Amaca Pty Ltd (under NSW administered winding up) v McGrath [2015] NSWSC 923 | Case summary

The issues arising in both proceedings

As in previous applications in this matter, the liquidators made submissions in order to identify arguments that might be put against the making of the orders by other insurance creditors (and perhaps general creditors) that are potentially adversely affected by the making of the orders, although that adverse effect is minimal in monetary terms as noted above. The liquidators otherwise neither consent to nor oppose the orders sought, subject to the Court's satisfaction as to their statutory basis and, in particular, three issues identified by the liquidators that I will address below.
The Court has previously held, on evidence led in earlier proceedings between the same parties in respect of the same years, that the Plaintiffs satisfied several of the requirements under s 562A of the Corporations Act in respect of their dealings with HIHC&G and HIHU&I respectively in the relevant policy years. The Plaintiffs submit, and I accept, that it is not necessary for them to read the evidence that was before the Court at those hearings, dealing with those policy years, since both the Plaintiffs on the one hand and the liquidator and the HIHC&G and HIHU&I on the other are bound by the findings recorded in those judgments. The Plaintiffs fairly acknowledge that this application, however, raises a new issue so far as the liquidator has obtained the relevant monies in a different manner to those arising in earlier judgments. That difference, is, as will emerge below, of significance in this application.
The Plaintiffs in turn refer to the matters addressed in Mr Honey's affidavit, by which the liquidator entered into the arrangement to sell or "factor" remaining unpaid reinsurance debts of the HIH group of companies to a third party. The Plaintiffs point out, and I accept, that a number of the debts assigned to the third party under the Assignment Agreement, by which that arrangement was documented, included amounts listed in an Excel spreadsheet attached as a schedule to that agreement, which in turn included contracts of reinsurance of HIHU&I and HIHC&G in the relevant policy years in respect of insurance provided by those companies to the James Hardie companies. Mr Honey's evidence is that a substantial portion of the debts factored under the Assignment Agreement related to reinsurance of contracts in respect of the James Hardie companies and a pro-rata allocation of the monies received under that agreement to those contracts would be $5,521 for the policy year 1996 and $200,217 for the policy years 1980, 1981 and 1982 (Honey [21], [23]). This is, of course, the amounts claimed by the Plaintiffs in this application.
I now turn to the terms of the Assignment Agreement. Clause 2.1 of that agreement provides that, on receipt of the relevant consideration from the third party, the HIH companies, including HIHC&G and HIHU&I, absolutely assign to the third party all rights, title, benefit and interest in the Debts (as defined). That assignment was not a novation or assignment of any of the relevant insurance contracts, but only of the relevant debts. Clause 4 of the Assignment Agreement provided that the total consideration payable to all assignors was to be deposited into the bank account of HIHC&G. The Plaintiffs submit, and I accept, that the Assignment Agreement is broadly in the nature of a factoring agreement, at least so far as such an agreement involves the transfer to a third party of the ability to receive the proceeds of a debt in return for a discounted sum of money, so that the creditor receives the cash from that sale, and the third party assumes the task of recovering the relevant debt: Commercial Factors Ltd v Maxwell Printing Ltd [1994] 1 NZLR 724.
As I noted above, relief is sought by the Plaintiffs under s 562A(4) of the Corporations Act. Section 562A of the Corporations Act overrides both ss 555 and 556 of the Corporations Act by directing that the specified assets be applied towards the claims with which the section is concerned: HIH Casualty & General Insurance Ltd v Building Insurers' Guarantee Corporation [2003] NSWSC 1083; (2003) 202 ALR 610 at [70]; Amaca 1 at [9]. Section 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" used in s 562A(1)(a) means a "contract of insurance entered into by the company, as insurer, before the relevant date" and includes contracts of reinsurance: AssetInsure Pty Ltd v New Cap Reinsurance Corporation Ltd (in liq) [2006] HCA 13; (2006) 225 CLR 331 at [86]-[87]. There is no controversy that the requirements of s 562A(1)(a) of the Corporations Act are satisfied in these applications. It is common ground that HIHC&G and HIHU&I were each insured under contracts of reinsurance entered into before the relevant date, being 27 August 2001, with the relevant policies having been written in policy years commencing 31 March 1980, 1981 and 1982 in respect of HIHU&I and 31 March 1996 in respect of HIHC&G. It is also common ground that those policies were taken out by HIHC&G and HIHU&I were facultative reinsurance policies taken out solely to cover liability to, and for the benefit of, the Plaintiffs.
Section 562A(1)(b) of the Corporations Act in turn requires that an amount "in respect of that liability" is received by the insurer "under the contract of reinsurance." The liquidators acknowledged that the phrase "in respect of" does not require a close connection between the receipt and the relevant liability and the liquidator accepts that, if an amount was received, it was received "in respect of" the relevant liability. I observed in Amaca Pty Ltd (under NSW administered winding up) v McGrath (as liquidators of the HIH Group of companies) [2012] NSWSC 1523 at [28], by reference to authority, that the words "in respect of" have a wide meaning and are "probably the widest of any expression intended to convey some connection between two related subject-matters". That connection was held to be satisfied, in earlier decisions relating to the relevant contracts, where payments were made in commutation of incurred but not reported claims and where dividends were received by the liquidators under a scheme of arrangement. On the other hand, in Re McGrath; Re HIH Insurance Ltd [2008] NSWSC 9, Barrett J held that requirement was not satisfied where HIH had entered into a five year contract of reinsurance with a reinsurer, under which it had not claimed, and an agreement was reached to cancel the reinsurance contract, give mutual releases and repay various monies. That decision seems to reflect, at least in part, the fact that HIH had not become subject to a liability under that contract so as to have a right to payment by Swiss Re. By contrast, the relevant liabilities here arose, both on the part of HIHC&G and HIGU&I and on the part of the reinsurers, and are reflected in the debts that are the subject of the Assignment Agreement. It seems to me that a relevant connection between the liability under the reinsurance contracts and the receipt of consideration under the Assignment Agreement is established, and the requirement that the relevant amounts be "in respect of that liability" is satisfied.
I now turn to the question whether the relevant amounts were "received" by the insurers. The liquidators accept that, by reason of cl 4 of the Assignment Agreement to which I referred above, HIHC&G can be taken to have "received" an amount in respect of the relevant liability. The liquidator also acknowledges that cl 3.1 of the Assignment Agreement provided for consideration to be paid to HIHU&I although that clause did not specify the amount to be paid to it. Mr Honey's evidence is that the amount paid by the third party to the HIH Group of companies has been allocated across those companies, including HIHC&G and HIHU&I, in proportion to the amount of their debts included in the sale. The liquidators note that one could conclude that "an amount in respect of that liability has been received by" HIHU&I for the purposes of s 562A(1)(b), but identify a counter-argument that it cannot be established that any amount in respect of the liability to HIHU&I has been received by it, so far as the information memorandum in respect of the debt asset sale made clear that particular debts may have no value or uncertain value and that no warranties were given in respect of them, and the Assignment Agreement itself did not attribute value or consideration to any particular debt. The liquidators acknowledge, however, that cll 2 and 3 of the Assignment Agreement and Mr Honey's evidence provided little support for a view that an amount had not been received by HIHC&G or HIHU&I in respect of Amaca's claims, or that any such amount was not readily ascertainable.
It seems to me that the question of receipt of the consideration is sufficiently established by clause 4.1 of the Assignment Agreement, which, as I noted above, provided for consideration to be payable to the assignors collectively, which include HIHU&I and HIHC&G. It does not seem to me that the fact that a particular amount was not attributed to the consideration in respect of the policies attributable to HIHC&G and HIHU&I means that an amount was not received, where it is common ground that an amount can properly be apportioned to that consideration. A similar approach has been adopted in other cases in respect of receipts in the HIH liquidation, for example Re HIH Underwriting Insurance (Aust) Pty Ltd (in liq and subject to a scheme of arrangement) [2015] NSWSC 36. The requirement that an amount has been or is received by the insurers seems to me to be satisfied in these applications.
Ms Rees, who appears for the Plaintiffs, acknowledges that the further requirement in s 562A(1)(b) that the relevant amount is received "under the contract of reinsurance" potentially causes greater difficulty for these applications. In Re McGrath; Re HIH Insurance Ltd above at [17]ff, Barrett J held that the monies paid by Swiss Re to HIH were not received "under the contract of reinsurance" as they were not referable to HIH's liability to any insured under contracts of insurance, but were instead referable to a new agreement to undo the relevant reinsurance contract. His Honour there referred to the High Court's decision in Chan v Cresdon Pty Ltd [1989] HCA 63; (1989) 168 CLR 242 at 249, where the plurality treated the word "under" as referring to "an obligation created by, in accordance with, pursuant to or under the authority of" a lease. In Amaca Pty Ltd (under NSW administered winding up) v McGrath (as liquidators of the HIH Group of Companies) [2012] NSWSC 176; (2012) 87 ACSR 625 ("Amaca 2"), I expressed the view that a payment is made under a contract of reinsurance where the amount represents a discharge of payment obligations created by that contract, including by a commutation of rights under that agreement. I observed (at [10]) that: "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'".
Ms Rees notes that both Barrett J and I had referred to the decision in Chan v Cresdon Pty Limited above and submits that that case concerned the liability of a party as a guarantee in respect of a lessee's performance under the lease and should be read in its relevant context. Ms Rees submits that the context at hand is different, so far as it involves the application of a statutory regime intended to give priority to insured creditors who can demonstrate a particular relationship with an insolvent insurer and its reinsurers. She draws attention to a possibly wider approach adopted by the High Court in Federal Commissioner of Taxation v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520 at [42], where the majority read the words "under a contract" in s 160U(3) of the Income Tax Assessment Act 1936 (Cth) as directing attention to: "The source of the obligation which was performed by the transfer of assets which constituted the relevant disposal."
In reliance on that proposition, Ms Rees submits that the question in these applications is whether the monies paid to the liquidator arose under the reinsurance contract or the Assignment Agreement and submits that, in the immediate sense, the payment arose under the Assignment Agreement but ultimately it arose under the reinsurance contracts. Ms Rees also refers to the Court of Appeal's judgment in Grave v Blazevic Holdings Pty Ltd [2010] NSWCA 324; (2000) 79 NSWLR 132 at [30]-[34], considering the language "arising under the construction contract" used in the Building and Construction Industry Security of Payment Act 1999 (NSW), and to the consideration of the phrase "under the mortgage" in Queensland Premier Mines Pty Ltd v French (2007) 235 CLR 81. Ms Rees also referred to the approach that I adopted in Amaca Pty Ltd (under NSW administered winding up) v McGrath as liquidator of the HIH Group of Companies) [2012] NSWSC 1523, where I held that amounts received by the liquidator, in respect of debt arising from reinsurance contracts, under a scheme of arrangement and by way of expected dividends payable under the scheme were received under the relevant contracts.
With the greatest of respect to the subtlety of Ms Rees' submissions, it seems to me that the amounts received by the liquidator under the Assignment Agreement were not amounts received "under the contract[s] of reinsurance", whether that phrase is read in a narrow or wider sense. It seems to me that the fundamental difficulty with those submissions is a factual one. Ms Rees submits that the "factoring arrangement was entered into so as to realise unpaid reinsurance debts in a cost effective way", and that "the monies are being received by the liquidator directly as a result of monies presently owed by the reinsurers to HIH in respect of James Hardie's contracts of insurance and not otherwise". It seems to me that the first proposition does not reflect the substance of the transaction, which involves a sale of the relevant debts at a discount to reflect the risk that they are potentially uncollectable, and the second proposition does not reflect the fact that the monies are received by the HIH companies under the Assignment Agreement in substitution for the receipt of the debts owing under the relevant contracts of insurance, rather than under those agreements. The amount paid by the third party under the Assignment Agreement was paid irrespective of whether the debts were ever collected by it and, once that third party had paid that amount, it was not required to account to the HIF companies or the liquidators for debts that it bought and later recovered. This is also not a case where, if the third party later recovered debts from the relevant reinsurers, it would do so on behalf of the liquidators or the HIH Group of companies. To the contrary, it will do so on its own behalf, having acquired the right to do so under the terms of the Assignment Agreements.
Mr Healey, who appears for the liquidators, in turn submits that cll 3 and 4 of the Assignment Agreement and Mr Honey's evidence make clear that the consideration for the relevant assignment was paid "under" the Assignment Agreement and there was no other cause for the third party that acquired the debts to make that payment. Mr Healey also points out that the relevant assignment is predicated upon the rights of the HIH companies continuing as against the reinsurer and that liability under the contracts of reinsurance has not been discharged by the reinsurer by performance, commutation or otherwise. As Mr Healey points out, the structure of the Assignment Agreement is itself inconsistent with HIHC&G or HIHU&I having received amounts under the reinsurance contracts because, had such amounts been received, the debt would have been discharged and would not have been available for assignment. Mr Healey also submits that the single amount received under the Assignment Agreement, as consideration for the assignment, was received under a "new contract" of the kind to which Barrett J referred in Amaca 1 and to which I referred in Amaca 2. The liquidator accepted that a conclusion that an amount was paid under the Assignment Agreement was not necessarily mutually exclusive of the possibility that the consideration might be said to have been received, concurrently, "under" some other agreement, relevantly, the reinsurance agreement. I also accept that proposition, as a matter of logical possibility, but here the structure of the Assignment Agreement seems to me to be inconsistent with the receipt of an amount under another agreement being the reinsurance contract.
Ms Rees submits that this approach would frustrate the policy of the section, or at least her client's expectation that it would receive the benefit of payments made under contracts of reinsurance entered into in the relevant circumstances. I cannot accept that submission, which seems to me to divert attention from the terms of the section, which permits an alteration to the priority among insured parties in the particular circumstances specified in it, to a general appeal to a policy found elsewhere than in the section. The Court is not, of course, permitted to disturb the priorities that would otherwise apply under s 556 of the Corporations Act unless the relevant statutory requirements are satisfied, and it seems to me they are not.
Ms Rees also raised the possibility in oral submissions that a "literal" approach to the section would allow a liquidator to defeat the purpose of the section by entering an assignment of debts owed by reinsurers to a third party. I do not accept that submission. If that course were adopted so as to defeat the operation of the section, it could readily be addressed by, for example, an approach to the Court for an inquiry into a liquidator's conduct under s 536 of the Corporations Act. It is, in any event, clear that that question does not arise in this case, since it is common ground between the parties, and apparent from the facts, that the liquidator's entry into the relevant arrangement was an entirely proper course in the circumstances of the liquidation.
In summary, it seems to me that the relevant payment under the Assignment Agreement was made, not under the contract of reinsurance, but in substitution for any payments that the liquidator would have received had it received a payment under the contract of reinsurance. The requirements of s 562A(1) are therefore not satisfied and that section does not apply to the relevant payment. The liquidators point out that, if an order cannot be made under s 562A(4) of the Corporations Act because no amount was received "under a contract of reinsurance", then s 562A(2)-(3) also cannot apply and amounts received under the Assignment Agreement in respect of HIHC&G's and HIHU&I's liability to the Plaintiffs will not be distributed to insurance creditors in accordance with the broad pooling approach under those sections, and the general rules of distribution under Pt. 5.6 Div. 6 of the Corporations Act, as modified by the relevant scheme, will apply. It seems to me that that is simply the consequence of the application of the section in the relevant circumstances.
If, contrary to my view, s 562A(1) of the Corporations Act applied in the relevant circumstances, the usual position would be 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), provides for the liquidator to provide each insured a proportion of their claim calculated in the manner specified. The 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." Several matters that the Court may take into account in considering whether to make such an order are specified, in an inclusive manner, in s 562A(5) of the Corporations Act.
The liquidators accepted that, if the Court was otherwise satisfied as to the relevant matters, earlier decisions of the Court based on matters which were again established by evidence in these applications would establish that it was just and equitable to make the orders sought. That question does not arise, given the finding that I have reached above that the amount was not received under a relevant contract of reinsurance. However, I should indicate that, had I been satisfied of that matter, then I would have found that it was just and equitable that it be applied in the manner proposed. The fact that the amounts claimed involved an allocation of receipts under the Assignment Agreement does not seem to me to deprive the orders sought of a just and equitable character, had the statutory basis for them otherwise been established, where the relevant allocation is a rational one and there appears to be no alternative basis on which the liquidators could proceed.

Amaca Pty Ltd (under NSW administered winding up) v McGrath

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Judgment (7 paragraphs)

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Legislation Cited (3)

Cases Cited (19)