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

Supreme Court of NSW|2011-02-10|Before: Barrett J, Mr J

The application in relation to the two particular years 63The plaintiffs seek orders as follows, based on the facts concerning the 1981/82 policy year: (a) an order pursuant to s 562A(4) that s 562A(2) and s 562A(3) do not apply to any of the three amounts received by the liquidators of HeathUI as referred to at paragraph [48] above; (b) an order under s 562A(4) that the liquidators of HeathUI apply each of the three amounts so received by, first, deducting expenses of and incidental to getting in the amount (being 2.5% of the amount) and, second, paying the balance of the amount to the plaintiffs. 64A corresponding claim is made in relation to the 1982/83 year by reference to the sums mentioned at paragraph [57] above.

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.

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Section 562A of the Corporations Act 8The jurisdiction the court is asked to exercise is that created by s 562A(4) of the Corporations Act 2001 (Cth). Section 562A as a whole is in these terms: "(1) This 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. (2) Subject to subsection (4), if the amount received, after deducting expenses of or incidental to getting in that amount, equals or exceeds the total of all the amounts that are payable by the company under relevant contracts of insurance, the liquidator must, out of the amount received and in priority to all payments in respect of the debts mentioned in section 556, pay the amounts that are so payable under those contracts of insurance. (3) Subject to subsection (4), if subsection (2) does not apply, the liquidator must, out of the amount received and in priority to all payments in respect of the debts mentioned in section 556, pay to each person to whom an amount is payable by the company under a relevant contract of insurance an amount calculated in accordance with the formula: Particular amount owed X Reinsurance payment Total amount owed where: 'particular amount owed' means the amount payable to the person under the relevant contract of insurance. 'reinsurance payment' means the amount received under the contract of reinsurance, less any expenses of or incidental to getting in that amount. 'total amount owed' means the total of all the amounts payable by the company under relevant contracts of insurance. (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. (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. (6) If receipt of a payment under this section only partially discharges a liability of the company to a person, nothing in this section affects the rights of the person in respect of the balance of the liability. (7) This section has effect despite any agreement to the contrary. (8) In this section: ' relevant contract of insurance ' means a contract of insurance entered into by the company, as insurer, before the relevant date." 9Section 562A co-exists with s 555 and s 556. Section 555 lays down the general rule that unsecured debts and claims proved in the winding up rank equally and, in case of insufficiency of assts, must be paid proportionately. Section 556 then says that certain categories of unsecured debts are to be paid "in priority to all other unsecured debts and claims" and specifies the order in which the categories are to take priority among themselves. Each section is expressed in terms that make its specification liable to be overridden by other statutory provisions. Section 556 overrides s 555. And s 562A overrides both s 555 and s 556. The interaction of the provisions was explained in HIH Casualty and General Insurance Ltd v Building Insurers' Guarantee Corporation [2003] NSWSC 1083; (2003) 202 ALR 610 at [70]: "The combined effect of ss.555 and 556 is that, in a winding up governed by the Corporations Act , unsecured debts and claims identified in s.556 are to be paid, in the order stated, in priority to all other unsecured debts and claims and, subject to that priority (and to the effect of any other provisions of the Corporations Act ), debts and claims proved in a winding up are to rank equally and, if the property of the company is insufficient to meet all debts and claims, they are to be paid proportionately. Section 562A, dealing specifically with contracts of reinsurance held by a company in the course of winding up in respect of insurances written by that company, requires the liquidator to make certain payments to certain persons out of the proceeds of the reinsurance and to do so in priority to all payments in respect of debts mentioned in s.556." 10Where a liquidator has in his or her hands an amount of the kind referred to in s 562A(1)(b), that amount will be dealt with separately from the balance of the funds under the liquidator's control. In the normal course of events, the amount will not be applied in accordance with s 555 and s 556, at least in the first instance, and will instead be dealt with as directed by either s 562A(2) or s 562A(3), depending on whether the amount exceeds the "total" referred to in s 562A(2). Under s 562A(4), however, the court has power to displace both s 562A(2) and s 562A(3) (or, more accurately, whichever of them applies of its own force in the particular circumstances) and, by its order, to substitute some method of application of the amount different from that which would otherwise have been applied in accordance with the displaced provision. 11The general principle reflected by s 562A is that, in the insolvent winding up of an insurer, reinsurance proceeds obtained by the liquidator under reinsurances pre-dating the winding up are to be applied towards claims arising from the insurer's liabilities under contracts of insurance written by it before the commencement of the winding up; and that those proceeds are not available to be applied towards debts of other kinds unless and until the claims arising from insurance contracts have been satisfied in full. A particular feature of the section is that the class of claims entitled to priority enjoyment of reinsurance proceeds is made up of all claims arising from insurance contracts, without reference to any link between those insurance contracts and the reinsurance by which the reinsurance proceeds are produced. Thus, for example, if reinsurance is held in respect of risks under fire insurance policies, creditors having claims under fidelity insurance policies quite distinct from the class of policies that gave rise to the reinsurance will share in the benefit of the priority application of the reinsurance proceeds directed by s 562A(2) or s 562A(3). 12In the present case, it is not disputed that certain amounts already received by the liquidators of HeathUI are of the kind with which s 562A is concerned. It is to those amounts that the first part of the plaintiffs' application relates (see paragraph [1] above). They say that the court should make an order under s 562A(4) having the effect that the liquidators are to apply the amounts in question exclusively towards satisfaction of debts or claims of the plaintiffs cognisable in the winding up. 13It is common ground that, in the absence of any s 562A(4) order, it will be s 562A(3) rather than s 562A(2) that applies to the amounts in question. The order, if made, will therefore eliminate the entitlements under s 562A(3) of "each person to whom an amount is payable by the company under a relevant contract of insurance" and substitute an entitlement of the plaintiffs alone - each of which, it is acknowledged, is a "person to whom an amount is payable by the company under a relevant contract of insurance". The effect of the order will be to allocate the relevant benefit to some members of the entitled class and to eliminate the entitlements of the remainder of the class.

The background to the enactment of s 562A 14I should, at this point, say something about the genesis and history of s 562A. 15The purpose and effect of the Third Parties (Rights Against Insurers) Act 1930 (UK) were that, if an insured carrying insurance cover against liability to another person became insolvent, that other person became entitled to the insolvent insured's rights against the insurer and could thereby maintain direct the claim upon the insurer that the insolvent insured could otherwise have brought. The insurance proceeds were thereby kept out of the fund of assets available to the insured's creditors generally. 16Versions of this English provision introduced into Australia were held to apply to contracts of reinsurance held by insurers in the same way as it applied to contracts of insurance held by any company exposed to the risk of third party claims: Re Dominion Insurance Co of Australia Ltd [1980] 1 NSWLR 271; Re Saltergate Insurance Co Ltd (No 2) [1984] 3 NSWLR 389; Re Palmdale Insurance Ltd (in liq) (No 3) [1986] VR 43. But, as was explained by the Australian Law Reform Commission in its General Insolvency Report (Harmer Report), problems arose in applying the section to reinsurance cases. These included difficulties in identifying third party claimants entitled to the benefit of particular reinsurance and the perceived inequity of persons whose contracts of insurance happened to be backed by reinsurance being the only persons able to benefit. 17At paragraph 764 of its report, t he Law Reform Commission made a recommendation as follows ("s 447" was the provision of corporations legislation then in force that allowed direct access by a third party to the insurance carried by an insolvent company): " Recommendation . The Commission recommends that unless the court orders otherwise, s447 should not apply to a contract of reinsurance. The matters that the court should take into account in deciding whether to make an order include the circumstances under which the contract of reinsurance was entered into, including any contract arrangement or understanding between the insured and the company that the company reinsure the risk and any prejudice likely to be suffered by the insured if an order is not made." 18That recommendation came after the Commission had expressed the following view (at paragraph 763): " The Commission's view . The Commission agrees that contracts of reinsurance are for the most part fundamentally different from contracts of insurance and that the application of s 447 to reinsurance contracts may lead to inequities. It appears unfair to allow an insured a special priority if the particular insurance policy is backed in some way by reinsurance whereas an insured with a policy not backed by reinsurance ranks with other unsecured creditors. There may however be situations where reinsurance is specifically taken out at the request of an insured even though this may not be a condition of the insurance contract. In such situations it is appropriate for the insured to get the benefit of the application of s 447. Generally, however, the Commission is of the view that s 447 should not apply to contracts of reinsurance." 19Section 562A, it may be noted, does not implement the recommendation of the Law Reform Commission - indeed, as was observed in Assetinsure Pty Ltd v New Cap Reinsurance Corporation Ltd [2006] HCA13; (2006) 225 CLR 331 (at [83]) by Kirby J and Hayne J (with the concurrence of Gleeson CJ, Heydon J and Crennan J on this aspect), s 562A represents "a rejection of the applicable recommendations made by the Harmer Report". 20The section as enacted works on the broad basis I have already described, that is, that proceeds of reinsurance carried by the company in liquidation should be applied, in the first instance, towards satisfaction of the company's insurance liabilities as a whole and regardless of the existence or non-existence of any connection between the source of a particular insurance liability and the subject matter of the reinsurance by which the proceeds are produced (the suggestion by Kirby J and Hayne J in Assetinsure Pty Ltd v New Cap Reinsurance Corporation Ltd , also at [83], that reinsurance receipts are to be applied in satisfaction of the insolvent insurer's liabilities under the contracts of insurance "that were reinsured" is, in my respectful opinion, per incuriam the s 562A(8) definition of "relevant insurance contract"). 21In one respect, however, s 562A does reflect, at least to some extent, the position taken by the Law Reform Commission. The section identifies, in s 562A(5), as matters that the court may take into account upon a s 562A(4) application, certain of the matters referred to by the Commission at paragraph 764. 22The fact remains that, by and large, the Commission's observations are of very little assistance in construing s 562A as enacted and now in force.

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