Chisholm v Gilchrist

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4153/99 - ESTATE OF LEE HEATH HALL; APPLICATION OF RICHARD JOHN WILLIAM D'APICE & 2 ORS JUDGMENT

1 HIS HONOUR: This is an application by summons filed on 30 September 1999 for an order that the plaintiffs (the executors) are at liberty to distribute the estate of Mr Hall (the deceased) without making any retention or further provision in respect of any contract of insurance or reinsurance underwritten by the deceased in the course of his business as an underwriting member of Lloyd's of London. 2 Mr Hall died on 13 December 1988 and probate was granted by this Court on 3 July 1999. The grant was resealed in England because the deceased had assets there. The deceased was before his death an underwriting member ('Name') of Lloyd's of London. His underwriting activities are treated by Lloyd's as having ceased on 31 December 1987. 3 The executors are now in a position to complete the administration of the estate and to distribute it to the beneficiaries. However, they do not wish to do so without the authority of the Court, because of the existence of possible contingent claims against the estate arising out of the deceased's underwriting activities, and their consequent risk of personal liability. The executors believe that the interests of any claimant against the estate have been reasonably secured by virtue of reinsurance arrangements made for Names through the Equitas Group. But they hesitate to act on that belief without the reinforcement of an order of this Court. 4 The executors have paid the debts of the deceased known to them and have advertised for and dealt with claimants in accordance with s 60 of the Trustee Act 1925 (NSW). Additionally they have sought and obtained leave from the High Court of Justice in England to distribute the assets of the estate situated there. The order which was obtained from the English High Court on 29 April 1999, is in the same form as the order now sought in this Court. 5 The basis of the application is the decision of Lindsay J in Re Yorke (deceased) ; Stone v Chataway [1997] 4 All ER 907. In that case his Lordship set out the contractual arrangements and exposure to liability of Lloyd's Names, the problems which confronted Lloyd's some years ago and the solution which emerged through reinsurance with the Equitas Group. His Lordship also considered fully the law with respect to liability of executors for an unauthorised distribution of the assets of a deceased's estate, concluding (at 923) that: 'the authorities show that the sanction of the Court can properly be given, even to cases where the provision for future creditors is not assuredly and in all possible events complete.' 6 As his Lordship remarked (at 910), the position of the executors in the case before him was unhappily far from rare in the United Kingdom. Some 3,000 estates were faced with similar questions. When, therefore, his Lordship made orders of the kind sought in the present case, a practice direction was adopted by the Chancery Division to deal with similar applications. Pursuant to the practice direction applications in the United Kingdom have become routine and are dealt with by the Master. 7 I assume that similar applications will be needed on far fewer occasions in Australian jurisdictions. Nevertheless, there is likely to be more than one, and therefore I shall set out my reasons for judgment in some detail in the hope that any future applications may be assisted by my doing so. 8 First, I respectfully accept and adopt his Lordship's conclusion on the law set out above, and the reasoning by which he reached that conclusion. Counsel's researches in the present case have not discovered any closely analogous Australian decisions. However, cases dealing more generally with the procedure for obtaining advice under provisions of State trustee and probate legislation and the protection of executors, such as Re Grose [1949] SASR 55; Pinnock v Hull (1876) 2 VLR 18, 24-25; Chisholm v Gilchrist (1982) 2 SR (Eq) 84, 85; and Re G B Nathan & Co Pty Limited (in liq) (1991) 24 NSWLR 674, 677E are consistent with his Lordship's reasons and conclusion. 9 The question in the present case is whether the evidence is sufficient for the application of the principle which Lindsay J has set out. I have no direct evidence as to the general contractual position of Lloyd's Names and the overall arrangements which were negotiated with the Equitas Group. However, there is a helpful description in Lindsay J's judgment. Although it is lengthy, I believe it is desirable for me to set it out in full. He said (at p911-913): 'As to the position of names, I have received evidence, none of which has been challenged, from Mr William David Robson, a director and the chairman of Anton Jardine Members Agency Ltd, a leading Lloyd's members' agent; he has been involved in the Lloyd's market since 1963. He is chairman of the Lloyd's Underwriting Agents' Association. He explains that each individual member of a syndicate, names such as Mr Yorke, agrees to assume a proportion of the risks underwritten by that syndicate. The liability of an individual for that agreed part is unlimited, but there is no liability upon him for the failure of any fellow member of the syndicate to bear that other's proportion. From 1927 there was a central fund, a principal function of which has been to assume responsibility for claims where the members concerned have failed to meet their liabilities. On becoming a name each individual signs a general undertaking to the effect that he and his personal representatives shall be bound by the rules of Lloyd's. Each syndicate is, in a sense, an annual venture; it exist for a year of account but syndicates are accounted for under a three-year accounting system. A syndicate's profit or loss is calculated only at the end of three years. However, at the end of any three years there are nowadays very likely still to be unsettled claims and the possibility of future ones. In order to achieve finality in respect of any accounting period of three years there is what is called reinsurance to close' (RITC). Members of a syndicate for a year which is to become a closed year' pay a premium to and assign their rights in relation to the closed year' to members of a syndicate for a later year who, in return, assume the liability of the members for the closed year' for all the known and unknown liabilities attributable to the closed year'. Until the year of account is closed by RITC it remains an open year', but once closed it is not reopened. By way of successive assignments by which syndicates for later years have year after year thus assumed responsibility for the risks of earlier years, any given syndicate which has become a reinsurer by way of RITC may find itself liable for late emerging or late-settled claims in respect of risks run many years before. In 1992, for example, there were still risks covered in respect of policies written before the 1939-45 war. The representative creditor, Mr G N Clarke, a past or present name, has the RITC for one of his years insured by a syndicate which included Mr Yorke; it is in that way in which he comes to be a possible future creditor of the estate. If there is in respect of a given year, a material degree of uncertainty about the appropriate figure to be fixed for its RITC, the syndicate's accounts will remain open; the syndicate is then in run-off'. The syndicate itself continues to pay claims and to debit its members until its present and future liabilities are felt to be sufficiently quantifiable to make a closure by RITC equitable as between the syndicate for the closing year and that of the year which proposes to take over the risk by becoming the reinsurer under the RITC. Subject to the other reinsurance methods I shall mention, so long as any of his years remains open a name remains at risk of being required personally to pay in respect of policies, as does his estate. He may reinsure by taking out a personal stop-loss' policy and, more materially to present consideration, he may subscribe or have subscribed to an EPP', an estate protection plan. An EPP is designed to protect a name's estate against claims in respect of such of his years as are open at his death, namely, such years as are open because their three years of account have not expired and years in respect of which RITC has not been achieved and which are therefore in run-off'. The indemnity afforded by the EPP will differ from case to case depending upon the terms of the policy, but EPPs have been found very valuable as personal representatives of names who had had generally in the past felt able safely to distribute the estates in their charge knowing that should there transpire to be some liability to policyholders in respect of open years they would have, from the EPP, a reliable total or specified indemnity. But at the material times the EPPs were themselves written at Lloyd's. The reliability of recovery under EPPs has therefore itself been put in question. A policyholder with a claim insured or reinsured at Lloyd's submits his claim to Lloyd's which then passes it on to the appropriate syndicate. The syndicate then meets it out of its reserves, including its RITC. If a syndicate has inadequate reserves to meet its claims before it is closed, then its members will be required to inject cash by way of calls'. If a call' is not met, a syndicate's managing agent may sue the member or his estate for the call' plus interest or the central fund I mentioned earlier may discharge the debt on the member's behalf and, where appropriate, then sue the member or estate concerned. A member ceases to be a member at his death. He does not participate in the syndicates for the year in which his death occurs. His personal representatives, however, are bound by the general undertaking which the name made upon his joining Lloyd's. The general practice in the past has been that estates protected by an EPP have distributed without making any further provision in respect of open years but in cases where the estates have not had the protection of EPPs, the executors not uncommonly, I am told, have made retentions of the whole or part of their estates against the risks of liabilities in respect of open years. In the period 1988-1992 Lloyd's suffered enormous losses. There have been years of anxiety, uncertainty, difficulty and litigation leading, in late July 1996, to the circulation of the settlement offer document' giving details of the 'Lloyd's reconstruction and renewal'. A reinsurance group was to be formed, Equitas into which all liabilities for 1992 and earlier years were to be reinsured. By late August 1996 the settlement offer had become unconditional and thereupon reinsurance of all Lloyd's 1992 and earlier non-life business was reinsured into Equitas for all names and the estates of deceased names, whether or not they had accepted the settlement offer.' 10 The Equitas Group includes a holding company, Equitas Holdings Ltd, and two wholly-owned subsidiaries which have been authorised by the Department of Trade and Industry pursuant to the Insurance Companies Act 1982 (UK). They are Equitas Reinsurance Ltd and Equitas Ltd. The former reinsures and acts as a conduit for the collection of payments, and will cede its reinsurance into the latter, which is required by the regulator to show an appropriate surplus of assets over liabilities on its balance sheet. A third company, Equitas Policyholders Trustee Limited, is to hold the rights of names under reinsurance contracts for the benefit of underlying policyholders. Lindsay J described the effect of the reinsurance arrangements as follows (at 913): 'The mechanics of Equitas are such that the liability of the EPPs in relation to years up to 1992 have been compulsorily reinsured into Equitas. A finality bill' (so-called) has been sent to names and to the personal representatives of deceased names under which, upon payment of the sums specified, the years in question attain RITC through Equitas. The DTI has accepted that reinsurance into Equitas can be treated as an RITC and that upon payment of the relevant finality bill' the names and the executors concerned may cease to be members of Lloyd's. Should Equitas fail, liability would revert to the relevant names. Policyholders under the arrangements now made, are unable to look to Lloyd's as they were in the past but rather would ultimately need to go directly against the particular names. Even should Equitas fail there are remedies or palliatives which may suffice to satisfy or head off the claims of policyholders before any individual name or any estate of a name might come to be sued. First, at the request of the DTI the Equitas arrangements contain a proportionate cover plan which would enable it to pay claims at a reduced rate rather than going into insolvent liquidation. So long as a policyholder feels he has been treated fairly in relation to all other claims, his recovery of a proportion only of his debt might suffice to head him off from pursuing the matter further. Secondly, Equitas would be able to propose a scheme under s 425 of the Companies Act 1985 under which a policyholder may have to be satisfied with less than a payment in full. In addition, some policyholders might have recourse to the deposits required by some regulatory authorities in other jurisdictions, which deposits might then be renewed by the then members of Lloyd's in order that Lloyd's could continue to do business in that jurisdiction, thus conferring on policyholders in such jurisdictions a possibility of recoupment out of deposits, possibly even beyond the extent of the deposit as it was at the time of failure. Beyond that there would be a strong commercial pressure upon Lloyd's, rather than to allow any Lloyd's policy to be dishonoured, for it to inject hitherto uncovenanted funds into Equitas to ensure that, even should Equitas at first have failed, its obligations would nonetheless be met. A policyholder still unsatisfied after the above measures had been exhausted and persistent in his wish to recover to the full might then embark on suits against the particular names within the particular syndicates covering his risk, a course fraught with difficulty on the part of the policyholder leading, to a persistent policyholder, to proceedings which, as against any one name, when identified, would be likely to be only for a relatively small proportion of the policyholder's overall and thus far still unsatisfied claim.' 11 Accepting as I do that this is the general position, some crucial matters of evidence must be established in the particular case to ensure that the protection of the Equitas reinsurance scheme is available to the estate of the deceased Name. Lindsay J found that: · the Group financial statements for the Equitas Group showed a substantial surplus, although notes to the financial statements and the auditor's report pointed out the uncertainty of estimates in this regard; · there were no syndicate in which the deceased participated which had been left outside the Equitas arrangements; · the reinsurance arrangement so far as it affected the deceased was still in force; · the two Equitas companies which had been granted authorisation still had the benefit of that authorisation and there was no basis for apprehending that it would be withdrawn. 12 When the matter first came before me on 1 November 1999 there was evidence that a 'Lloyd's Statement of Reinsurance' had been issued in the name of the deceased with a covering letter of 27 December 1997 signed on behalf of Lloyd's and Equitas Reinsurance Ltd. The Equitas reinsurance premium set out in that statement was £79,295, but there was no direct evidence that the premium had been paid. Additionally, the financial statements for the Equitas Group for the year ended 31 March 1999 were put into evidence, but I found it difficult to relate those statements to the financial picture described by Lindsay J. Additionally I was concerned, given the recent turbulence in the financial performance of reinsurance companies everywhere, that there was no evidence updating the financial position of the Equitas Group after March 1999. I therefore adjourned the hearing to give the plaintiffs the opportunity to obtain further evidence. The matter came before me again on 8 December 1999 and on that occasion I was satisfied with the additional evidence. I indicated that I would make the orders. 13 The additional evidence includes financial statements for the Equitas Group for the period ending 4 September 1996, the period ending 31 March 1997, and the year ending 31 March 1998. That evidence shows two things. First, the group had a steadily increasing retained surplus which stood at £588 million on 4 September 1999 and rose in each financial reporting period, reaching £772 million on 31 March 1999. In each of the financial reports to which I have referred, notes to the financial statements indicate the difficulty of making provision for future liabilities. For example, on page 43 of the financial statements for the year to 31 March 1999 there is a statement that the Group's ability to settle liabilities in full is dependent on the generation of sufficient investment income to match the increase in insurance liabilities that will result each year from the unwinding of the discount. The statement notes that there is uncertainty in forecasting the generation of such investment income, and states a number of variable factors. Similarly, in the auditor's reports for each of those years reference is made to the uncertainties and limitations of the audit of claims outstanding, reinsurers' claims and reinsurance recoveries. 14 I am satisfied, however, that these qualifications to the financial statements (and I hasten to add they did not produce a qualified audit report in the normal sense) were before Lindsay J when he made his decision, and there is a continuity of financial performance in the Equitas Group from 1996 to 1999. 15 The plaintiffs obtained some other evidence in the form of letters. A letter from Equitas Ltd to the plaintiffs' instructing solicitors dated 2 December 1997 stated that 'all Names' 1992 and prior years non-life liabilities have been reinsured by Equitas Reinsurance Ltd (ERL) and each reinsured name is reinsured by ERL in respect of all such liabilities notwithstanding that he may not have paid his Equitas premium'. The letter noted that the reinsurance contract dated 3 September 1996, to which the reinsured names were parties remained in full force and effect. 16 A letter from the Financial Services Authority to the plaintiff's solicitors dated 6 December 1999 stated that Equitas Reinsurance Ltd and Equitas Ltd were regulated by the Authority rather than directly by the Department of Trade and Industry, pursuant to the Contracting Out (Functions in relation to Insurance) Order 1998, and that the Authority had not issued any report or changed its regulatory attitude towards those companies since the date of the last financial statement, and indeed that their regulatory status had not changed since 1996. A letter from Lloyd's to the plaintiff's solicitors dated 7 December 1999 stated that the payment of premium due in respect of Mr Hall's estate had been made under the deceased's Protection Plan Policy and all residual funds held at Lloyd's had been released to the estate. 17 Finally and perhaps most importantly, a letter dated 1 December 1999 to the plaintiff's solicitors from Jardine (Lloyd's Underwriting Agents) Ltd, which was the members' agent for Mr Hall, said: 'The rules of Membership at Lloyd's are such that a Name is deemed not to participate in the year of account in which they die if they are an active underwriter at that time. Therefore it follows that the last open year of account was the 1987 year of account. It also follows that any Syndicates not contained within the text of his Finality Statement have closed naturally by way of reinsurance prior to the 31st December, 1995 when Equitas effectively purchased the reinsurance of those Syndicates held open as at the 31st December, 1995. I can confirm that Mr Hall ceased underwriting as at the 31st December, 1987 however, he would still be deemed to be the underwriting member until all Syndicates had closed by way of reinsurance. As a consequence he would only be deemed by Lloyd's to have had his business fully wound up once any liabilities emanating through the Reconstruction and Renewal of Lloyd's at Finality had been paid during the latter part of 1996. Mr Hall's Finality Statement will show those Syndicates which had remained open following the 1987 year of account until finality and it is those Syndicates on which he participated for whom liabilities have transferred to Equitas. I can confirm that there are no outstanding debts due either to Equitas or to Lloyd's so far as Mr Hall is concerned. In addition I confirm that I am unaware of any events that have taken place since the 31st March 1998 which may give rise to doubt the ability of Equitas to meet any claim which might arise out of the Late Mr Hall's membership of any Syndicate or that there has been any report in relation to Equitas or change of attitude by the Department of Trade and Industries since 31st March, 1999. I also confirm that there has been no report issued by this Agency in respect of Equitas since the 31st March, 1999 or that we have had any change of attitude towards Equitas since that date.' 18 On the basis of this evidence I conclude that the Equitas reinsurance arrangements described by Lindsay J are in full force and effect with respect to Mr Hall's estate, and provide reasonable protection to his estate with respect to any contingent liability of his as a Name. While there is a remote possibility, if the overall reinsurance arrangements fail in consequence of some catastrophe, that a further claim will be made against the estate, I respectfully agree with Lindsay J's assessment that such a possibility is remote and should not prevent the executors from distributing the whole of the estate to the beneficiaries who are entitled to receive it. In those circumstances it is reasonable for the executors to seek the protection of an order of this Court similar to the order made by Lindsay J and also by the Chancery Division for the benefit of Mr Hall's estate, and I therefore make the order. * * * * * * * * *

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