Amaca Pty Ltd & Ors v McGrath & Anor as liquidators of HIH Underwriting and Insurance

The approach to be taken by the court 65Section 562A(4) itself says that the court may authorise and require a manner of application different from that dictated by s 562A(2) or s 562A(3) only if it considers that different manner to be "just and equitable in the circumstances". Section 562A(5) then sets out four matters that the court "may take into account" in deciding whether to make a s 562A(4) order, making it clear both that the specified matters need not be taken into account and that matters not mentioned may be taken into account, provided, of course, that they are relevant to an assessment of what is "just and equitable in the circumstances". 66The "just and equitable" criterion requires the court to proceed in a way to which I referred in Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd [2004] NSWSC 273 at [45]-[47]: "[45] The phrase 'just and equitable' is commonly used in legislative drafting: see, for example, Corporations Act 2001 (Cth), s 461(1)(k), Family Law Act 1975 (Cth), s 75(2); Motor Accidents Act 1988, s 74(3); Property (Relationships) Act 1984, s 20(1); Conveyancing Act 1919, s 66M. Numerous cases have considered the significance of the phrase. The conclusions drawn are reflected in the words borrowed by Lord Shaw of Dunfermline in Loch v John Blackwood Limited [1924] AC 783 at 791 from 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.' A court directed by statute to proceed according to what is "just and equitable" is given a wide discretion. There is, as Owen J observed in Thomas v MacKay Investments Pty Ltd (1996) 22 ACSR 29 4 at 302, "no necessary limit on the generality of the words". They are "to be applied in their ordinary meaning as calling for the exercise of judgment in the conventional way." [46] In Stephenson v State Bank of New South Wales (1996) 39 NSWLR 101 Sheller JA, in considering s 66M of the Conveyancing Act 1919, said (at 113): 'The determination of what is just and equitable in the circumstances is not a matter of unfettered individual opinion, nor does it involve a discretion of an arbitrary kind; see Cominos v Cominos (1972) 127 CLR 588 at 599. As Kitto J observed in R v The Commonwealth Industrial Court; Ex parte the Amalgamated Engineering Union, Australian Section (1960) 103 CLR 368 at 383, the criteria are of a nature with which Courts are familiar. In Talga v MBC International Limited (1976) 133 CLR 622 at 634 Stephen, Mason and Jacobs JJ dealing with the issue raised for the Court by the Banking Act 1974 of whether it was just and equitable that a transaction should be treated as valid, said: "... The court will have before it an existing transaction replete with all its surrounding facts and circumstances and in their light will determine what is just and equitable. In doing so it will certainly be exercising a wide discretion that this is a commonplace of the curial process; the court will be bound to act judicially, exercising its discretion by reference only to such considerations affecting the transaction as, on an examination of the legislation, may be seen to be material to the decision which it is called on to make. Irrelevant matters, matters such as the plaintiffs instanced in the course of argument, which have no rational connection with the policy of the regulations but would be expressive only of the personal predilections of the Court cannot be allowed by it to play any part in its decision." Campbell J endorsed this approach in Sullman v Sullman [2002] NSWSC 169, applying it to his consideration of what was "just and equitable" in relation to s 20 of the Property (Relationships) Act 1984. [47] Cominos v Cominos (1972) 127 CLR 588 was a case in which the High Court was asked to consider the constitutional validity of s 86 of the Matrimonial Causes Act 1959 (Cth), which granted the court power to order the settlement of property in the manner it considered "just and equitable". Gibbs J said at 599: "It is true that in determining an application under s 86 the court, after deciding such questions of fact and law as have arisen, is called upon to make a discretionary judgment. The discretion, although wide, must, as was said by Windeyer J in Sanders v Sanders (1967) 116 CLR 366, at pp 379-380, 'be exercised according to accepted principle, for what is just and equitable in this jurisdiction is not a matter of unfettered individual opinion'. It is not discretion of an arbitrary kind. The standard imported by the familiar words 'just and equitable' is 'by no means foreign to the judicial function' (cf Steele v Defence Forces Retirement Benefits Board (1955) 92 CLR 177, at p 188 nor is it 'so indefinite as to be insusceptible of strictly judicial application' (cf Reg v Commonwealth Industrial Court; Ex parte The Amalgamated Engineering Union, Australian Section (1960) 103 CLR 368, at p 383). It is also true that s 86 enables the court to create new rights and impose new duties and not merely to enforce legal rights already existing, but the fact that a court is authorized to create or alter rights and not merely to declare and give effect to pre-existing rights does not necessarily show that the powers conferred are not judicial powers: Peacock v Newtown Marrickville and General Co-operative Building Society No 4 Ltd (1943) 67 CLR 25 at pp 35, 46 and 54-55.' 67Section 562A(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. Lord Wilberforce explained this exercise in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at p.379: "It [the phrase 'just and equitable'] does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way." 68In the present context, the relevant "legal rights" are those arising from s 562A(2) or s 562A(3) - broadly speaking, first, the rights of all creditors entitled to participate under the winding up in respect of debts arising from insurance contracts written by the company before winding up to participate, to the exclusion of other creditors, in the enjoyment of reinsurance proceeds received by the liquidator (until either 100 cents in the dollar has been paid on those debts or the proceeds have been exhausted) and, second, the right of each such favoured creditor to participate in that way pari passu with each other such favoured creditor. Given the law reform materials to which I have referred (see paragraph [17] and [18] above), it may be inferred that the legislature deliberately rejected any notion of automatic flow-through of reinsurance proceeds to only those creditors with debts arising from the insurances which, as it were, were backed by the particular reinsurance; and that likely difficulties of matching reinsurance contracts held with insurance contracts written played a significant part in the adoption of that course. 69Elements of the evidence are relevant to the matters raised by s 562A(5)(a) and s 562A(5)(b). I shall return to these. As to s 652A(5)(c), I was not taken to evidence that would suggest that the HeathUI contracts of insurance made reference to those contracts being "protected by reinsurance". 70Section 562A(5)(d) directs attention, in the present case, to the question whether any person insured by HeathUI under an insurance contract entered into before winding up commenced "would be severely prejudiced" if, in accordance with s 562A(2) or s 562A(3), all persons so insured by HeathUI shared rateably in the net reinsurance proceeds received by the liquidators from Baloise, Hannover and Gerling. This makes it necessary to consider the position of not only the plaintiffs but also the position of the other insurance creditors of HeathUI. 71There are, at this point, fourteen insurance creditors of HeathUI, including the plaintiffs. Their claims amount to some $58.267 million. Of these claims, a total of $21.333 million has been agreed by the liquidators and the balance of $36.933 million is not yet agreed. The plaintiffs account for $36.971 million of the total of $58.971 million, $4.658 million of the agreed amount of $21.333 million and $32.312 million of the $36.933 million not agreed. 72Mr Honey estimates that, if all insurance creditors participate rateably in the reinsurance proceeds now in question (that is, there is no preferred treatment for the plaintiffs), those creditors will receive approximately 20 to 25 cents in the dollar in respect of their insurance debts, whereas if the plaintiffs' application is successful, the other insurance creditors are likely to receive approximately 15 to 20 cents in the dollar. These calculations have been made according to the "broad pooling" approach regarded as applicable to s 562A in both New Cap Reinsurance Corporation Ltd v Faraday Underwriting Ltd [2003] NSWSC 842; (2003) 177 FLR 52 and Re HIH Casualty and General Insurance Ltd [2005] NSWSC 240; (2005) 190 FLR 398. The correctness of the approach did not arise for consideration at subsequent of the stages of the New Cap litigation: Assetinsure Pty Ltd v New Cap Reinsurance Corporation Ltd [2004] NSWCA 225; (2004) 61 NSWLR 451 and, in the High Court, Assetinsure Pty Ltd v New Cap Reinsurance Corporation Ltd (above). 73The only relevant persons who might conceivably be "severely prejudiced" by the application of reinsurance proceeds rateably among all insurance creditors in accordance with s 562A(2) or s 562A(3) are the plaintiffs. Prejudice will arguably accrue to insurance creditors other than the plaintiffs only if the scheme of s 562(2) and s 562(3) is departed from by way of an order of the kind now sought; but s 562A(5)(d) is concerned with prejudice flowing from the unaltered operation of s 562A(2) and s 562A(3), not prejudice flowing from alteration pursuant to s 562A(4) of the effects that they would otherwise produce. 74Section 562A(5)(d) uses the words "severely prejudiced". An electronic search of the AUSTLII database suggests that these words do not appear elsewhere in the Corporations Act or, for that matter, in any other enactment of an Australian legislature. I approach the provision on the simple footing that it is concerned with "prejudice" (or disadvantage) that is "severe", that is, harsh or unpleasantly extreme, so that the question is whether the plaintiffs will be disadvantaged in a way that is harsh or unpleasantly extreme if s 562A(3) applies in unmodified form.

Assessment 75In the present case, there is no difficulty, as regards the 1981/82 and 1982/83 years, in matching insurance contracts under which HeathUI granted cover to the plaintiffs with the reinsurance contracts written in favour of HeathUI by the three relevant reinsurers, Baloise, Hannover and Gerling. HeathUI entered into those and associated facultative reinsurance contracts for the clear and express purpose of providing for the plaintiffs cover that HeathUI was itself unable to provide without the assistance of reinsurers and in circumstances where the reinsurers could not insure the plaintiffs direct. In addition, the premiums paid to by the plaintiffs were passed through to the reinsurers, less a commission retained by Heath Australia. It is, I think, clear from the evidence that HeathUI derived no premium so that it is in substance correct to say, in words used by counsel for the plaintiff, that HeathUI ""was paid nothing for doing nothing". 76In terms of s 562A(5)(a), it is plainly possible to identify the insurance held by the plaintiffs from HeathUI as precisely that in respect of which reinsurance contracts were entered into with Baloise, Hannover and Gerling in relation to the 1981/82 and 1982/83 years. As to the s 562A(5)(b) matter, the payments made by the plaintiffs in respect of the insurance provided by HeathUI for those years were applied in whole to pay insurers and reinsurers in the London market, after deduction of Heath Australia's 7.5% commission. There is, as I have said, no evidence relevant to the s 562A(5)(c) matter. It remains to consider the question of "severe prejudice" raised by s 562A(5)(d). 77The reinsurance backing was arranged by HeathUI with the full knowledge of the plaintiffs' broker and under arrangements that that broker expressly or by implication approved. As has been noted, the James Hardie Group and its broker were active in assisting Heath Australia to obtain cover in the London market 78It is, in my opinion, clear that, in relation to each of the 1981/82 and 1982/83 years, the plaintiffs' dealings with Heath Australia and HeathUI were such as to authorise or require them to provide insurance cover that the plaintiffs knew that HeathUI could not itself carry unaided. The plaintiffs must be taken to have been aware, through their broker, that the whole of the risk nominally taken by HeathUI would be laid off in the London market by means of facultative reinsurance contracts specifically sought and obtained for the purpose. Those reinsurance contracts did not cover a class or category of exposure to which HeathUI became subject because of a number of policies written for different insureds either without reference to reinsurance or with the possibility of some generic reinsurance in mind (or, indeed, with generic reinsurance having already been obtained without reference to the several policies). The reinsurance was the means by which the reinsurers provided, through HeathUI, the insurance the plaintiffs required. The reinsurance was obtained for the express purpose of fulfilling the plaintiffs' needs. 79On that basis, the reinsurance proceeds derived by HeathUI ought properly be regarded as part of what HeathUI, as insurer, was committed to provide to the plaintiffs upon and by reason of their sustaining the relevant loss. 80It will therefore be a cause of prejudice to the plaintiffs if they do not receive the direct benefit of the reinsurance moneys for which they bargained with HeathUI. That company was, to the plaintiffs' knowledge, of insufficient substance and stature to carry the risk itself. The plaintiff chose to deal with HeathUI notwithstanding its knowledge of the company's limited capacity - but only when the limitation had been offset by reinsurance. 81It is suggested in submissions made on behalf of the liquidators that it is material to the question of prejudice to the plaintiffs that their current financial capacity is such that, without external help, they do not expect to be able to pay their creditors (being asbestos claimants) from the year ending on 30 June 2011 and for a number of years thereafter. This is the effect of the evidence of Mr Booth, the chief executive officer of AICF: "Give the AICF's financial position and the expected level of asbestos claims which will be made against it in this and coming years, I regard it as vital to obtain the benefit of any additional funds which may be available to [the plaintiffs] from all sources, including all potential insurance and reinsurance recoveries." 82Mr Booth's statement does not, in terms, address the question of prejudice to the plaintiffs if s 562A(3) is left to take its course without the intervention of the s 562A(4) orders the plaintiffs seek. He is, rather, concerned - and understandably concerned - with the socially important matter of the availability of money to meet the claims of persons with rights to be compensated in respect of illness contracted through exposure to asbestos. The fact that the due working out of the s 562A scheme, without modification pursuant to s 562A(4), may mean that there is less money for those persons than if the s 562A(4) order is made as sought (so that more will then have to be sought from other quarters), although very important in a general sense, is irrelevant to the question of prejudice with which s 562A(5)(d) is concerned. 83Counsel for the liquidators made the related point that enhancement of the plaintiffs' receipts in the winding up of HeathUI through any s 562A(4) order will merely mean that there is reduced demand on the other sources of AICF funding, that is, contributions by the new Hardie Group under the 2006 funding agreement and loans from government. In that way, it is said, the ultimate beneficiary of the s 562A(4) orders, if made, will be the new Hardie Group. But this too, to my mind, is irrelevant to the questions of prejudice with which s 562A(5)(d) is concerned. 84On the question of prejudice to the plaintiffs, it seems to me that the only relevant consideration is that the true arrangement with HeathUI was that it would provide for the plaintiffs the benefit of the specific cover obtained in the London market through reinsurance which, to the plaintiffs' knowledge, offset the whole of HeathUI's own theoretical exposure as insurer; and that, if s 562A(3) takes its course unaffected by a s 562A(4) order of the kind the plaintiffs seek, the plaintiffs will be denied that intended benefit. I do not know whether it would be correct to regard that prejudice as "severe", but there is no need for me to attempt to answer that question since a finding on the "severely prejudiced" question posed by s 562A(5)(b) is not essential. 85Given the clear and strong link between the insurance cover made available by HeathUI and the specific reinsurance obtained by HeathUI, the financial arrangements regarding premium and the true nature of the arrangement as described in the immediately preceding paragraph, the special circumstances of this case are, in my opinion, such as to make it just and equitable that the ordinary course envisaged by s 562A(2) and 562A(3) be departed from in respect of each of the 1981/82 and 1982/83 policy years in such a way that the net reinsurance proceeds received from Baloise, Hannover and Gerling are applied towards the debts owing to the plaintiffs under insurance contracts held at commencement of the winding up, to the exclusion of debts owing to other creditors under insurance contracts then held, except to the extent, if any, that any balance of the net reinsurance proceeds remains after 100 cents in the dollar has been paid in respect of those debts owing to the plaintiffs (on the figures as I understand them, the possibility that there will be any such balance is non-existent and academic).

Decision on the first part of the application 86The court will therefore grant relief of the kind the plaintiffs seek in relation to sums actually received under reinsurance for the two policy years in question - subject to two matters. First, there should be a single order, not two separate orders as contemplated by the application: see paragraph [63] above. The single order should both displace s 562A(2) and s 562A(3) and specify the alternative method of application the court is directing. This is consistent with s 562A(4) which refers to a single order. Second, there is a need for clarification as to which of the plaintiffs actually have relevant insurance claims that have been recognised in the winding up in accordance with the scheme of arrangement. It seems likely that ABN 60 Pty Ltd, although the principal insured named in the policies, did not incur any liability to which the HeathUI insurance was responsive and that the claimants under the winding up and scheme are Amaca Pty Ltd and Amaba Pty Ltd only. There is also a question whether there needs to be some appropriate apportionment between those two companies.

The second part of the application 87The answer to the question whether the court may make a s 562A(4) order in respect of an amount not yet received under a contract of reinsurance depends entirely on the correct construction of the legislation. 88In contending for a positive answer, the plaintiffs place emphasis on the words "has been or is received" in s 562A(1)(b). This, the plaintiffs say, shows that the section as a whole is concerned not only with amounts already received but also with amounts yet to be received - otherwise it would have been sufficient to refer to an amount that "has been received" and to omit the words "or is". 89I do not think that the question can be disposed of in that way. The power under s 562A(4) is a power to order that s 562A(2) and s 562A(3) "do not apply to the amount received under the contract of reinsurance" and to cause the amount to be applied in some other way. Such an order displaces the s 562A(2) or s 562A(3) requirement as to payments to be made by the liquidator "out of the amount received" under the reinsurance contract and imposes some other requirement. Under s 562A(4) itself, the order can only be made if the court forms an opinion that the alternative manner of application of "the amount received under the contract of reinsurance" is "just and equitable in the circumstances". 90In deciding whether an order affecting a particular "amount received under the contract of reinsurance" should be made, the court must thus focus on the amount itself, the circumstances prevailing at the time the court is asked to make the order and what, in those circumstances, is "just and equitable" with respect to the application or disposition of the amount. The inquiry is, of its nature, directed to an existing and established factual situation involving the "amount received". A necessary factor in the decision as to what is just and equitable - and an element of the "circumstances" to be taken into account - may be, in some cases, the quantum of the amount. 91I am not persuaded that, as a matter of construction, it is open to the court to make an order under s 562A(4) otherwise than in relation to an amount already received and presently caught by whichever of s 562A(2) and s 562A(3) operates unless displaced pursuant to such an order. The purpose of s 562A(4) is to allow departure from the s 562A(2) or s 562A(3) regime in respect of a particular sum according to circumstances for the time being prevailing. To attempt to apply s 562A(4) to future receipts which, if they are forthcoming at all, will emerge in circumstances that cannot presently be known would be to remove the inquiry from the specific factual surroundings to which the section directs attention. 92The words "has been or is received" in s 562A(1)(b) are followed by "by the company or the liquidator". As the plaintiffs acknowledged in submissions, the distinction between "has been" and "is" may be one that is concerned to accommodate both receipts by the company before the advent of winding up and receipts by the liquidator or the company in liquidation. On this basis, both "has been" and "is" have work to do. 93I am of the opinion that the court has no power to make the order the plaintiffs seek as to payments to be received in the future. 94The relief sought in that respect will not be granted.

Conclusion 95The parties should bring in short minutes of orders to give effect to paragraphs [86] and [94] above. If there is any difficulty in formulating orders, the matter may be mentioned in court. 96The short minutes should also reflect any agreed position on costs. If there is no agreement on costs, I shall hear submissions at a time to be fixed.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 02 March 2011