AssetInsure Pty Ltd v New Cap Reinsurance Corporation Ltd

" Assets of the Scheme Companies 35. The principal assets of the Scheme Companies comprise cash, investments and reinsurance recoveries. Other assets include inter-company debts and other receivables. Receivables include likely recoveries by the Liquidators relating to claims under Part 5.7B of the Corporations Act ( Voidable Transaction Claims ) and from other legal proceedings ( Major Litigation Claims ). Reinsurance Recoveries 36. The Scheme Companies (and other entities within the HIH Group) are party to contracts of reinsurance which give rise to existing and potential claims for payments by reinsurers to the Scheme Companies (and other entities within the HIH Group). The contracts provide for various different types of reinsurance cover, including facultative reinsurance and treaty reinsurance. 37. Contracts of reinsurance were entered into by Scheme Companies with various reinsurers located in several countries, including Australia, the United Kingdom, the United States and in Europe. The process of entering into, and the terms of, the contracts of reinsurance vary. 38. A contract of reinsurance provides cover for the occurrence of those events by reference to which a liability is incurred by the insurer. In the absence of the commutation of a contract of reinsurance, the entitlements of the Scheme Companies to reinsurance will generally accrue over a considerable period of time as liabilities are incurred by the Scheme Companies. In particular, an entitlement to recover reinsurance assets does not (unless as a result of a commutation) usually arise until an insurance claim is made and settled or finally determined. Liabilities of the Scheme Companies 39. The principal liabilities of the Scheme Companies comprise amounts owed to insurance creditors ( Insurance Liabilities ). The quantum of Insurance Liabilities is described in the Financial Reports as 'Outstanding claims'. The Financial Reports also refer to liabilities to non-insurance creditors, including related bodies corporate, tax liabilities, trade creditors, borrowings and sundry creditors (comprised of liabilities for insurance premiums paid in advance and which are refundable as a result of cancellation of the insurance policy). Insurance Liabilities 40. Liabilities under insurance policies are generally described as: (a) Agreed claims These are claims reported to the insurer and which have been finally agreed or determined. Agreed claims presently comprise approximately 35-40% of total estimated claims; (b) Outstanding claims (also described as reported claims) These are claims which have been reported to the insurer but have not been finally agreed or settled; and (c) Incurred but not reported (IBNR) These are claims by insureds under policies issued by Scheme Companies and Liquidators have not been advised. The IBNR exposure of the Scheme Companies does not include tort claims by insureds directly against a Scheme Company (although there are likely to be tort claims by third parties against insureds that will result in claims by the insureds against the Scheme Companies pursuant to the insurance policy of the insureds). The IBNR is therefore limited to circumstances which may crystallize into a claim under policies issued by Scheme Companies for which the Scheme Companies will be liable in whole or in part. Because of the nature of these claims, the assessment of the amount of IBNR requires actuarial analysis. This analysis has been undertaken in relation to IBNR of the Scheme Companies by KPMG Actuaries." 5 Some (perhaps all) of the companies have assets and liabilities in other countries, including the United Kingdom and the United States. Provisional liquidators are in office by virtue of orders made by the High Court of Justice in England in respect of four of the companies. Three of the last mentioned companies plus two others of the eight are the subject of preliminary orders made by the United States Bankruptcy Court for the purpose of preventing pursuit of claims by creditors in the United States, as well as preventing removal of assets from the United States by the liquidators. These orders are ancillary to the Australian winding up. The proposed scheme and the liquidators' application 6 It is in this context that the liquidators intend to propose an arrangement for the consideration of creditors. The arrangement is characterised as a "run-off" scheme. In that respect, its purpose is to make provision for ascertainment and payment of liabilities of each scheme company in a way considered by the liquidators to be more expeditious and more efficient (as well as less costly) than the playing out of the ordinary processes of winding up. I have been referred to several English cases in which such schemes have been seen as appropriate for the insurance companies no longer writing business: Re Osiris Insurance Ltd [1999] 1 BCLC 182, Re Equitable Life Assurance Society [2002] 2 BCLC 510, Re Anglo American Insurance Ltd [2001] 1 BCLC 755, Re Hawk Insurance Co Ltd [2001] 2 BCLC 480. The essence of a "run-off" scheme may be gleaned from the description given by Neuberger J of the arrangement proposed in the case of Osiris Insurance (which, it may be noted, was solvent and not in the course of being wound up): "The scheme would work as follows. Scheme creditors must submit information in respect of their scheme claims on or before a 'bar date', which is a date 90 days after the scheme becomes effective. If no information is submitted by a scheme creditor by the bar date, his scheme claim will be determined on the basis of the information then available to the company. Any outstanding scheme claim is to be the subject, if possible, of agreement between the scheme creditor and persons appointed pursuant to the scheme, called 'scheme supervisors' (who are independent accountants and partners of KPMG) within two months of the bar date. If the scheme supervisors want further information from the scheme creditor, then the scheme creditor is entitled to provide it notwithstanding that the bar date has passed. If any scheme claim is not agreed within two months of the bar date, it is to be referred to one of three scheme adjudicators (one of whom is a former US magistrate judge of the US District Court for the Southern District of New York and two of whom are independent actuaries and partners of English Matthews Brockman) depending upon the governing law of the specific scheme claim. The scheme adjudicator is to determine such scheme claim, and his or her determination is to be final."

The emphasis here is upon a substituted and more streamlined process of determining and quantifying creditors' claims. 7 The scheme proposed by the liquidators is designed to serve a second and no less important purpose. The intention is that there be a form of codification of rights of participation by creditors in the assets of the respective companies and that those rights will differ from the rights prevailing in the absence of the scheme. As will be seen, statutory provisions in Australia applying specifically in relation to insurers, as well as effects or apprehended effects of insolvency principles in the United Kingdom and the United States, have caused the liquidators to formulate scheme provisions which allocate assets of each company among three funds and specify the classes of creditor claims that are to be met out of the respective funds. In doing this, the liquidators have, of necessity, proceeded according to particular views about the operation of Australian statutory provision and the courses considered likely to be followed by courts in the United Kingdom and the United States in administering insolvencies of the companies in those countries. 8 The liquidators' applications for orders for the convening of meetings of creditors were heard by me on 4, 10 and 18 March 2005. Nine entities were granted leave under rule 2.13 of the Supreme Court (Corporations) Rules 1999 to be heard without becoming parties. Those entities are Amaca Pty Limited, Amaba Pty Limited, Hazelwood Power, Latrobe Power Partnership, Transfield Construction Pty Ltd, Obayashi Corporation, Transfield Pty Ltd, Transfield Philippines Inc and Perisher Blue Pty Limited. Each is or claims to be a creditor of one or more of the eight companies. In addition, Australian Securities and Investments Commission (ASIC) was granted leave to appear by counsel as amicus curiae. 9 ASIC and all the entities granted leave to be heard made submissions to the effect that the views as to the operation of relevant statutory provisions reflected in the structure of the scheme are incorrect. Some of them also submitted that it may not be prudent to rely on the views as to the attitudes likely to be taken by foreign courts (or, more precisely, the English court) that have been put into evidence. Various other matters in relation to the proposed schemes - some raised by ASIC and the entities granted leave to be heard and others raised by the court - were canvassed. On 18 March 2005, I reserved judgment on the liquidators' applications.

10 The question most extensively canvassed in submissions is whether the scheme proceeds upon a correct view of the interaction between and effects of two provisions of Commonwealth law, namely, s.116(3) of the Insurance Act 1973 (Cth) and s.562A of the Corporations Act 2001 (Cth). At the conclusion of the hearing on 18 March 2005, Mr M.B. Oakes SC, senior counsel for the liquidators, asked that the court proceed to determine that question as if it were a question for separate determination so that the liquidators might, in light of the answer, give consideration to the best way of progressing their proposal for the benefit of creditors. ASIC supported that approach, as did each of the entities granted leave to be heard. Function of the court 11 As it relates to creditors or a class of creditors of a company, s.411 causes an arrangement to become binding if four conditions are satisfied: first a meeting of creditors or the relevant class of creditors is convened in accordance with an order made by the court under s.411(1); second, the arrangement is agreed to at that meeting by the particular majority of the creditors or class of creditors specified in s.411(4)(a)(i); third, the arrangement is approved by the court under s.411(4)(b); and, fourth, an office copy of the second order is lodged with ASIC under s.411(10). 12 The present application is concerned with the first of these conditions. The court is asked to make, in relation to each of the eight companies, an order convening a meeting of the creditors of the company so that those who choose to attend or be represented at the meeting may decide whether or not to agree to the proposed arrangement. 13 The function of the court upon such an application is well settled. I summarised the matter thus in Re Westfield Holdings Ltd (2004) 49 ACSR 734 (a case involving a members' scheme): "The court's role on a s.411 application of this kind has been described in a number of cases. According to the formulation adopted by Santow J in Re NRMA Insurance Ltd (2000) 33 ACSR 595, the court must see, on the material placed before it, that the proposal fits within the statutory concept of arrangement or compromise, that there will be available to members all the main facts relevant to the exercise of their judgment, that ASIC has had a reasonable opportunity to examine the proposal and that the scheme is so conceived and presented as to that structure, purpose and effect that there is no apparent reason, so far as can be foreseen, why it should not, in due course, receive the court's approval if the necessary majority of members' votes is achieved. To substantially similar effect are observations of Austin J in Re GIO Building Society Ltd (2001) 39 ACSR 77, French J in Re Foundation Healthcare Ltd (2002) 42 ACSR 252 and Parker J in Re Ranger Minerals Ltd (2002) 42 ACSR 582. Slightly different, but by no means conflicting, are the criteria enunciated by Emmett J in Re Central Pacific Minerals NL [2002] FCA 239 and repeated in the following terms by Conti J in Re CSR Ltd (2003) 45 ACSR 34: '(i) the likelihood or otherwise that the court will approve the scheme of arrangement, if the statutory majority of shareholders is achieved at the proposed scheme meeting; (ii) whether there has been compliance with such preliminary matters as are relevant to the holding of the meeting; (iii) where there will be sufficient disclosure, to those persons and entities who will be affected by the scheme of arrangement, of its detail and effects; and (iv) whether there has been reasonable opportunity for the commission to examine the terms of the scheme of arrangement.' " 14 A source of the aspect focussing on the likelihood or otherwise of the court's approval of the scheme being given is the judgment of Street CJ (with whom Hutley JA and Samuels JA agreed) in F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69. The Chief Justice said (at p.72): "The approach taken upon a summons [for orders for the convening of meetings] is that the court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that, if it achieves the statutory majority at the creditors' meeting the court would be likely to approve it on the hearing of a petition which is unopposed." 15 In the present case, the main focus of the court has been upon the question whether the proposal is, as to its structure, purpose and effect, of such a kind and quality that there is no apparent reason why it should not, in due course, receive the approval of the court if the necessary majority of creditors' votes is achieved. The aspect of that question concerned with the particular statutory provisions I have mentioned has received special attention to this point. The scheme in outline 16 It is proposed that the provisions contained in a single scheme document will, by the means provided for in s.411 of the Corporations Act, become binding on the liquidators of each of the eight companies and the creditors and contributories of that company. Eight schemes in identical terms are thus envisaged, although it is acknowledged that the statutory pre-conditions may be satisfied in some cases but not others so that the scheme comes to apply in the winding up of only some of the eight companies. 17 The provisions of the scheme are such that it will become effective, according to its terms, in respect of a particular company only if: (a) an office copy of an order of this court under s.411(4)(b) has been lodged with ASIC; (b) where the company is one in respect of which the English court has appointed provisional liquidators - an office copy of an order of the English court sanctioning the scheme has been delivered for registration to the Registrar of Companies in England and Wales as required by s.425(3) of the Companies Act 1985; and (c) where the company is one in respect of which a preliminary order of the United States Bankruptcy Court is in place - that court has entered a permanent injunction order which "gives full force and effect in the US to the Scheme and, among other things, permanently restrains any action inconsistent with the Scheme" (whether any order made by the United States court answered that description would no doubt be a question of construction to be addressed at the time). 18 When such of those events as are applicable in relation to a particular company have happened, the scheme is, in its own words, "effective in respect of" that company. The condition concerning the English court makes it clear that, in the case of a company administered by provisional liquidators under the United Kingdom legislation, the scheme will not be operative according to its terms unless it becomes binding under both the Corporations Act 2001 (Cth) and the Companies Act 1985 (Eng). The process envisages that one meeting of creditors will be convened in conformity with orders of the two courts. I do not see that as presenting any difficulty from the perspective of the Australian legislation: see generally, D.M.J. Bennett, "Multi-State Schemes of Arrangement" (1978) 52 ALJ 320. 19 In the case of a company in respect of which the United States Bankruptcy Court has exercised jurisdiction, the scheme will not be operative, according to its terms, unless a permanent injunction is ordered by that court and the order is entered. 20 A consequence of these provisions with respect to the English and United States courts is that the scheme in relation to a particular company may achieve binding force by virtue of s.411(4) but in such a way that its operation is, by its own terms, in suspense unless and until each of the foreign courts makes a particular order. As a general rule, a court exercising jurisdiction under s.411 does not grant approval under s.411(4)(b) unless the scheme can be seen to be of such a kind that, once that approval has been given, the scheme has a self-sufficient and self-executing operation free from subsequent decision making as to its terms and efficacy. I do not, however, regard that principle as offended in a case where some other court has jurisdiction in relation to part of the relevant subject matter and a provision of the scheme suspends its substantive commencement until that jurisdiction has been exercised in a way precisely defined by the scheme. 21 The operative provisions of the scheme are complex. It will be necessary to go into the provisions about marshalling of assets and liabilities in some detail. Those provisions are concerned with what I have termed the second purpose of the scheme. In relation to the provisions about ascertaining and assessing claims (the "run-off" aspect of the scheme), it is sufficient to quote the brief outline contained in Mr McGrath's affidavit: "The Schemes make provision for: (a) the administration of the Schemes by scheme administrators ( Scheme Administrators ). The Scheme Administrators will be myself, Mr Riddell (one of the UK Provisional Liquidators) and Christopher John Honey, a registered liquidator and partner of McGrathNicol+Partners who has been extensively involved in the liquidation of the Scheme Companies. The Schemes make provision for the appointment of additional Scheme Administrators who must be registered liquidators; (b) a cut-off date for the making of claims under the Schemes by which date the Liquidators presently estimate that many of the claims of creditors will have been made and interim dividends paid to creditors ( Estimation Date ); (c) the continuation of the run-off of the insurance business of the Scheme Companies until the Estimate Date ( Run-Off Period ); (d) after the Estimation Date, any outstanding claims to be subject to an estimation process; (e) a stay of proceedings during the Run-Off Period with the right on the part of a creditor to commence proceedings if claims are not agreed within six months after service by the creditor of a Notice of Litigation on the Scheme Company; (f) interim payments to be made to creditors during the Run-Off Period on the basis that sufficient assets are reserved for future expected costs and claims after taking into account future expected asset realisations; (g) the assets of the company to be distributed in accordance with particular applications of the legislative provisions affecting the windings up, in particular s116(3) of the Insurance Act and s562A of the Corporations Act; (h) following the Estimation Date, and unless claims are agreed, claims to be referred to a scheme adjudicator for adjudication. The scheme adjudicator will be a qualified actuary who is bound to perform his or her duties under the Schemes by separate contract with the Scheme Companies; (i) the windings up to continue, subject to the operation of the Schemes; (j) the appointment of creditors' committees; (k) the operation of set-off including particular provisions in respect of Lloyd's syndicates; (l) claims to be made in the currency of the contract." 22 Mr McGrath says that the scheme adopts many of the features of schemes implemented in relation to insolvent insurance companies in the United Kingdom. This, it seems to me, is true of the "run-off" aspect. But the parts of the scheme dealing with marshalling of assets and liabilities and the application of assets towards discharge of liabilities raise particular Australian issues calling for detailed examination in the light of relevant statutory provisions. The statutory context 23 Subdivision D of Division 6 of Part 5.6 of the Corporations Act contains fifteen sections which define the order in which debts and claims proved in a winding up are to rank inter se and, in some cases, direct that certain property be made preferentially available to meet certain claims. I shall refer to these provisions as "the Corporation Act priority provisions". 24 The first of these provisions is s.555. It lays down the general rule of pari passu participation by creditors in a winding up. It says that, except as otherwise provided by the Act, debts and claims proved in a winding up "rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionately". The debts and claims to be admitted to proof are determined in accordance with the provisions in Subdivisions B and C of Part 5.6, the general rule under s.553(1) being that those the circumstances giving rise to which occurred before the "relevant date" (see paragraph [3] above) qualify to be admitted, subject to other provisions of Division 6 of Part 5.6. 25 The second of the Corporations Act priority provisions is s.556(1). It says that, subject to Division 6 of Part 5.6, the debts and claims it lists in fourteen separate paragraphs are to be paid in priority to all other unsecured debts and claims. Each of the fourteen paragraphs except the first begins with the word "next", making it clear that the paragraphs fix an order of priority among the several sub-categories of the category afforded the priority conferred by s.556(1). Section 559 says that debts and claims within each such sub-category rank equally among themselves and must be paid in full unless the property of the company is insufficient to meet them, in which case they must be paid proportionately. 26 The other Corporations Act priority provisions requiring comment are s.562 and s.562A. The former deals with the application of insurance proceeds in respect of liabilities of the company to third parties where those liabilities are covered by the insurance. Section 562 is not directly relevant to the matters under discussion, although it will be necessary to refer to it in the discussion of s.562A. 27 Section 562A and its effects are central to the operation of the scheme. Section 562A is as follows: " 562A Application of proceeds of contracts of reinsurance (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: 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." 28 The Corporations Act is not the only statute relevant to the winding up of the companies with which I am concerned. As I have foreshadowed, it is necessary to refer also to s.116 of the Insurance Act 1973 (Cth): "116. Body corporate not to carry on insurance business after commencement of winding up (1) If a body corporate that is authorised under this Act to carry on insurance business is begun to be wound up: (a) the body must not carry on insurance business after the date of commencement of the winding up; and (b) APRA must cause to be published in the Gazette a notice stating that, because of the commencement of the winding up, the body is no longer permitted to carry on insurance business. (2) A body corporate is not guilty of a contravention of subsection (1) by reason only that it is carrying on business for the purpose of discharging liabilities assumed by it before the date of commencement of the winding up. (3) In the winding up of a body corporate authorized under this Act to carry on insurance business, or in the winding up of a supervised body corporate, the assets in Australia of the body corporate shall not be applied in the discharge of its liabilities other than its liabilities in Australia unless it has no liabilities in Australia. (4) Section 31 has effect for the purposes of this section. (5) Nothing in this section affects the validity of a contract entered into by a body corporate after it is commenced to be wound up. (6) This section has effect and shall be complied with notwithstanding anything in any law of a State or Territory." 29 I also quote relevant parts of s.31 of the Insurance Act 1973 (Cth): " 31 Liabilities (1) In this Part, unless the contrary intention appears, a reference to liabilities of a body corporate includes a reference to provision for liabilities made in its accounts, or directed in accordance with this section to be made, but does not include: (a) a liability in respect of share capital; or (b) where the body corporate is registered under the Life Insurance Act 1995 , a liability that is, in accordance with that Act: (i) referable to a class of life insurance business carried on by the body corporate in respect of which it has established a statutory fund under that Act; or (ii) charged on any of the assets of such a statutory fund. (2) For the purposes of this Act, a body corporate carrying on insurance business shall make in its accounts provision in respect of liabilities.

... (4) For the purposes of this Part, where a liability is undertaken by a body corporate under: (a) a contract of insurance (including reinsurance) made in Australia or in respect of which a proposal was accepted or a policy issued in Australia, not being a contract: (i) that relates only to a liability contingent upon an event that can happen only outside Australia, not being a liability that the body corporate has undertaken to satisfy in Australia; or (ii) where the body corporate carries on insurance business both in and outside Australia, that relates only to a liability that the body corporate has undertaken to satisfy outside Australia; or (b) a contract of insurance (including reinsurance) made outside Australia or in respect of which a proposal was accepted or a policy issued outside Australia where any part of the negotiations or arrangements leading to the making of the contract, to the acceptance of the proposal or to the issue of the policy took place or were made in Australia, being a contract: (i) that relates to a liability contingent upon an event that can happen only in Australia; or (ii) where the body corporate carries on insurance business both in and outside Australia, that relates to a liability that the body corporate has undertaken to satisfy in Australia; that liability is a liability in Australia." Marshalling of assets and liabilities under the scheme 30 The terms of each scheme, as eventually propounded by the liquidators, are those in the document initialled and dated by me on 10 March 2005 which is marked "Substituted Version as Noted in Court" and has been placed in the court file as Exhibit A. Part H of that document is headed "Application of the Assets of the Scheme Companies". It is appropriate to summarise and comment on the Part H provisions. 31 The first provision is clause 30.1. It deals with what is termed the "State Cut-through Legislation", being the State and Territory legislation dealt with in my judgment in HIH Casualty & General Insurance Ltd v Building Insurers' Guarantee Corporation Ltd (2003) 202 ALR 610. The clause states that nothing in the scheme affects the operation of that legislation. It therefore raises no issue of difficulty. 32 Clause 31 provides for the "Scheme Assets" of each company to be allocated among three funds. "Scheme Assets" are the totality of the relevant company's assets. The funds are designated Fund 1, Fund 2 and Fund 3. The provisions identifying the assets to be allocated to a particular fund also define the liabilities that are to be met out of that fund and prescribe the manner of application of the fund assets towards satisfaction of those liabilities. 33 Clause 32.1 says that Fund 1 is to consist of Scheme Assets that are "Australian Assets", that is, those "that on the Record Date, are 'assets in Australia' within the meaning of that term in s.116(3) of the Insurance Act determined in accordance with clause 32 [scil: 32.2]" (the "Record Date" is 27 August 2001, the date of commencement of the winding up; and the "Insurance Act" is the Insurance Act 1973 (Cth)). Clause 32.2, after confirming that the question whether a Scheme Asset is an Australian Asset is to be determined as at 27 August 2001, says: "The Scheme Administrators shall determine that a Scheme Asset is an Australian Asset in accordance with the application of the principles of private international law. In making such a determination, unless the principles of private international law require a contrary treatment in relation to any particular asset as at the Record Date: (a) receipts from reinsurers incorporated in Australia shall be Australian Assets; (b) receipts from reinsurers not incorporated in Australia, but who carried on business in Australia on the Record Date, shall be Australian Assets; and (c) receipts from reinsurers not incorporated in Australia and not carrying on business in Australia on the Record Date, shall not be Australian Assets."

There is then a statement that "[a]ny conversion of a Scheme Asset to cash (or money in any other form) after the Record Date shall retain the classification of the Scheme Asset as at the Record Date". This seems to be intended as an indication that a Scheme Asset arising by reason of the conversion into money of a Scheme Asset which, at the Record Date, does not consist of money has the same character, for the purposes of clause 32.2, as the Scheme Asset from which it is derived. 34 Clauses 32.1 and 32.2 seem to me to raise something of a dilemma in that assets are to be treated as Australian Assets if they are "assets in Australia" within the meaning of the s.116(3) Insurance Act and the Scheme Administrators, applying to particular rules set out in clause 32.2, determine them to be assets in Australia. The dilemma will be real if the rules in clause 32.2 are inconsistent with the principles to be applied in determining what are "assets in Australia" for the purposes of the Insurance Act. I shall return to this matter. 35 Clause 32.3 defines "Fund 1 Liability" as "an Established Scheme Claim that is an Australian Liability". An "Established Scheme Claim" is a "Liability" (in the broad sense defined in clause 1.1) that is an "Australian Liability". Clause 32.4 describes the process for determining whether a particular "Established Scheme Claim" is an "Australian Liability": "The Scheme Administrators shall determine that an Established Scheme Claim is an Australian Liability as follows: (a) all Established Scheme Claims which are liabilities to indemnify insured persons against losses occurring in Australia will be Australian Liabilities; (b) all Established Scheme Claims which are to be satisfied in Australia will be Australian Liabilities; (c) all Established Scheme Claims which otherwise are liabilities in Australia within the meaning of s 31(4) of the Insurance Act will be Australian Liabilities; and (d) all Established Scheme Claims which are liabilities for which there should be assets in Australia available to meet them will be Australian Liabilities; and (e) no other Established Scheme Claims shall be Australian Liabilities." 36 Clause 32.5 then says how Fund 1 is to be applied: "Subject to clause 35, Fund 1 of each Scheme Company shall be applied, after deduction of the Fund 1 Costs, in the following order: (a) payment of Priority Claims which are Fund 1 Liabilities; (b) payments in respect of Threshold Liabilities which are Fund 1 Liabilities; and (c) payment of Fund 1 Liabilities (other than Threshold Liabilities) pro-rata." 37 The "Fund 1 Costs" are, in essence, such of the costs and expenses of operating the scheme as are incidental to getting in the Australian assets and something described as "the Australian run-off costs", together with a proportion of "Indirect Costs" corresponding with that which the Fund 1 Liabilities bear to the excess of the Fund 3 Liabilities over the Fund 1 Liabilities. The definition of "Fund 1 Costs" is as follows: "[S]uch of the Scheme Costs of or incidental to: (a) getting in the Australian Assets; (b) the Australian run-off costs including the costs of or incidental to investigating, defending, negotiating and agreeing or otherwise determining the Fund 1 Liabilities; and such amount of the Indirect Costs as are in the same proportion as the amount of the Fund 1 Liabilities bears to the amount by which the Fund 3 Liabilities exceed the Fund 1 Liabilities." 38 Clause 35, to which clause 32.5 is expressed to be subject, defines the way in which creditors with claims upon several funds are to be dealt with. I shall consider it after summarising the provisions with respect of Fund 2 and Fund 3. 39 Fund 2 is to consist of some (but not all) of the Scheme Assets that are amounts received by a Scheme Company "under a Contract of Reinsurance under which the relevant Scheme Company is insured against liability to pay amounts in respect of an Insurance Contract". The capitalised terms are defined in a way that may be accepted as causing them to have meanings corresponding with those of equivalent terms in s.562A of the Corporations Act. The assets that might compendiously be called "reinsurance recovery amounts" placed within Fund 2 do not represent all reinsurance recovery amounts of the particular company. Excluded by clause 33.1 are amounts determined to be "Australian Assets" in accordance with clause 32.2 (already noticed), amounts determined to be "UK Assets" in accordance with clause 33.2, amounts determined to be "US Assets" in accordance with clause 33.3 and amounts which are paid to the liquidators under clause 9.5 unless they are paid back by the liquidators to the scheme administrators. 40 Clauses 33.2 and 33.3 require the Scheme Administrators to classify particular reinsurance recovery amounts as "UK Assets" or "US Assets" if the provisions of private international law give them that character. Leaving to one side the aspect concerning clause 9.5 (which is of a mechanical nature related to applications under s.562A of the Corporations Act not requiring attention at this point), the effect of the exclusions provided for in clause 33.1 is, in general terms, to cause Fund 2 to consist of reinsurance recovery amounts that are not, in accordance with the scheme itself, classified as Australian Assets, UK Assets or US Assets. 41 The items towards which Fund 2 Assets are to be applied are identified in clause 33.4. There is reference there to a "Fund 2 Liability" as being an Established Scheme Claim that the Scheme Administrators determine to be "a liability pursuant to an Insurance Contract entered into by or on behalf of a Scheme Company as insurer or in relation to which a Scheme Company has assumed any liability as insurer". (No timing factor is expressed here but appears to be introduced by the definition of "Insurance Contract" which refers to the Record Date but, at the same time, introduces an element of uncertainty by referring only to contracts entered into by Scheme Companies and not to those entered into on their behalf or those under which they assume any liability as insurer.) 42 Subject to clause 35, Fund 2 is to be applied in the order stated in clause 33.5, that is, first, in meeting such of the costs and expenses of operating and administering the scheme as are "incidental to getting in Fund 2", second, in meeting such of the Fund 2 liabilities as are Threshold Liabilities and, third, in meeting the remainder of the Fund 2 liabilities. 43 Fund 3 is the residual fund. It is to consist of all Scheme Assets other than those in Fund 1 and Fund 2. Having regard to the exclusion from Fund 2 of reinsurance recoveries that are UK Assets and US Assets and the allocation to Fund 1 of only reinsurance recoveries that are Australian Assets, the US and UK components of reinsurance recoveries will, by default, fall into Fund 3. 44 Clause 34.2 makes provision for the application of Fund 3 towards meeting, first, the "Fund 3 Costs" which are costs of getting in Fund 3 (plus certain other costs associated with Fund 3); second, Priority Claims that are Fund 3 Liabilities; third, Threshold Claims that are Fund 3 Liabilities and; fourth, all other Fund 3 Liabilities pro rata. The expression "Fund 3 Liability" is defined by clause 1.1 as simply "an Established Scheme Claim" but I think the intention is that it be confined to such Established Scheme Claims as are not Fund 1 Liabilities or Fund 2 Liabilities. This would be in accordance with the residual nature of Fund 3 and I approach the matter on that basis. 45 In the application of each of Fund 1, Fund 2 and Fund 3, priority is afforded to such "Priority Claims" as are, as the case may be, Fund 1 Liabilities, Fund 2 Liabilities or Fund 3 Liabilities, with the former taking precedence over the latter. In the case of Fund 1 and Fund 3, next priority is given to such "Threshold Liabilities" as are Fund 1 Liabilities or Fund 3 Liabilities. "Priority Claim" means "any debt or claim against a Scheme Company described in ss.556 and 562 of the Corporations Act determined on the basis that the Record Date is the relevant date". Sections 556 and 562 are, of course, provisions affording priority to certain claims in a winding up and the intention seems to be (although perhaps not expressed as clearly as it might be) that the system of priorities embodied in those sections will, by force of the scheme, apply in relation to the assets of a particular fund and the liabilities that are allocated to that fund. 46 A "Threshold Liability" is "any Liability that becomes a Threshold Liability in accordance with clause 23.1". As previously noted "Liability" is defined as meaning, in essence, any debt or claim. The definition of "Threshold Liability" (… means any Liability that becomes a Threshold Liability in accordance with clause 23.1") suggests that clause 23.1 contains a mechanism for causing certain debts and claims to become "Threshold Claims". What clause 23.1 in fact does is to enable the scheme administrators to treat with creditors whose claims are not more than $50,000 with a view to having them accept some agreed sum in satisfaction of the "Liabilities" owed to or claimed by them. The aim is to provide a means of settling some small claims expeditiously by negotiation. If such a person accepts an offer made by the administrators, that person's "Established Scheme Claim" is a "Threshold Liability". This is stated in clause 23.3. The intention seems to be that, once this process has been undertaken, the "Threshold Liability" is of the amount for which the administrator's offer is accepted, rather than the amount of the "Established Scheme Claim" that has become a "Threshold Liability". The words do not actually say this, but I approach the matter on the basis that they will be appropriately amended. 47 The approach with respect to each of Fund 1 and Fund 3 may thus be seen to be that each is applied, first, in meeting in full the costs allocated by the scheme provisions to the particular fund (Fund 1 Costs or Fund 3 Costs), second, in meeting from the fund according to the priorities they are given by s.556 and s.562 claims of the description with which the fund is concerned (Fund 1 Liabilities or Fund 3 Liabilities) and which are afforded priority by those provisions, third, in paying amounts involved in compromises reached by the scheme administrators with creditors having claims with which the fund is concerned (Threshold Liabilities) and, fourth, towards pro rata discharge of remaining claims with which the fund is concerned. 48 The approach with respect to Fund 2 is slightly different. First call on the fund is, as in the other cases, for costs associated with the fund. Next, the fund is to be applied towards meeting sums resulting from compromises reached by the administrators with persons having small claims of the kind with which Fund 2 is concerned (Threshold Liabilities). Third, the fund is to be applied towards meeting pro rata other claims with which Fund 2 is concerned, being, in essence, insurance contract liabilities. 49 Taken as a whole, the ways in which the three funds are to be applied exhibit features marking general points of distinction from the position that would apply in a winding up. First, each fund has thrown upon it certain costs referable to it and this is done in a way that causes those costs to enjoy first call on the fund. In the case of Fund 1 and Fund 3, these take priority over claims dealt with by s.556 rather than taking their place in the s.556 order (for example, under paragraph (a) or paragraph (dd)). The s.556 priorities are therefore postponed to a form of super-priority afforded to the fund costs. 50 The second point of distinction comes from the treatment of the Threshold Liabilities. The creditors whose claims of $50,000 or less are susceptible to compromise under the Threshold Liability process may be ordinary unsecured creditors occupying a non-preferred position; or they may be, for example, employees or persons owed injury compensation who occupy a rung on the ladder of priority created by s.556 and who thereby have Priority Claims (see s.556(1)(e) and (f)). In the first of these cases, classification of the result of the compromise as a Threshold Liability means that it will occupy a higher position on the scale of priorities than it would otherwise have enjoyed as an ordinary non-preferred debt; while in the second case, the move from Priority Claim to Threshold Liability involves a lower position on the scale of priorities. 51 The concept of "Priority Claim" is defined by reference to ss.556 and 562. Liabilities afforded, as against particular liabilities, the preferred position provided for by s.562A are therefore not within the "Priority Claim" definition. Unless either singled out for special treatment in a particular fund or subjected to the clause 23.3 compromise process and thereby given the status of Threshold Liabilities, liabilities thus preferred by s.562A will, in the application of a fund, rank with ordinary non-priority liabilities which are to be met out of that fund. 52 In the case of Fund 1, there is no provision according special treatment to s.562A liabilities. The position is therefore as I have described, namely, that s.562A liabilities payable out of Fund 1 rank with ordinary unsecured liabilities to be met out of Fund 1 unless they qualify for and attain the status of Threshold Liabilities. And this will be so even though claims referable to Fund 1 which are preferred by s.556 or s.562 will be Priority Claims ranking ahead of both Threshold Liabilities and ordinary unsecured claims referable to Fund 1. 53 In the case of Fund 2, the position is different. Fund 2 Liabilities are (or, at least, are intended to be) confined to liabilities of the s.562A kind. Some of these may attain Threshold Liability status through the clause 23.3 process. If they do, they will, in the application of Fund 2, be afforded precedence over the remaining s.562A liabilities. 54 In the application of Fund 3, s.562A liabilities, unless made Threshold Liabilities, will fall into the residual class for all remaining liabilities. This is so even though Fund 3 may include reinsurance recoveries. 55 Two provisions of the scheme (clauses 33.6 and 35.1) recognise the possibility that a person with a s.562A claim may obtain an order of court under s.562A(4) directing that an amount out of reinsurance proceeds be applied for the benefit of the person (although neither provision seems to accommodate the very broad range of possibilities presented by s.562A(4): indeed, the first of them deals only with the case of a direct receipt of a payment by the creditor pursuant to the order). The general approach is that any such benefit works to reduce the creditor's Established Scheme Claim so that participation in Fund 1, Fund 2 or Fund 3 in respect of that claim, according to whether the claim subjected to reduction is a Fund 1 Liability, a Fund 2 Liability or a Fund 3 Liability, is then on the basis of the reduced amount. 56 This leads to a consideration of the provisions of clause 35.2 concerning distributions from more than one fund. That clause is as follows: "A Scheme Creditor: (a) who is entitled to a distribution from Fund 1 shall not receive a distribution from Fund 2 until all other Scheme Creditors who are entitled to a distribution from Fund 2 have received, in respect of their Established Scheme Claims (adjusted in accordance with clause 35.1 if appropriate), a pro-rata distribution from the funds other than Fund 1 which is equal to the pro-rata distribution received by the Scheme Creditor from Fund 1; (b) who is entitled to a distribution from Fund 2 shall be treated, for the purposes of the application of Fund 1 and Fund 3, as receiving any distribution from Fund 2 in reduction of the total amount of such Established Scheme Claim for which it is entitled to a distribution from Fund 1 or Fund 3; and (c) who is entitled to a distribution from Fund 1 shall not receive a distribution from Fund 3 until all other Scheme Creditors who are entitled to a distribution from Fund 3 have received, in respect of their Established Scheme Claims (adjusted in accordance with clause 35.1 if appropriate), a pro-rata distribution from Fund 3 which is equal to the pro-rata distribution received by the Scheme Creditor from Fund 1." 57 The intent of clause 35.2(a) appears to be that a person entitled to a distribution from Fund 1 shall not be entitled to participate in Fund 2 until all other persons entitled to participate in Fund 2 have received from Fund 2 or Fund 3 or both a "pro rata distribution" which equals the "pro rata distribution" that the person concerned has received from Fund 1. The aim is, clearly enough, to ensure that pro rata participants in Fund 1 do not enter upon Fund 2 on a basis that is financially more favourable to them than that on which persons precluded from Fund 1 but admitted to Fund 2 have enjoyed from both Fund 2 and Fund 3. (The assumption in the drafting is that pro rata participation by all participants in Fund 1 will be on an equal footing but that, of course, is not so because of the priority afforded to Priority Claims in Fund 1. I pass over this as just another anomaly that requires attention). 58 Under clause 35.2(b), a person entitled to participate in Fund 2 is treated, for the purposes of participation in Fund 1 and Fund 3, as receiving any distribution from Fund 2 in reduction of the face value of the claim in respect of which there is to be participation in Fund 1 or Fund 3. 59 Likewise, under clause 35.2(c), a creditor entitled to participate in Fund 1 is not to participate in Fund 3 until all other persons entitled to participate in Fund 3 have received from Fund 3 a pro rata distribution equal to that received by the particular creditor from Fund 1. 60 The system thus appears to be one under which a person who has participated in Fund 1 but has not been fully satisfied out of Fund 1 moves to Fund 2 or Fund 3 on the basis that there must be brought into hotchpot in the calculation of entitlement in the latter fund the amount received from Fund 1; while a person who has participated in Fund 2 but has not been fully satisfied out of Fund 2 is entitled to participate in Fund 3 for the unsatisfied balance of the original claim. How this affects a creditor who becomes entitled to participate in all three funds is something that I have not sought to establish, although my general impression is that the provision does not cater adequately for that case. However, in the absence of submissions and explanation, I say no more about the point, except to note that clause 35.2 speaks of the entitlement of a "Scheme Creditor" and appears to proceed on the basis that such a person will have a claim of only one kind, whereas one person may presumably have, for example, a claim that is an Australian Liability referable to an insurance contract, a claim that is not an Australian Liability but is referable to an insurance contract, a claim that is an Australian Liability but is unrelated to an insurance contract and a claim that is not an Australian Liability and is not referable to an insurance contract, so that that one person is entitled to primary participation in each fund (albeit in respect of different debts). The question about subsequent participation in other funds would logically be addressed separately in relation to each of the residual amounts rather than simply in relation to the single "Scheme Creditor" having all four claims. 61 At some risk of over-simplification, it may be said that the intended general effect of the three funds and the directives as to their application are as follows:

1. Australian assets (including reinsurance recoveries having particular Australian characteristics) are made applicable to Australian liabilities (that is, both insurance liabilities and other liabilities), with Priority Claims ranking first, Threshold Liabilities ranking second and all other Australian liabilities (including, it seems, insurance liabilities) then ranking together pari passu.

2. Reinsurance recoveries (excluding those having particular Australian attributes as just mentioned, those determined to be UK assets and those determined to be US assets) - essentially, reinsurance recoveries that are not Australian, UK or US assets - are made applicable to insurance liabilities without territorial qualification.

3. UK reinsurance recoveries, US reinsurance recoveries and all other assets (except Australian assets and the particular reinsurance recoveries applicable under 2) are applicable to liabilities at large.

4. Successive recoveries out of the several funds in respect of a single liability are regulated in the way generally described at paragraph [60] above (I am assuming here that when clause 35.2 speaks of the entitlement of a Scheme Creditor it intends to deal separately with each entitlement of a Scheme Creditor who has several claims). Sections 116(3) and 562A 62 Central to an assessment of the scheme thus outlined is an appreciation of the extent to which its effects correspond with, or depart from, those of the statutory provisions applicable in a winding up. The scheme, as formulated, reflects certain views about the interaction of s.116(3) of the Insurance Act (Cth) and s.562A of the Corporations Act 2001 (Cth). That issue requires examination.

63 The liquidators note that, in New Cap Reinsurance Corporation Ltd v Faraday Underwriting (2003) 177 FLR 52, Windeyer J held (at [21] and following) that s.116(3) of the Act of 1973 applied to a winding up that had commenced before that provision was repealed by the General Insurance Reform Act 2001 (Cth) as of 1 July 2002. That aspect of his Honour's decision was confirmed by the Court of Appeal: see AssetInsure Pty Ltd v New Cap Reinsurance Corporation Ltd [2004] NSWCA 225. Section 116(3) applies in the way described because creditors acquire rights at the commencement of winding up in return for restrictions thereby placed upon enforcement of their debts (see paragraph [119] below) and those rights are prima facie accrued rights which are not affected by later legislative changes unless an intention that they be affected is shown. The liquidators have therefore proceeded on the basis that s.116(3), as affected by s.31, applies to the winding up of each of the eight companies with which I am here concerned. 64 Section 562A of the Corporations Act 2001 (Cth) also applies in relation to each winding up (see paragraph [27] above). As I have already mentioned, that Act came into operation on 15 July 2001 which was before the "relevant day" for each winding up (27 August 2001). There was a counterpart provision in the Corporations Laws of the States and Territories, in the form of s.562A introduced with effect from 23 June 1993 by the Corporate Law Reform Act 1992 (Cth).

65 As the submissions filed by the liquidators recognise, the interaction between s.116(3) and s.562A was considered in the New Cap Reinsurance litigation, both at first instance and on appeal. But the question arose in relation to a winding up that had commenced before the commencement of the Corporations Act on 15 July 2001. The interaction that Windeyer J and the Court of Appeal had to consider was accordingly that between a provision of Commonwealth law (s.116(3) of the Insurance Act 1973 (Cth)) and a provision of State law (s.562A of the Corporations Law). It was held, both at first instance and on appeal, that, to the extent of any inconsistency, the Commonwealth provision prevailed over the State provision. That, of course, is no more than a working out of ordinary rules of constitutional law. 66 The liquidators, in formulating the scheme, have proceeded upon views of the operation and interaction of s.116(3) and the present s.562A which they regard as indicated by the decision of the Court of Appeal in New Cap Reinsurance and, to the extent that any relevant matter did not arise for consideration by the Court of Appeal but was dealt with by Windeyer J, as indicated by his Honour's first instance judgment. Speaking of s.562A as a provision of the Corporations Act, the liquidators outline in their submissions the approaches they consider the New Cap Reinsurance judgments to make applicable: "In relation to s.562A, so long as the provision was contained in State legislation (the Corporations Law ) it could not displace s.116(3). Nor did the enactment of s.562A of the Corporations Act on 15 July 2001 give effect to a partial repeal of s.116(3). This was because: (i) of s.8(c) of the Acts Interpretation Act 1901 (Cth) which provided in effect that where an Act repealed a former Act, unless the contrary intention appeared, the repeal did not affect inter alia any accrued right under the repealed Act; (ii) the scheme of s.562A worked sensibly on the basis that it applied only to companies placed under winding up after the coming into force of the Corporations Act and did not affect rights accrued against companies wound up before that date; (iii) the old s.116(3) being legislation dealing specifically with insurance companies, was not displaced by s.562A, which dealt with companies generally: at [83] - [86], [7] and [235]; (iv) relevant transitional provisions relating to the new s.116(3) did not indicate that the legislature intended to do away with the regime set up by the old s.116(3) in respect of liquidations commenced but not concluded: [6], [92] - [96]." 67 In the obiter dicta thus referred to, Ipp JA (with whom Hodgson JA and Bryson JA agreed on this point) viewed s.562A as working "sensibly" in relation to companies placed under winding up after the coming into force of the Corporations Act. He expressed the opinion (with which the other members of the court agreed) that "s.116(3), being legislation dealing specifically with insurance companies, is not displaced by s.562A which deals with companies generally". His Honour cited Maybury v Plowman (1913) 16 CLR 468 in that connection. Ipp JA had earlier described what he regarded as an inconsistency between s.116(3) and s.562A: "Section 562A governs the payment by a wound up insurer, of amounts received by it pursuant to contracts of reinsurance, to those creditors to whom it is liable, as insurer, under contracts of insurance. The section does not confer a specific priority, in respect of such amounts, on creditors in respect of liabilities in Australia. Section 562A, therefore, is to that limited extent inconsistent with the old s 116(3) which provided that claims in respect of liabilities in Australia were to be discharged from the wound up insurer's assets in Australia, in priority to claims in respect of other liabilities." 68 The suggestion that s.116(3) of the Insurance Act is a provision with respect to "insurance companies" while s.562A of the Corporations Act deals with "companies generally" requires comment. It is true that s.116(3) is concerned with "a body corporate that is authorised under this Act to carry on insurance business". As it applies in relation to such a body corporate which is a company within the meaning of the Corporations Act, s.116(3) may therefore be said to be a provision dealing with "insurance companies". It is also true that s.562A is one of several provisions I have earlier called "the Corporations Act priority provisions" which are concerned with priorities among debts and claims proved in the winding up of any company the winding up of which proceeds under the Corporations Act. But s.562A deals with a special type of company. It applies only where the company in course of winding up is insured under a contract of reinsurance "against a liability to pay amounts in respect of a relevant contract of insurance or relevant contracts of insurance" (s.562A(1)(a)). A "relevant contract of insurance" is "a contract of insurance entered into by the company, as insurer, before the relevant date" (s.562A(8)). The section thus applies in the winding up of a company which, "as insurer", has entered into one or more "contracts of insurance". It follows that s.562A is concerned with the particular class of companies which act "as insurer". There will not be precise correspondence between the class of bodies with which s.116(3) is concerned (for example, some of them may not be "companies" for Corporations Act purposes) and the class contemplated by s.562A (for example, some of them, although "companies" writing contracts as "insurer", may not carry on insurance business in Australia). But the fact remains that both deal in a general sense with the winding up of what Ipp JA called "insurance companies", with the result that, where a particular winding up is affected by both provisions of Commonwealth law, any collision or overlap between them cannot be resolved by viewing s.562A, standing alone, as a provision of general application and s.116(3) as a provision of special or specific application. 69 But s.562A obviously forms part of a legislative scheme with respect to winding up that applies to companies generally. The dichotomy between "insurance companies" and companies generally is therefore one that plays a part in the present analysis. The legislative scheme applicable to companies generally to which I have referred, insofar as it deals with recognition and priority of claims and the order of application of assets, is found in the Corporations Act priority provisions. The approach that regards s.116(3) as a specific provision with respect to insurance companies should be adopted in dealing with questions about its interaction with the Corporations Act priority provisions (including s.562A) applying to companies generally. 70 As one of the Corporations Act priority provisions concerned with priority of debts and the application of assets, s.562A says that a liquidator must apply amounts referable to reinsurance recoveries with which it is concerned in the way it dictates and that this is to be "in priority to all payments in respect of the debts mentioned in s.556". The last-mentioned section (which is expressed to operate subject to the other provisions of Part 5.6) identifies debts and claims that are to be paid "in priority to all other unsecured debts and claims". Both s.562A and s.556 thus represent exceptions to the general rule laid down by s.555 that "all debts and claims proved in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionately". Section 562A does not deal only with priority of debts and claims. It has the added feature of directing that assets of a particular kind be applied towards the claims with which it is concerned. 71 Section 116(3) of the Insurance Act is not directly concerned with priority among claims. Its preoccupation is exclusively with the application of assets. Section 116(3) imposes a prohibition. It forbids any course of action that does not involve application of assets in Australia in discharging liabilities in Australia until either the assets in Australia are exhausted or the liabilities in Australia are fully discharged. The prohibition is upon the application of assets in Australia otherwise than as the section allows. It is not infringed unless assets in Australia are applied otherwise than in or towards the discharge of liabilities in Australia while any such liabilities exist. It is therefore not infringed if assets that are not assets in Australia are applied in or towards discharging liabilities in Australia. 72 Nothing in s.116(3) is concerned with the order of application of assets in Australia in or towards discharge of liabilities in Australia. If those liabilities were, by some means, divided into two classes and those in one class were satisfied in full out of assets in Australia before anything was paid in respect of those in the other class which, in turn, were satisfied only to the extent of ten cents in the dollar out of assets in Australia before those assets were exhausted, there would be no breach of the prohibition imposed by s.116(3): assets in Australia would not be applied otherwise than in the discharge of liabilities in Australia. 73 The next aspect of the New Cap Reinsurance judgments on which the liquidators rely is the part of Windeyer J's judgment dealing with the way in which s.116(3) operates with respect to the application of Australian assets. That matter was not touched upon by the Court of Appeal. At paragraph [34] of his judgment, Windeyer J expressed the opinion that s.116(3) requires all liabilities in Australia to be "treated equally". That led his Honour to conclude (at paragraph [67]) that s.562A creditors enjoyed no preferred position regarding participation in assets in Australia and that the applicable order of priority was as follows: "1. Liabilities in Australia are to be satisfied out of assets in Australia if necessary pro rata.

2. Section 562A priorities are to be satisfied insofar as they have not been satisfied under item 1 out of any balance of assets in Australia and any other assets.

3. Thereafter payments are to be made in accordance with s555 and s556 of the Corporations Act ." 74 This approach plays a fundamental part in the structure of the scheme as formulated by the liquidators. It is one of the main factors that have caused Fund 1, Fund 2 and Fund 3 to be constituted and made applicable as the scheme proposes. But I regret to say that I find myself in disagreement with Windeyer J on this point. In my opinion, s.116(3) cannot be regarded as laying down a rule of pari passu ranking with respect to liabilities in Australia, so far as application of assets in Australia is concerned. The prohibition s.116(3) creates is not disobeyed if, when assets in Australia are applied in or towards the discharge of liabilities in Australia, those liabilities are first ranked according to the priorities they are afforded by some other law. 75 If the relevant winding up is, as in the present case, governed by the Corporations Act 2001 (Cth), both the Corporations Act priority provisions and s.116(3) of the Insurance Act will be observed if the following procedure is adopted:

Step 1: Amounts received by the company or liquidator as mentioned in s.562A(1)(b) which are assets in Australia for the purposes of s.116(3) are applied in accordance with s.562A towards satisfaction of those amounts payable under "relevant contracts of insurance" (within the meaning of s.562A) which represent liabilities in Australia for the purposes of s.116(3).

Step 2: Amounts received by the company or liquidator as mentioned in s.562A(1)(b) which are not assets in Australia for the purposes of s.116(3) are applied in accordance with s.562A towards satisfaction of those amounts payable under "relevant contracts of insurance" (within the meaning of s.562A) which do not represent liabilities in Australia for the purposes of s.116(3) and any amounts payable under "relevant contracts of insurance" which do represent liabilities in Australia but have not been fully satisfied at Step 1. Step 3: Assets which are assets in Australia for the purposes of s.116(3), excluding any part thereof applied at Step 1, are applied towards satisfaction of such of the debts proved in the winding up which are liabilities in Australia for the purposes of s.116(3) as have not been fully satisfied at the conclusion of Step 2, with those debts being ranked according to the priorities given to them by the Corporations Act priority provisions.

Step 4: Remaining assets (that is, any amounts received by the company or liquidator as mentioned in s.562A(1)(b) that remain at the conclusion of Step 2, any assets in Australia that remain at the conclusion of Step 3 and all assets not contemplated by Steps 1 to 3) are applied towards satisfaction of such of the debts proved in the winding up as have not been met in full at the conclusion of Step 3, with those debts being ranked according to the priorities given to them by the Corporations Act priority provisions. 76 This sequence of steps does not offend against the prohibition in s.116(3) because assets in Australia are not capable of being applied towards discharge of liabilities that are not liabilities in Australia until the conclusion of Step 3, at which point, if assets in Australia have not been exhausted, liabilities in Australia will be fully satisfied. The sequence envisaged does, in one respect, tend to disrupt the order of priorities under the Corporations Act priority provisions. While it does not allow any category dealt with by the Corporations Act priority provisions to attain priority over or equality with any category to which it is subordinated by one of those provisions, it does have the effect that each of those categories is itself separated into two parts, with one part (Australian) enjoying the benefit flowing from the statutory prohibition in s.116(3). That, however, is no more than a legitimate playing out of the status of s.116(3) as a specific provision with respect to the winding up of insurance companies and the Corporations Act priority provisions as provisions of general application to the winding up of companies at large. 77 Subject to three matters of refinement to which I am about to come, the sequence of steps outlined at paragraph [75] above was accepted by all of Amaca Pty Limited, Amaba Pty Limited, Hazelwood Power, Latrobe Power Partnership, Transfield Construction Pty Ltd, Obayashi Corporation, Transfield Pty Ltd, Transfield Philippines Inc and Perisher Blue Pty Limited as reflecting an appropriate reconciliation of s.116(3) and s.562A. It was at first not so accepted by ASIC which, in a written submission, on a somewhat abbreviated but nevertheless consistently drafted earlier version of the sequence of steps, said: "… [S]tep 2 does not cater for the need to apply all other assets in Australia, apart from reinsurance recoveries, to the discharge of liabilities in Australia by force of s.116(3) in the manner required by the Corporations Act 2001 or an appropriate scheme which ensures compliance with the requirements of s.116(3). It would be incorrect to aggregate liabilities in Australia with those not in Australia until all assets in Australia have been applied to meet liabilities in Australia in accordance with s.116(3)." 78 ASIC's original submission went on to suggest that the correct order of priorities is as follows: "(a) Liabilities in Australia that fall within section 562A are to be paid from assets being reinsurance recoveries of the body corporate in Australia as at the winding up date (paid pro rata, subject to any order under s.562A(4)). (b) Other liabilities (including the balance of s.562A(3) liabilities) in Australia, payable from the remaining assets in Australia (paid in accordance with the priorities set out in the Corporations Act 2001). (c) Remaining liabilities that fall within s.562A are payable from non Australian assets being reinsurance recoveries as at the date of the winding up (to the extent that the Australian liquidators can assert title to those recoveries or a foreign court or law recognizes the operation of s.562A or an analogue) (paid pro rata, subject to any order under s.562A(4)). (d) Other liabilities paid from non Australian assets (to the extent that the Australian liquidators can assert title to those recoveries) to be paid in accordance with the priorities set out in the Corporations Act 2001 subject to the application of foreign law." 79 This submission by ASIC was ultimately withdrawn. It nevertheless illustrates the need to emphasise an important point about the way in which s.116(3) works. Section 116(3) is not the source of a "need to apply" assets in Australia in any particular way. It produces a need to avoid applying assets in Australia except towards discharge of liabilities in Australia. Application of assets other than assets in Australia towards discharge of liabilities in Australia is not forbidden by s.116(3) which, as I have said, does no more than regulate the application of those assets that are assets in Australia. The section does not compel any matching of the totality of assets in Australia with the totality of liabilities in Australia in such a way that assets other than assets in Australia are not applied towards liabilities in Australia while there are unapplied assets in Australia. 80 The problem I perceive with the sequence (a) to (d) earlier suggested by ASIC but ultimately not pressed is that it fails to give effect to that part of s.562A which, speaking generally, directs that insurance liabilities be met out of reinsurance proceeds "in priority to all payments in respect of the debts mentioned in section 556" [emphasis added]. That directive is observed within paragraph (a) but it is disobeyed at paragraphs (b) and (c). Liabilities in Australia other than s.562A liabilities participate in paragraph (b) when other s.562A liabilities have yet to achieve participation at paragraph (c). The s.562A liabilities dealt with under paragraph (c) are, for that reason, not dealt with "in priority to all payments in respect of the debts mentioned in section 556" as s.562A itself requires. 81 I have already mentioned the need for refinement of the sequence of basic steps outlined at paragraph [75] above for the purpose of giving effect simultaneously to both s.116(3) of the Insurance Act and the Corporations Act priority provisions (including, in particular, s.562A). The need for refinement arises in three ways. First, it is necessary to determine the appropriate basis for "matching" or "pooling" under s.562A - that is, for identifying the amounts payable under "relevant contracts of insurance" to which particular amounts received as mentioned in s.562A(1)(b) are to be allocated. Second, it is necessary to refer to the way in which orders of the court under s.562A(4) are to be accommodated. Third, there is a need to define the basis on which debts dealt with at one step in the sequence of steps by way of partial satisfaction only are to participate at a subsequent step or subsequent steps. Refinement - matching/pooling 82 The "matching" or "pooling" question - involving identification of the contracts of insurance which are the source of claims to be afforded the benefit of a particular contract of reinsurance pursuant to s.562A - has been considered in decided cases but is ultimately a question of construction. Three possible approaches were identified by Windeyer J at first instance in New Cap Reinsurance. He called them "narrow matching", "narrow pooling" and "broad pooling". 83 Under "narrow matching", the entitlement to a particular reinsurance recovery is regarded as accruing to those insurance creditors whose claims have actually produced the recovery, with those creditors being confined to participation in that recovery, so far as priority entitlement under s.562A is concerned. "Narrow pooling" recognises an entitlement on the part of all insurance creditors whose claims have produced reinsurance recoveries, with all such creditors participating in the totality of such recoveries by way of priority entitlement under s.562A. Under "broad pooling", all insurance creditors are regarded as entitled to priority pursuant to s.562A in the totality of reinsurance recoveries, whether or not claims under their contracts of insurance have played a part in bringing home the reinsurance recoveries. 84 Before considering Windeyer J's treatment of this subject I should refer to earlier decisions. Butterell v The Douglas Group Pty Ltd (2000) 35 ACSR 398 concerned an insurer which laid off its risks by means of reinsurance only to the extent that individual claims exceeded $350,000 each. The reinsurance was structured accordingly. Leaving aside a special case arising from s.6 of the Law Reform (Miscellaneous Provisions) Act 1946, Young J identified four possible methods of application of the reinsurance proceeds: first, for the benefits of all insured, regardless of whether the claims of any of them exceeded $350,000; second, towards the claims of those insured whose claims exceeded $350,000; third, by payment to one insured whose claim exceeded $350,000 and was the claim in respect of which the reinsurance payment was received; and, fourth, the claims of those insureds whose claims exceeded $350,000 and were notified within the year to which the reinsurance contract related. His Honour did not consider the first possibility because none of the four parties before him contended for it. The method Young J held to be applicable was the fourth: "The choice must therefore be between Mr Gleeson's submissions and Mr Gee QC's. Of the two, I prefer Mr Gee QC's. This is because Mr Gee QC's submissions take into account that with reinsurance, one is looking at an annual contract and that to just average claims over every insurance year where the policies of reinsurance may be on different terms seems to me to produce an arbitrary result just for the sake of simplicity. To my mind, the intent of the section is that "reinsurance payment" in sub-section (3) means a reinsurance payment for a particular claims year and what one does is to work out the net payments received from reinsurers in a particular year, and that each claimant in that year gets the fraction of that money as set out in sub-section (3)." 85 Young J recognised that the approach he preferred might be regarded as inconsistent with a decision of Needham J in Re Saltergate Insurance Co (No 3)[1984] 3 NSWLR 389. That, however, did not trouble his Honour since, as he said, it did not appear that the basis upon which he had determined the matter had been put to Needham J. The Saltergate case pre-dated s.562A. It was concerned with the application of s.292 of the Companies Act 1961 (now s.562 of the Corporations Act) to reinsurance. The decision turned on the wording of the section and is of no real assistance in the present context. 86 Section 562A was briefly considered in passing in Pace Tasmania Pty Ltd v FAI General Insurance Co Ltd (2001) 10 Tas R 276. Cox CJ expressed some preference for a narrow matching or narrow pooling approach. 87 In New Cap Reinsurance, Windeyer J determined the matter before him by preferring broad pooling. After considering the Harmer Report and the Butterell, Saltergate and Pace cases, his Honour said: "My conclusion is that s562A(1) determines the existence of a fund and that s562A(2) and (3) determine the claimants on the fund. If the claimants were to be restricted to narrow pooling claimants then the obvious way to have achieved this would have been to put the word "such" before the words "relative contract of insurance" instead of the indefinite article "a". I consider that the inclusion of s562A(5)(a) supports this conclusion. I have considered carefully the decision in Butterell . The evidence is that while policies of reinsurance are annual contracts their periods do not necessarily co-incide with insurance years under the policies reinsured. The decision I favour makes calculation relatively easy - a decision based on annual risks and recoveries make it very difficult if not impossible. However, as Young J pointed out simplicity does not determine construction. Broad pooling was not argued before him but was argued on behalf of the first defendant before me. I consider it is the correct method." 88 I respectfully agree. The approach Windeyer J endorsed is, in my view, dictated by the words of the legislation. Section 562A(1) defines the circumstance in which the section applies, that is, where the company is insured under a contract of reinsurance against liability to pay amounts under one or more contracts of insurance entered into by it as insurer and an amount in respect of the liability under the contract (or contracts) of insurance is received by the company or the liquidator under the contract of reinsurance. Sections 562A(2) and (3) then provide that the net proceeds of the reinsurance are to be paid, in one case, in meeting "the total of all the amounts that are payable by the company under relevant insurance contracts" and, in the other, "to each person to whom an amount is payable by the company under a relevant contract of insurance". Each provision deals with "relevant contracts of insurance" generally. The "relevant contracts of insurance" are all contracts entered into by the company as insurer before commencement of the winding up. This is the effect of s.562A(8). Neither 562A(2) nor 562A(3) distinguishes some of the contracts from the others. Nor do the words suggest or imply any basis for distinction. In particular, the word "relevant", in the expression "relevant contracts of insurance", does not direct attention to some connection or relationship between the contracts of insurance in question and the reinsurance producing the payment. The use of that word does not impose some qualification to the effect that, in order to qualify under the section, particular contracts of insurance must have some "relevance" to the reinsurance. The word "relevant" is no more than part of the label given to the term defined by s.562A(8) and employed elsewhere in s.562A. 89 Steps 1 to 4 at paragraph [75] above require refinement to accommodate the "broad pooling" basis preferred by Windeyer J in New Cap Reinsurance. Refinement - accommodating s.562A(4) 90 Section 562A(4) allows the court to make an order to the effect that the generally applicable provisions in ss.562A(2) and (3) are to have modified operation in a particular case. Such an order may be made on the application of a person to whom an amount is payable under a relevant contract of insurance. That person may seek, in effect, treatment more favourable than that provided for in s.562A(2) and s.562A(3), contending that considerations of the kind described in s.562A(5) (or other circumstances) make it "just and equitable" that there be a departure from the general rule. 91 If orders of this kind had been made, the effects of the orders would have to be accommodated at Step 1 and Step 2. The orders would affect the division of reinsurance proceeds among persons with established claims under relevant insurance contracts. To the extent that an order gave a particular person more than a pro rata share of those proceeds, the greater entitlement to participate in the proceeds would be recognised. After the effect of all such orders affecting the net proceeds of particular reinsurance had been accommodated, the proceeds would be divided, consistently with s.562A(3), among persons insured under relevant contracts of insurance in proportion to the amounts payable under those contracts of insurance, assuming that funds were insufficient to permit payment in full of those amounts as envisaged by s.562A(2). Steps 1 to 4 outlined at paragraph [75] above require refinement to accommodate these principles. Refinement - residual participation (s.562A priority claims) 92 The description of Steps 1 to 4 does not refer to the basis on which a claim only partially satisfied at one step qualifies for participation, as to its residue, at subsequent steps. The question arises separately in relation to claims having the benefit of s.562A and claims not dealt with by s.562A. I consider s.562A claims first, beginning with a discussion of the way in which claims of that kind relate to claims not dealt with by s.562A. 93 The general issue requiring attention here is best illustrated by an example. Assume that available assets in the winding up are $100 net insurance proceeds and $30 other assets. Assume further that four creditors are entitled to participate in the winding up, being A with an insurance contract debt of $125, B with an insurance contract debt of $75, C with a debt of $120 unrelated to an insurance contract and D with a debt of $80 also unrelated to an insurance contract debt. After A and B between them absorb the net reinsurance proceeds of $100 ($62.50 for A and $37.50 for B), the remaining aggregate of their claims will be $100 (A: $62.50; B: $37.50). On what basis should these residuary debts of $62.50 and $37.50 participate in the remaining $30 of assets along with the debts of C and D ($120 and $80) in respect of which no allocation has yet been made? 94 This matter was addressed by Windeyer J (but not by the Court of Appeal) in New Cap Reinsurance (at [64]). His Honour referred at once to s.562A(6) which, as he said, "makes it perfectly clear that the priority payment under s.562A is not the only payment to which a preferred insurance creditor is entitled". He saw s.562A(6) as preserving the entitlement of the creditor concerned "to prove for the balance of the claim". That led him to the conclusion that "there does not seem to be any reason why in respect of that balance it should not be treated proportionately with all other creditors in accordance with s.555 of the Act". His Honour continued: "In other words, it would be treated in a conceptually similar way to a secured creditor under s.554E." 95 On this basis, the outcome in the hypothetical case I have outlined would be that creditors A and B, with established entitlements partially satisfied out of the net reinsurance proceeds of $100 (which were thereby exhausted), would rank for their remaining debts of $62.50 and $37.50 pari passu with C and D in respect of their debts of $120 and $80, so that the remaining assets of $30 would be allocated at the rate of 10 cents in the dollar among claims totalling $300. Total recoveries would thus be $68.75 for A, $41.25 for B, $12 for C and $8 for D. 96 At an earlier point in his judgment (and for different purposes), Windeyer J had noted the way in which equality among foreign and local creditors is, as a matter of comity, usually maintained in concurrent windings up in different jurisdictions. The approach there is one of hotchpot designed to ensure that distribution out of one estate is taken into account in determining the extent of participation in the other, with a view to ensuring that the receipts of all creditors are in a constant proportion regardless of source. The general rule in such cases was described by Lord Scott of Foscote (speaking for the Privy Council) in Cleaver v Delta American Reinsurance Co [2001] 2 AC 328 as follows: "The authorities establish the principle that if a company is being wound up in an English liquidation and also in a liquidation in a foreign country, a creditor who has proved and received a dividend in the foreign liquidation may not receive a dividend in the English liquidation without bringing into hotchpot his foreign dividend." 97 Applied to the hypothetical case, this approach would mean that creditors A and B, having received out of net reinsurance proceeds priority applications of $62.50 and $37.50 (in respect of their debts of $125 and $75), would not participate further unless and until creditors C and D had achieved the same proportionate level of allocation (50 cents in the dollar) in respect of their debts of $120 and $80. And since the remaining assets of $30 would produce only 15 cents in the dollar for C and D, the whole of those assets would be allocated to them - $18 to C and $12 to D.

98 In the hypothetical case, the different methods would thus produce different distributions of the total of $130 as follows: Creditor First Method Second Method A $68.75 $62.50 B $41.25 $37.50 C $12.00 $18.00 D $ 8.00 $12.00 99 In approaching the choice between these two possibilities (I do not think there are any others), I note that a person accorded preferential treatment under s.562A must be a creditor who has established a right of participation in the winding up by virtue of a claim against the company under a contract of insurance. Before there can be seen to be an "amount … payable by the company under a relevant contract of insurance", the person concerned must have gone through the processes necessary to show his or her provable debt. Section 562A cannot be regarded as in some unexplained way concerned with debts or claims that somehow enter into the arena of the winding up otherwise than through the gateway created by s.553 and related provisions in Subdivision A of Division 6 of Part 5.6. Thus, for example, the rules in Subdivision B of Division 6 of Part 5.6 would operate where the claim was of uncertain value or involved a foreign currency amount. 100 But once the claim to which s.562A applied had been quantified, it would enjoy a position of first priority (that is, priority over all admitted claims covered by the scale of priorities in s.556 and those afforded no priority at all) as regards access to the particular asset with which s.562A is concerned. I have suggested elsewhere (see (1990) 64 ALJ 523) that a statutory provision which, in a winding up, requires a particular class of claims to be met out of particular property in priority to all claims not within the class might be regarded as creating a charge or having the effect of a charge upon that property. The suggestion was made in relation to a now superseded provision of banking legislation directing that, if an Australian bank became unable to meet its obligations or suspended payment, "the assets of the bank in Australia shall be available to meet that bank's liabilities in Australia in priority to all other liabilities of the bank". The thesis that a statutory directive of this kind creates a charge or has the same effect as a charge recognizes that the essence of an equitable charge is the creation by a debtor of a right for the creditor to resort to particular property to satisfy the debt (a notion explained, in relation to choses in action, in Rodick v Gandell (1852) 1 De G M & G 763 at pp.777-778).

101 Section 562A should be regarded as having this effect. It causes the admitted debt of the insured under the contract of insurance with the company in the course of being wound up to be recoverable, in priority to all other admitted claims, out of the particular asset with which it is concerned. The position of the creditor with the claim thus preferred should, in my opinion, be regarded as the equivalent of (or, at least, analogous with) that occupied by a creditor with a debt secured by a charge upon that asset.

102 In the search for guiding principle, these considerations distinguish a s.562A case from the case of proofs in concurrent windings up. In that situation, there is no suggestion of exclusive resort to particular property and the question is merely as to the equitable way of accommodating the claims of creditors with claims upon the general pool of assets being administered in two segments. For reasons I have stated, a s.562A case bears a much closer conceptual similarity to the situation where a secured creditor realises the security and, after that source of satisfaction is exhausted, joins with unsecured creditors generally in seeking the balance of the debt from the common pool.

103 I therefore accept and endorse the conclusion of Windeyer J that the balance of a proved debt covered by s.562A that remains after exhaustion of the net reinsurance recoveries applicable to that proved debt "should be treated in a conceptually similar way to a secured creditor under s.554E", so that the balance is "treated proportionately with all other creditors in accordance with s.555 of the Act". 104 On this basis, Steps 1 to 4, as I have outlined them at paragraph [75] above, would be refined by a proviso to the effect that, once the claims of creditors preferred by s.562A had exhausted the reinsurance recoveries made applicable to them by that section, any residual amount of each claim would rank as a non-priority claim in the winding up and should be treated, for the purposes of its participation along with other non-priority claims, as if the residue itself was a debt ranking pari passu with other debts. 105 Implicit in what I have just said is a proposition that should be expressly stated and explained. The proposition is that the priority created by s.562A(3) subsists only in relation to the application of the particular asset with which s.562A is concerned, with the result that, when that asset is exhausted, the priority does not apply to the residuary liability preserved by s.562A(6) and that residuary liability takes its place among ordinary unsecured and non-preferred debts. The words used in s.562A(3) are: "the liquidator must, out of the amount received and in priority to all payments in respect of the debts mentioned in section 556, pay …". This command to pay has two aspects: the payment must be both "out of the amount received" (that is, the net reinsurance recovery) and "in priority to all payments in respect of the debts mentioned in section 556". The command cannot be obeyed once "the amount received" is wholly expended. The twofold directive is then no longer operative. It cannot be suggested that, as to any unsatisfied balance of the liability under the insurance contract, the directive expressed by the words "in priority to all payments in respect of the debts mentioned in section 556" continues in force alone. This construction is, in my opinion, consistent with the legislative purpose of ensuring that creditors with admitted insurance claims enjoy the net proceeds of reinsurance recoveries in priority to all other creditors. Nothing in that purpose is offended by the notion that no priority applies to such claims once net reinsurance recoveries have been fully applied towards them. And s.536A(6) dispels any argument that the rights of the creditors concerned are merely co-extensive with the reinsurance recoveries. Any balance ranks as an unsecured and non-preferred debt. Refinement - residual participation generally 106 The next question concerns residual participation of two kinds: first, in a case where a s.562A preferred claim is not fully satisfied at Step 1 and therefore qualifies for residual participation at Step 2; and second, in a case where a claim dealt with at Step 3 is not thereby satisfied in full and qualifies for residual participation at Step 4. 107 Cases within both these classes do not involve any element of s.562A priority entailing a primary call upon particular assets. Nor does s.116(3) operate to create anything analogous with a secured position: its prohibition affords no positive hold over particular assets. 108 Because the claims of a particular kind that may be met out of particular funds at successive stages are claims of equal degree (for example, several s.562A claims no longer enjoying priority because the relevant reinsurance proceeds have been exhausted, or several claims for wages enjoying the priority given by s.556(1)(e) or several non-preferred debts) and stand in a pari passu relationship with one another, the appropriate method of treatment is by way of hotchpot in accordance with the second method discussed under the immediately preceding heading. Participation by claims of equal degree in separate funds administered in a single winding up is logically to be treated in the same way as participation by claims of equal degree in several concurrent windings up. 109 Steps 1 to 4 at paragraph [75] above require refinement by way of addition of this feature. Capacity of a Part 5.1 scheme to alter creditors' rights in a winding up 110 I turn now to the question whether an arrangement deriving binding force from s.411(4) of the Corporations Act can modify the rights, entitlements and duties that would otherwise prevail in the winding up of the body to which the arrangement relates. 111 Disregarding references to members and classes of members, s.411(4) begins as follows: "A compromise or arrangement is binding on the creditors, or on a class of creditors, … as the case may be, of the body and on the body or, if the body is in the course of being wound up, on the liquidator and contributories of the body, if and only if …" 112 When this part of s.411(4) refers, in three places, to "the body", it refers back to the opening words of s.411(1): "Where a compromise or arrangement is proposed between a Part 5.1 body and its creditors or any class of them …"

(A "company" as defined by s.9 is, of course, a "Part 5.1 body" as so defined). 113 Section 411(1) goes on to say that an application for an order for the convening of the meeting (or meetings) of creditors that is a central feature of the statutory machinery may be made by "the body or any creditor or member of the body, or, in the case of a body being wound up, of the liquidator". The necessary conditions to which s.411(4) refers (after the words "if, and only if") include a condition that, "in the case of a compromise or arrangement between a body and its creditors or a class of creditors", the compromise or arrangement is agreed to in a particular way at a meeting or meetings of creditors convened in accordance with an order under s.411(1). 114 I mention these aspects of the statutory language because they show that, while s.411 contemplates and makes provision with respect to a compromise or arrangement between a Part 5.1 body and its creditors (or a class of creditors), it does not, in the case of a compromise or arrangement of that type involving a body in the course of being wound up, cause the compromise or arrangement to be binding on the body itself. In such a case, the compromise or arrangement is binding on the body's creditors (or the relevant class of its creditors) and on the liquidator and the contributories. This is the clear effect of the word "or" appearing after "and on the body" and before "if the body is in the course of being wound up, on the liquidator and contributories of the body". 115 It was submitted by both Mr Oakes SC for the liquidators and Mr Rares SC for ASIC that "or", in that particular context, must mean "and", so that the compromise or arrangement is binding on the creditors (or class of creditors), the body itself, the liquidator and the contributories. Mr Rares said that if the body itself were not bound, creditors' claims intended to be affected and changed by an arrangement involving a company in the course of winding up would, upon any termination of the winding up, re-assert themselves as claims against the company in their original and unmodified form. 116 This aspect of s.411 dealing with creditors of a body in the course of winding up is a direct descendant of s.2 of the Joint Stock Companies Arrangement Act 1870 (Eng): "Where any compromise or arrangement shall be proposed between a company, which is, at the time of the passing of this act or afterwards, in the course of being wound up, either voluntarily or by or under the supervision of the Court, under the Companies acts, 1862 and 1867, or either of them, and the creditors of such company, or any class of such creditors, it shall be lawful for the Court, in addition to any other of its powers on the application in a summary way of any creditor or the liquidator, to order that a meeting of such creditors or class of creditors shall be summoned in such manner as the Court shall direct, and if a majority in number representing three-fourths in value of such creditors or class of creditors present either in person or by proxy at such meeting shall agree to any arrangement or compromise, such arrangement or compromise shall, if sanctioned by an order of the Court, be binding in all such creditors or class of creditors, as the case may be, and also on the liquidator and contributories of the said company." 117 Under this provision, the binding force of a compromise or arrangement extended only to "all such creditors or class of creditors, as the case may be, and also on the liquidator and contributories of the said company". There was no suggestion that "the said company" was itself in any way bound. 118 I am satisfied that the present s.411 applies, in the case of a company being wound up, in the way that the original provision of 1870 applied. The general concept is one of a compromise or arrangement between the body and its creditors or a class of them but that compromise or arrangement, if it becomes binding at all, binds the creditors (or class), the liquidator and the contributories. I am also satisfied that omission of reference to the company (or body) itself is not an error made in 1870 and not recognised since. 119 When winding up begins, creditors are denied the rights they would otherwise have to sue for their debts. They obtain instead a right to participate in a distribution in the winding up. The concept is elucidated in Motor Terms Co Pty Ltd v Liberty Insurance Ltd (1967) 116 CLR 177, particularly in the judgment of Kitto J at pp.180-181. It derives from the old law of bankruptcy: see Re Higginson & Dean; ex parte Attorney-General [1899] 1 QB 325 at p.333. Commencement of winding up marks the point at which a special regime of collection and administration of assets begins. The liquidator presides over that process. The persons interested in the estate administered by the liquidator are the creditors and the contributories. Each such group has a right to see the administration duly and properly conducted and to receive, in satisfaction of rights that existed against the company, the distribution required by the statutory provisions. The process is one of administration of assets according to a statutory scheme, not one in which rights against the company itself are pursued or enforced. If that process is terminated, the creditors revert to their original rights. 120 It follows, in my opinion, that a compromise or arrangement under s.411 which is described as one "between" a company being wound up and the creditors of that company can, because of the effect s.411(4) causes it to have, modify the basis upon which creditors participate in the winding up. Because it becomes binding on the creditors, the liquidator and the contributories, such a compromise or arrangement takes effect among the official whose duty it is to conduct the administration of assets and the two groups of persons having rights under that administration. The company or body, as an entity, is extraneous to the administration. 121 The capacity of a compromise or arrangement under s.411 to alter creditors' rights of participation under a winding up already in progress has been recognised in decided cases. An example is Re Trix Ltd [1970] 1 WLR 1421 where it was observed that the proper way to distribute assets among creditors in a winding up otherwise than strictly in accordance with the statutory order was by scheme of arrangement under the equivalent of s.411 which bound all creditors. The decision of the English Court of Appeal in Re Bank of Credit and Commerce International SA (No 3) [1993] BCLC 1590 and that of the Privy Council in Kempe v Ambassador Insurance Co [1998] 1 WLR 271 reflect the same thinking, as do some recent decisions of this court: eg, Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209; Re Switch Telecommunications Pty Ltd; Ex parte Sherman (2000) 157 FLR 158; Re Wily (as liquidator of Wire Lagoon Pty Ltd) (2003) 48 ACSR 86; Re Dean-Willcocks; Alpha Telecom (Aust) Pty Ltd (2004) 208 ALR 414 (see also Re Austcorp Tiles Pty Ltd (1991) 10 ACLC 62 and Mentha v GE Capital Ltd (1997) 154 ALR 565 at p.571). 122 The observations in these cases were concerned with the rights of creditors only. They recognise that creditors' rights of participation under a winding up may be varied as among the creditors themselves. An arrangement voted upon by creditors alone and made binding under s.411 could not enlarge the rights of creditors at the expense of contributories. If there were any such incursion upon the rights of members, the arrangement proposed would be one between the company and its members, as well as between the company and its creditors, and a meeting of members would also be required: see Re Tea Corporation Ltd [1904] 1 Ch 12. 123 There is no suggestion here of any incursion upon the rights of members. I therefore proceed on the basis that the procedures the liquidators have chosen to invoke are, in the abstract, capable of producing results of the kind they contemplate, namely, modification of creditors' rights of participation in the winding up. Because the scheme in contemplation involves the rights of creditors rather than members, it may be that limits upon the reach of Australian legislation produce the consequence that not all creditors will be effectively bound, even though Australian statute law declares them to be bound. That binding force might well not affect a debt cognisable in a foreign court (New Zealand Loan and Mercantile Agency Co Ltd v Morrison [1898] AC 349) or a debt the discharge of which is governed by a foreign law (Re Bulong Nickel Pty Ltd (2002) 42 ACSR 52; Re Glencore Nickel Pty Ltd (2003) 44 ACSR 210). Indeed, the Australian winding up itself might not, in the eyes of the law administered by a foreign court, cause a creditor's debt to be relegated in favour of the rights of participation in the winding up referred to in Motor Terms Co Pty Ltd v Liberty Insurance Ltd (above): see the discussion by Powell J in Fiske v Sterling Investment Co Pty Ltd (1977) 3 ACLR 158. These, however, are not matters that should deter the court from making an order for the convening of a meeting of creditors to consider such a scheme, if a case for the making of such an order is otherwise shown. Any such difficulties will be mitigated to some extent by the circumstance that, in relation to certain of the companies, the scheme will not become operative according to its terms unless it becomes binding under the Companies Act 1985 by virtue of an order of the English court (see paragraph [17] above). Limits upon the scope of s.411 arrangements 124 It is axiomatic that an arrangement under s.411 cannot achieve ends that are unlawful and that an arrangement directed towards such ends will not be approved by the court. In Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 458, the High Court held that s.411 provides no authority for approving an arrangement containing a provision which is inconsistent with the express or implied provisions of the corporations legislation. The court quoted with apparent approval an observation of Smith J in Re International Harvester Co of Australia Pty Ltd [1953] VR 669 at p.674: "But however widely the language of s 153 may be construed, it cannot, of course, operate to enable a company to escape from compliance with those provisions of the Act which, either expressly or by implication, lay down a special and exclusive procedure for effecting certain kinds of alterations to the memorandum." 125 Citing Re Australian Mutual Investment & Building Co Ltd (1899) 9 BC (NSW) 62 and Re Northumberland Insurance Co Ltd (No 3) (1977) 3 ACLR 15, Young J said in Re Theatre Freeholds Ltd (1996) 20 ACSR 729: "No scheme of arrangement can be confirmed unless the scheme is lawful." 126 Case law contains expressions of disapproval of the use of a s.411 scheme to impose a regime of creditor rights different from that which would apply in a winding up: see, for example, Re Brian Cassidy Electrical Industries Pty Ltd (1984) 9 ACLR 140. Those reservations do not arise here. They have been expressed in contexts where the company was not already in the course of being wound up and the aim of the scheme was to forestall winding up. The concern centres on the undesirability of using a s.411 scheme to maintain in operation (and to avoid winding up of) companies that are insolvent. The situation is clearly distinguishable from the present case where winding up on the grounds of insolvency has already been ordered by the court and is in progress. The special position of s.562A 127 The scheme as proposed by the liquidators has an operation that is inconsistent with the Corporations Act priority provisions. For reasons I have stated, that is, as a general matter, unobjectionable. But enough has been said to this point to make it clear that the proposed scheme also envisages a modified operation of s.562A. That raises a special consideration: it makes it necessary to consider the effect of s.562A(7): "This section has effect despite any agreement to the contrary." 128 Section 562A shares such a privative clause with s.562 which is concerned with a similar subject: see s.562(3) (predecessor versions included like privative clauses: see Companies Act 1936 (NSW), s.297(5)(c); Companies Act 1961 (NSW), s.292(7); Companies (New South Wales) Code, s.447(3)). Section 562 is derived from United Kingdom legislation, the Third Party (Rights Against Insurers) Act 1930. That Act was introduced to ensure that, where a person insured against liability to another person became insolvent, the proceeds of the insurance should pass to that other person in satisfaction of a proper claim upon the insured in respect of the insured liability, rather than becoming part of the fund of assets for the insured's creditors generally. A predecessor of s.562 was 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 risk of claims (Re Dominion Insurance Company of Australia Ltd [1980] 1 NSWLR 271; Re Saltergate Insurance Co Ltd [1984] 3 NSWLR 389; Re Palmdale Insurance Ltd [1986] VR 439) but, as was explained by the Australian law Reform Commission in its General Insolvency Report (Harmer Report), problems arose in applying the section in those 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 were backed by reinsurance, being the only persons able to benefit. 129 The provision within each of s.562 and s.562A saying that the section has effect despite any agreement to the contrary was probably inspired by the United Kingdom Act of 1930. Section 1(3) of that Act declared that any provision of the relevant contract of insurance (that is, the contract by which the insured which later became insolvent was covered in respect of a relevant third party claim) that purported "to avoid the contract or to alter the rights of the parties thereunder [ie, insurer and insured] upon the happening to the insured of" an insolvency event triggering the Act in favour of the third party was "of no effect". The aim of that provision was to make ineffective any contractual attempt by insurer and insured to abolish or curtail the benefits of the insurance which, in the case of the insured's insolvency, would accrue to the persons whose claims against the insured were covered by the insurance. Cases confirming this are summarised in the recent judgments in the English Court of Appeal in Freakley v Centre Reinsurance International Company [2005] EWCA Civ 115 (11 February 2005). 130 Unlike the United Kingdom provision, the privative clauses in s.562 and s.562A do not, in terms, concentrate on preserving the effects of the relevant contract of insurance or reinsurance. They are expressed to preserve the effect of the sections themselves. In the case of s.562A, this can only mean that the section as a whole is to operate according to its terms even if some attempt is made by "agreement" to displace that operation. The relevant operation is, of course, one which requires certain assets available to a liquidator in a winding up to be applied towards certain liabilities cognisable in the winding up and to define the way in which the persons to whom those liabilities are owed are to participate in the application of those assets. In providing that s.562A is to "have effect" despite any agreement to the contrary, s.562A(7) is, in my opinion, saying that no agreement - whether between a liquidator and a creditor or among creditors or between the company and its reinsurer - can be effective to require assets of the kind with which s.562A is concerned to be applied in a winding up otherwise than in the way s.562A stipulates. As a corollary, a person having rights under the section to have the particular assets applied in the specified way is "incapable of contracting himself out of them" (Josephson v Walker (1914) 18 CLR 691 at p.700 per Isaacs J). 131 A s.411 arrangement does not have contractual force and does not amount to or embody an "agreement". There is some controversy as to whether it is the order of the court under s.411(4)(b) or the statute itself that is the source of the binding force of a s.411 scheme. The differing views are expressed, at appellate level, in the decision of the Full Court of the Supreme Court of Western Australia in Caratti v Hillman [1974] WAR 92 and the decision of the Privy Council in Kempe v Ambassador Insurance Co (above). The differences were canvassed by Austin J in Ray Brooks Pty Ltd v New South Wales Grains Board (No 2) (2002) 171 FLR 350 at p.367. It is not necessary in the present proceedings to seek to resolve the matter. It is sufficient to note the description of the purpose of a predecessor of s.411 given by Street J in Re Norfolk Island & Byron Bay Whaling Co Ltd [1970] 1 NSWR 221: "The section is intended to provide machinery (i) for overcoming the impossibility or impracticability of obtaining the individual consent of every member of the class intended to be bound thereby, and (ii) for preventing, in appropriate circumstances, a minority of class members frustrating a beneficial scheme. As Younger J said in 1917 of the corresponding English section, in terms later quoted by Astbury J in Re Anglo-Continental Supply Co Ltd [1922] 2 Ch 723, at 731: 'Its purpose is strictly limited; it does not confer powers; its only effect at any time is to supply, by recourse to the procedure thereby prescribed, the absence of that individual agreement by every member of the class to be bound by the scheme which would otherwise be necessary to give it validity.' It is, perhaps, also appropriate to recall what Bowen LJ said of the earlier similar English provision, namely, that it was a section 'which is constantly utilized, and often, I think, very carelessly and unjustly' ( Sovereign Life Assurance Co v Dodd [1892] 2 QB 573, at 584)." 132 Because, as Astbury J observed in Re Anglo Continental Supply Co Ltd [1922] 2 Ch 723 at p.731, part of the purpose of s.411 is "to supply … the absence of that individual agreement by every member of the class to be bound by the scheme which would otherwise be necessary to give it validity", such a scheme has an operation that is not contractual but puts the persons concerned into the positions they would have occupied had all of them, by means of individual assents, become party to a contract embodying the terms of the scheme binding on them by virtue of the section. 133 In declaring that s.562A as a whole "has effect despite any requirement to the contrary", s.562A(7) says nothing explicitly about whether a s.411 arrangement may displace or modify the effect of s.562A. One would expect that a provision of the Corporations Act obviously intended to be preserved from the contrary inroads of an "agreement" should also be preserved from contrary inroads of a set of provisions given by statute a force and effect akin to those of an "agreement", so that the case is one in which a provision of the Corporations Act itself precludes a scheme by which it is sought to put such a set of provisions into effect. If that impression is correct, the reasoning in Australian Securities Commission v Marlborough Mines (above) means that an arrangement of the kind in question is beyond the scope of s.411 and the court lacks jurisdiction under ss.411(1) and 411(4) in relation to it. If, on the other hand, it is possible, as a matter of jurisdiction, for the court to entertain such an arrangement, the circumstance that the scheme, if it becomes binding upon the liquidator, the creditors and the contributories, will achieve a result that the statute does not allow those persons to achieve by agreement will lead to the exercise of the s.411(4) discretion against approval of the arrangement if and when application is made for an approving order. Is the scheme consistent with s.116(3) of the Insurance Act? 134 Inconsistency with s.116(3) is found in the part of clause 32.5 which causes Fund 1 (which I assume, for the moment, to consist of assets that are "assets in Australia" for the purposes of s.116(3)) to bear the "Fund 1 Costs" before being applied towards satisfaction of the Fund 1 Liabilities. "Fund 1 Costs" are part of the "Scheme Costs" which, in turn, include costs and expenses incurred by the liquidators after the Effective Date, costs and expenses incurred by the Scheme Administrators in carrying out the scheme and any sum the company or the Scheme Administrators are obliged to pay by reason of obligations imposed by the scheme (clause 64.2). The full definition of "Fund 1 Costs" is set out at paragraph [37] above. 135 In New Cap Reinsurance, it was held by Windeyer J and confirmed by all members of the Court of Appeal that the effect of s.116(3) is to create in creditors at the commencement of the winding up a right to have their claims dealt with in a manner complying with s.116(3). The section thus operates upon assets in Australia at the time of winding up. The scheme, if it becomes effective, will provide that those assets form Fund 1. Windeyer J said (at [41]) that, having regard to s.116(3), there was no basis on which the liquidator's expenses of winding up should be borne by the assets in Australia; also that there was no reason why those costs should be borne rateably by the assets in Australia and the assets other than assets in Australia. As his Honour noted, the costs and expenses involved in one collection may be substantially more than those involved in another collection. In his view, it is a matter for the liquidator to charge costs fairly against the two funds having regard to the work involved in collecting the assets in Australia and the assets outside Australia and in paying the liabilities having regard to a fair apportionment and spread of the general costs of the winding up. His Honour added: "Whether or not a rateable apportionment would be a proper apportionment is for the liquidators to determine in due course " [emphasis added]. 136 The principle upon which Windeyer J relied is that recognised by Dixon J in Re Universal Distributing Co Ltd (1933) 48 CLR 171, namely, that where property is assembled and applied by a liquidator so as to constitute a fund to meet a preferred claim before being available to be applied towards other claims, the expenses attendant upon realisation of the fund must be borne by it. Although s.116(3) does not cause any claims to be preferred, it does direct that a distinct fund be assembled and applied, so that the principle is applicable. The principle is concerned with costs actually incurred, viewed in the context of the actual circumstances of incurring. The matter cannot be determined by a priori rules of calculation and dissection. I respectfully agree with Windeyer J that the principle of fair apportionment may be taken to apply for the purposes of s.116(3). I do not agree with the proponents of the scheme that the rules fixed in advance by the definition of "Fund 1 Costs" reflect a correct or permissible application of the principle. In that way, the scheme seeks to modify the operation of s.116(3) in an impermissible manner. 137 I move to a second aspect of the application of s.116(3). As noted at paragraph [33] above, clauses 32.1 and 32.2 have the effect that particular assets are to be treated as Australian Assets if two conditions are satisfied in relation to them: first, that they are "assets in Australia" within the meaning of s.116(3) of the Insurance Act; and, second, that they are determined by the Scheme Administrators to be Australian Assets in accordance with directives in the scheme itself. The first directive is that "principles of private international law" are to be applied by the administrators and are to take precedence over the other directives of which there are three. Each says that certain "proceeds of reinsurance" are (or are not) to be Australian Assets. 138 One might question the directives, both as to their reliability and as to their utility. Assume that a scheme company wrote professional indemnity insurance business in Country X and, in connection with and for the purposes of that part of its activities, obtained reinsurance from a reinsurer incorporated and having its principal operations and central management and control in Country X, with the contract of reinsurance being negotiated and concluded in Country X and containing express statements that the contract is to be governed by and construed in accordance with the law of Country X, that the parties submit to the exclusive jurisdiction of the courts of Country X and that all payments are to be made in Country X and in the currency of Country X. Assume also that the reinsurer conducts a branch business in Australia but the scheme company concerned has never had any business dealings with it in Australia. 139 What would the principles of private international law say about the location of the chose in action thus owned by the scheme company in the form of a contractual obligation owed by the reinsurer? Australian principles of private international law would regard a combination of residence of the reinsurer in Country X (New York Insurance Co v Public Trustee [1924] 2 Ch 101) and the stipulation of County X as the place in which the sum concerned was recoverable (F & K Jabbour v Custodian of Israeli Absentee Property [1954] 1 WLR 139) and as the place in which the contractual obligation was to be performed (Kwok Chi Leung Karl v Commissioner of Estate Duty [1988] 1 WLR 1035) as leading to the conclusion that the chose in action was situated in Country X. And as was recognised in New Cap Reinsurance both by Windeyer J at first instance (paragraphs [30] and [31]) and by Ipp JA in the Court of Appeal (at paragraphs [122] to [129]), such a conclusion would apply for the purposes of s.116(3). 140 This effect of private international law is something to which the administrators would have to accord precedence in applying clauses 32.1 and 32.2. The apparently contrary directive in clause 32.2(b) (which would cause the chose in action to be regarded as an Australian asset) would not have effect because of the paramountcy afforded to principles of private international law. What, then, is the value of that and the other specific directives? If principles of private international law are always to be the overriding determinant, one may ask rhetorically whether the specific directives are, at best, superfluous and, more worryingly, likely to be productive of error. 141 There was no occasion in the New Cap Reinsurance litigation for the judgments either at first instance or on appeal to address the meaning of "assets in Australia" for the purposes of s.116(3). Nor does there appear to be judicial guidance elsewhere. It seems likely that the matter is to be addressed by reference to principles of private international law as clauses 32.1 and 32.2 contemplate. But no useful purpose is, to my mind, served by including in the scheme anything beyond the statement that Australian Assets are those assets which are "assets in Australia" for the purposes of s.116(3). Anything more creates possibilities of distortion. 142 The scheme provisions with respect to identification of "Australian Liabilities" raise similar issues. In this case, a measure of guidance is provided by the judgments in New Cap Reinsurance. 143 Clause 32.4 requires the administrators to classify and treat as "Australian Liabilities" those Established Scheme Claims which fall within any of four classes: first, "liabilities to indemnify insured persons against losses occurring in Australia" (clause 32.4(a)); second, liabilities "which are to be satisfied in Australia" (clause 32.4(b)); third, liabilities "which otherwise are liabilities in Australia within the meaning of s.31(4) of the Insurance Act" (clause 32.4(c)); and, fourth, liabilities "for which there should be assets in Australia available to meet them" (clause 32.4(d)). 144 Except for the third class (which consists of liabilities designated liabilities in Australia by a provision of the legislation), these classes are constituted and described in ways derived from observations of members of the Court of Appeal in New Cap Reinsurance. The court considered the question whether s.31(4) of the Insurance Act contained an exhaustive statement of what constitutes "assets in Australia" for the purposes of s.116(3). Ipp JA (at [119] and [120]) answered that question in the affirmative. Hodgson JA (at [27] and [28]) and Bryson JA (at [236]) answered it in the negative. 145 Hodgson JA, after an analytical dissection of the statutory provisions in point form, said (at [26] to [28]): "26 Three points emerge from this analysis: 1. Great importance is placed on where the liability is to be satisfied. If it must be in Australia, this is sufficient, except in the case of the first anomaly, and categories 1.3 and 2.3. 2. Great importance is also placed on where the triggering event is to occur. If it must be in Australia, this is sufficient, except in the case of the second anomaly, and categories 1.3 and 2.3. 3. No independent significance is placed on where a triggering event actually occurs, or where a liability would in fact be paid, except where payment in Australia or outside Australia is specifically required by the contract.

27 In my opinion, these points confirm that s.31(4) was not intended to be exhaustive, at least in relation to liabilities that have actually been triggered. They also strongly suggest that such liabilities are liabilities in Australia if they indemnify an insured against a loss occurring in Australia (that is, where the triggering event has actually occurred in Australia), or if the liability is in fact to be paid in Australia (either because the contract requires this, or because the insured resides in Australia and there is no reason to pay elsewhere).

28 I also think that s.31(4) was not intended to be exhaustive even in relation to liabilities that are only provisions for liabilities. Suppose both insurer and insured reside in Australia, and an insurance contract is made in Australia to cover the insured's travel in Europe, which permits but does not require compensation for lost luggage to be paid in Australia. Although that insurance would fall into category 1.1(c) or 2.1(c), it would be surprising if provision for liabilities in Australia." 146 His Honour had earlier said (at [15]): "I think it is reasonable to approach the question as to what are liabilities in Australia on the basis that prima facie these are liabilities in respect of which there should be assets in Australia available to satisfy them. And again, prima facie, in the case of liabilities under insurance policies, this would seem to be liabilities to indemnify against losses occurring in Australia and other liabilities which are to be satisfied by payments in Australia. What is to be "in Australia" is the insurance company's liability, not the creditor's asset corresponding to that liability; and I do not think that private international law rules concerning the location of such an asset are of direct application." 147 His discussion of the general meaning of "liabilities in Australia" concluded (at [29]): "Thus, in my opinion, the question of what are liabilities in Australia is not answered by reference to a simple definition, whether it be the private international law rules as to the location of debts or the provisions of s.31(4) or some other definition. In my opinion, they include liabilities to indemnify insured persons against losses occurring in Australia, and liabilities which are to be satisfied in Australia. Otherwise, the question is to be determined pragmatically, having regard to the purpose of the Act that liabilities in Australia are the liabilities for which there should be assets in Australia available to meet them, and to the other considerations set out above. Of course, any liabilities that satisfy s.31(4) will also be included." 148 Dealing with the question whether s.31(4) represented an exhaustive description of "liabilities in Australia", Bryson JA said (at [236]): "In my opinion subs.31(4) of the Insurance Act 1973 (Cth.) operated to widen the liabilities in Australia which, and provision for which, required to be considered in the scheme of authorization to carry on insurance business in Part III of that Act; with the purpose of maintaining, or tending to maintain financial capacity to meet obligations the protection of which the Commonwealth Parliament saw as its concern. It would not serve the purpose of subs.31(4) that it should be exhaustive, and it was not in its own text expressed to be exhaustive. The anomalies of expression which Hodgson JA has exposed present no real difficulty for interpretation of subs.31(4) overall: the subsection operated to declare that the cases with which it expressly deals are included (para (b)) or in some cases excluded (para (a)) without attempting to deal completely with what are liabilities in Australia. Discernible anomalies where a provision in one Part of this elaborate legislation is referentially given effect in a provision in another Part cannot be closely searched for implications. Attribution of entire integration and internal logic to the whole of a piece of legislation may not be a reliable indication of what the legislature truly intended." 149 His Honour's conclusion as to the meaning of "liabilities in Australia" was stated at [237]: "The question whether liabilities are "liabilities in Australia" within the meaning of old s.116(3), if not determined by the application of subs.31(4), is to be determined by the pragmatic process described by Hodgson JA and applied by his Honour to policy FC 3A. The question is not a question in the Conflict of Laws, and old s.116(3) did not adopt the Conflict of Laws in its workings." 150 Ipp JA's conclusion that s.31(4) is an exhaustive statement of what are "liabilities in Australia" made it unnecessary for him to express any concluded view about what the expression would otherwise include. He made it clear, however, that he would have endorsed the approach taken by Windeyer J at first instance to the effect that a liability is, for these purposes, to be regarded as located where the chose in action owned by the person to whom the liability is owed is locally situated according to principles of private international law. 151 The approach taken in clause 32.2 of the scheme (see paragraph [33] above) is to latch on to isolated statements in the judgment of Hodgson JA. The class of liabilities in clause 32.4(d) has regard to the statement at paragraph [15] of his Honour's judgment that "prima facie these are liabilities in respect of which there should be assets in Australia available to satisfy them" - a formulation that relates back to s.19 of the Act which, with greater regard to notions of accounting than to principles of law related to property and its situs, imposes a condition of a prudential nature that the value of assets in Australia at all times exceed the amount of the liabilities in Australia by a stated minimum margin. The classes of liabilities in clauses 32.4(a) and (b) are formulated by reference to another prima facie proposition stated by Hodgson JA but re-stated in slightly more definite terms later in his judgment. At paragraph [15], his Honour said, as we have seen, that "again, prima facie, in the case of liabilities under insurance polices, this would seem to be liabilities to indemnify against losses occurring in Australia and other liabilities which are to be satisfied by payments in Australia". At paragraph [27] Hodgson JA said that the points in the analysis he had made "strongly suggest" that liabilities that have been actually triggered are liabilities in Australia "if they indemnify an insured against a loss occurring in Australia (that is, where the triggering even has actually occurred in Australia) or, if the liability is in fact to be paid in Australia (either because the contract requires this, or because the insured resides in Australia and there is no reason to pay elsewhere)". 152 It is, in my opinion, dangerous to elevate "prima facie" propositions "strongly suggested" by an analysis made for particular purposes to the status of firm rules of universal application. The core message from the judgments of Hodgson JA and Bryson JA is that liabilities in Australia are to be identified "pragmatically, having regard to the purpose of the Act …, and to the other considerations" set out in the judgment of Hodgson JA. The specific scheme provisions with respect to identification of Australian Liabilities give the character of firm rules to what are, in the judicial statements, no more than "considerations" to be taken into account in a process to be undertaken "pragmatically" by reference to legislative purpose. In that way, the scheme seems to me to become a source of distortion which has the potential for "assets in Australia" for the purposes of s.116(3), being the components of Fund 1, to be applied towards satisfaction of liabilities that are not liabilities in Australia while liabilities in Australia are not fully satisfied. 153 The potential for the specific rules for determining Australian Assets and Australian Liabilities to lead, as a matter of construction or by way of rigid and unthinking application, to results inconsistent with s.116(3) is a factor which could be expected to cause the court to withhold its approval of the arrangement. Summation 154 Implementation of the scheme in the form proposed by the liquidators would cause assets to be applied in contravention of the prohibition in s.116(3) of the Insurance Act, as well as creating a potential for misclassification of assets for the purposes of that section (and therefore for further contravention). It would also cause assets to be applied otherwise than in accordance with the provisions of the Corporations Act concerning application of assets in a winding up. While the latter consequence is one that an arrangement under s.411 is, in general terms, capable of producing in relation to a company already in the course of being wound up, departure from the statutory regime for winding up under the Corporations Act will not be countenanced where, as here, the departure means that s.562A will not operate according to its terms. This is because s.562A(7) either prohibits the departure (and thereby precludes any s.411 arrangement that seeks to effect the departure) or means that the court will, as a matter of discretion, not sanction an arrangement that seeks to effect the departure. 155 Aspects of the scheme not canvassed in these reasons should be mentioned briefly. The proposals with respect to the marshalling of assets proceed on the basis of certain views as to the ultimate availability to the liquidators, as a practical matter, of assets located in other jurisdictions. The question whether those views are well founded will eventually turn on conclusions reached on the basis of evidence of foreign law and practice. That question would have to be considered as part of any further assessment of the scheme's consistency with s.116(3) and s.562A. There are also important questions about the roles of the scheme administrators and the adjudicators. While, in general terms, there may be no difficulty with the idea that such functionaries would, as "officers" within the s.9 definition and in the light of the susceptibility of their decisions to review by the court under s.1321, perform assessment or valuation functions, the court would give close attention to the fundamental aspect of the scheme under which the liquidators would relinquish all assets for alternative administration (not controlled or supervised by them) by persons who were not officers of the court, had no clear means of access to the court for directions and were not subjected by statute to the duties specifically applicable to liquidators. 156 Because the matters referred to in the preceding paragraph have not been the subject of detailed submissions and assessment to this point, I say no more about them. In mentioning them, I do not suggest that they are necessarily the only matters that would require attention if the liquidators sought to take their proposals further. Indeed, additional issues and contentions are foreshadowed by written submissions already communicated by ASIC and the entities granted leave to be heard. Among these is the sufficiency of disclosures made in the proposed explanatory statement, particularly by way of comparison of the positions creditors would occupy under the scheme and under a winding up. 157 Also for future consideration if the proposals were progressed would be the question whether classes of creditors were created. It was submitted in a preliminary way by some of the entities granted leave to be heard that, because of special positions occupied by them as a result of separate litigation and contractual arrangements, they might constitute a separate class of creditors. Other class creating possibilities may also require attention. These are matters that need not be pursued at this point. Conclusion 158 In my judgment, the scheme as proposed by the liquidators in relation to each of the eight companies is not a scheme that would, in due course, receive the court's approval upon an unopposed application for approval, assuming that the necessary majority of creditors' votes was achieved. I express that opinion solely by reference to the matters of substance concerning s.116(3) of the Insurance Act and s.562A of the Corporations Act considered in these reasons and without implying any view about the matters I have identified as raised in a general way but not considered. 159 In the normal course, this conclusion would lead to dismissal of the originating process. The liquidators have indicated, however, that they may seek to amend if, as is now the case, the conclusions on the matters of substance with which I have dealt are determined adversely to their contentions. Another possibility is that the liquidators may wish to seek further guidance on those matters from the Court of Appeal and, for that purpose, to have the result of the court's deliberations to this point expressed in the form of an answer to a question for separate determination under Part 31 of the Supreme Court Rules. I do not at this point foresee any problems with such a course if the plaintiffs wish to adopt it and there is no objection. 160 I understand both ASIC and the entities granted leave to be heard to be generally receptive to both the possibilities the liquidators have in mind and to agree with them that an appropriately formulated scheme of the "run-off" type envisaged would, in a general sense, be beneficial to creditors. 161 I shall therefore hear, at an early date, further submissions as to the orders that should be made.

07/04/2005 - Typographical adjustment - Paragraph(s) 6, 46, 50, 60, 155

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