referable to the James Hardie Group. 25The conclusion that it is just and equitable to make the orders sought is also supported by the fact that, while the prejudice to the Plaintiffs of being deprived of the proceeds of the reinsurance for which they bargained is significant, the adverse impact of the orders sought on other insurance creditors of HIH C&G will be widely diversified and the detriment suffered by any particular creditors will be limited. Mr Honey's evidence is that, if the orders sought by the Plaintiffs were not made under s 562A(4), then in excess of 7,000 insurance creditors of HIH C&G would be entitled to share in the relevant reinsurance proceeds by reason of s 562A(3) of the Corporations Act . The return to those creditors, applying the "broad pooling" approach referred to in New Cap Reinsurance Corporation Ltd v Faraday Underwriting Ltd [2003] NSWSC 842 and Re HIH Casualty & General Insurance Ltd [2005] NSWSC 240, would be reduced by less than 0.3 cents in the dollar by the outcome sought by the Plaintiffs in these proceedings. 26In my view, the Plaintiffs have established that it would be just and equitable to make an order under s 562A(4) of the Corporations Act. The factors which supported such an order in Amaca v McGrath are also present in this case, including a strong link between the insurance cover made available by HIH C&G and the specific reinsurance which it obtained, correspondence between the premium paid by the Plaintiffs and the premium paid by HIH C&G to the reinsurers and the evidence that the James Hardie Group dealt directly with the reinsurers and would not have entered the arrangement with HIH C&G without the existence of the reinsurance arrangement. The fact that the prejudice to other relevant creditors of HIH C&G would be less than 0.3 cents in the dollar from making the relevant orders is a factor which assists in, but in my view is not necessary to, a finding that it is just and equitable to make that order. Orders 27Accordingly, I make the following orders, in the form which the parties agreed was appropriate if I considered that it was just and equitable to make an order under s 562A(4) of the Corporations Act in the particular circumstances: