HIH Insurance Limited (in Liq) & Ors [2001] NSWSC 997

Supreme Court of NSW|2001-11-05

Background 1 Anthony Gregory McGrath and Alexander Robert Mackay Macintosh are the liquidators of HIH Insurance Limited ACN 008 636 575 ("HIH") and 19 of its subsidiaries. They were previously appointed to be the provisional liquidators of HIH and most of those companies on 15 March 2001. 2 They have applied to the Court for a direction as to whether they are justified, as liquidators of those companies, in participating in and cooperating with the HIH Royal Commission, and in incurring costs and expenses against the assets of those companies in so doing.

(b) in answering the Summons he must take legal advice as to questions of privilege and confidentiality so as not to prejudice any future claims which may be made in that regard and the interests of the proper winding up of HIH Companies;

(d) if neither he nor the other KPMG witnesses cooperate with the Royal Commission by providing a statement, the whole of that evidence in chief would have to be given orally and that would be likely to occupy a substantial amount of his time and the time of the Royal Commission;

(e) a written statement is preferable to giving oral testimony in chief as both the other KPMG witnesses and himself would have the opportunity, in preparing their statements, to review at length such material as may be necessary and to consider it in the light of all other relevant material and their evidence in chief would therefore be more likely to be as complete as it can be at this stage of the liquidations and efficiently given;

(f) some of the work required for the preparation and participation in the Royal Commission would be work which would be necessary in the course of the liquidation in any event (for example investigation of potential claims which may be brought for the benefit of creditors);

(g) insofar as the Royal Commission's inquiries affect the interests of creditors (for example, by identifying and analysing voidable transactions or breaches by any party of an obligation to the HIH Companies) there may be a cost saving to creditors in sharing the workload with the Royal Commission in assembling material and cross examining witnesses;

(h) participation in the Royal Commission may improve the liquidators' ability to fulfil other statutory duties, such as our duty to report certain matters to the Australian Securities and Investment Commission under s533 of the Corporations Act 2001 (Cth);

(i) there would, however, be time and resources which could otherwise be allocated to the liquidation which must be diverted to cooperating with and participating in the Royal Commission (although at the time of deposing to this Mr McGrath could not give an estimate of how much time or what level of resources from within KPMG will be necessary).

(j) that as Mr McGrath had already received a Summons, he must incur some legal expenses in relation to the Royal Commission. However, his voluntary participation may require additional expenditure in preparation of statements and liaison with the Royal Commission. It was therefore likely that, even with the saving of hearing time brought about by preparation of the statements, legal costs in respect of Mr McGrath's participation in the Royal Commission would be higher if he and other KPMG witnesses involved in the HIH liquidations were to participate voluntarily. 10 In light of the above considerations, Mr MrGrath proposes that the liquidators should (a) co-operate with the Royal Commission;

(b) appear by his legal advisers at such of the hearings of the Royal Commission as may affect the conduct of the liquidations of the HIH Companies and/or the interests of creditors;

(c) assist with the preparation of the statements of evidence in chief which the Royal Commission proposes to adduce from him and from other KPMG personnel involved in the liquidations of the HIH Companies (including persons from KPMG in London); and

(d) take such other steps in connection with the Royal Commission as would enable me as liquidator to protect the interests of creditors, to further the orderly winding up of the companies and fulfil my other statutory functions. 11 In order to take the steps outlined in the preceding paragraph, Mr McGrath deposes that he will need the advice and assistance of legal counsel and wishes to retain the legal advisers (his solicitors) who have represented his firm since the liquidators were appointed provisional liquidators on 15 March 2001 and he therefore proposes to continue to instruct them to act in respect of the liquidations and to instruct them to act in relation to the Royal Commission. 12 Mr McGrath was not able to estimate the difference between costs and disbursements likely to be incurred by cooperating with the Royal Commission, compared with any costs and disbursements that would otherwise be incurred in respect of the Royal Commission. He was able to state, however, that he believed it likely that additional costs would be incurred by voluntarily participating. 13 The liquidators have explored the possibility of obtaining funding from other sources such as the Commonwealth of Australia so that participation in the Royal Commission will not be at the sole expense of the HIH Companies. However the Commonwealth has will not fund the liquidators' current legal advisers or counsel at the rates proposed to be charged by those selected to represent the liquidators at the Royal Commission, or indeed at all. 14 The liquidators have notified creditor members of a consultative group, which acts as a convenient line of communication between the liquidators and the HIH companies' major creditors (representing approximately 70% (by value) of all Australian creditors) and regulators, that the liquidators would be making this application for directions from the Court. Only the Commonwealth of Australia has chosen to attend to support the application. One other creditor has in writing notified the liquidators of its general support of the application. The solicitors for the provisional liquidators of some Hong Kong subsidiaries has sent an e-mail to the liquidator's solicitors expressing some reservations as to whether full cooperation would be a proper use of the company's money.

Observations 15 The principal consideration for the Court is whether it is appropriate for the liquidators to expend the money of the companies in acting in the ways outlined above. Section 556(1), Corporations Act 2001 in effect sanctions the expenditure of money by the liquidators by recognition of a priority if the expenses are "properly incurred ... in preserving, realising or getting in property of the company, or in carrying on the company's business" or "properly incurred by" the liquidators. 16 It seems clear enough that the expressions "properly incurred" in ss556(1)(a) and (dd), Corporations Act 2001 is interpreted broadly: cf. Price v Price (1904) 29 VLR 719; 25 ALT 215; 10 ALR 86; Re Just Juice; James v Commonwealth Bank (1992) 37 FCR 445. 17 Nevertheless, these provisions must be viewed in the context of the functions and duties of a liquidator. Those duties are primarily to realise and get in the assets of a company as soon as is practicable (see s478, Corporations Act) and to distribute it to the persons entitled. In recent times, the functions and duties of liquidators are seen as more extensive: for example, the duty of a liquidator to deliver a report under s533, Corporations Act 2001. It is recognised in cases such as Douglas-Brown v Furzer (1994) 13 ACSR 756 and Re New Cap Reinsurance Corporation Holdings Limited [2001] NSWSC 835 (per Santow J) that there is a public interest in the proper investigation of possible civil or criminal proceedings arising out of the insolvency of corporations as well as the creditors' and the public interest in a beneficial winding up of the corporation. To the extent that the proposed actions of the liquidators in respect of the Royal Commission are consistent with the objectives of that public policy, it is proper for the liquidators to do so. Accordingly, it is appropriate to give a direction to the liquidators that they are justified in so acting. 18 However, having regard to the terms of reference of the Royal Commission, it is not self-evident that all of the matters in respect of which participation might be required will necessarily have a nexus with the beneficial winding up of the companies, even in the broad terms that I have described above. Further, it is not appropriate for the Court (and the liquidators do not seek) that they be given a unfettered right to charge against the assets of the companies of which they are liquidators the costs of anything that may in the future by requested by the Royal Commission by way of cooperation with it. Accordingly I consider that the liquidators should keep records of : (a) the costs of, and expenses incurred in, so participating and assisting the HIH Royal Commission; and

(b) the benefits, insofar as they are able to be identified, of so participating and assisting the HIH Royal Commission, (comprehending also any detriment in not so doing) including benefits relating to the costs that may be able to be saved from so participating and assisting the HIH Royal Commission, and taking into account the extent to which the HIH Royal Commission cooperates in any information sharing arrangements compatible with the powers of the HIH Royal Commission and the Liquidators' powers and duties. 19 I also consider that, whilst I am satisfied that it is proper to give the direction sought, the liquidators should apply to the Court for further directions in the event that it appears to the Liquidators that the Liquidators' continued cooperation with the HIH Royal Commission in the manner requested by the HIH Royal Commission is (or is likely to be) no longer in the interests of the creditors or the beneficial winding up of the company, the Liquidators are to apply for further directions.

Orders 20 On the basis of the above I make the following orders in each of the proceedings: 1. That the liquidators of each of the HIH Companies are justified in participating in, and assisting on a voluntary basis, the HIH Royal Commission and incurring costs and expenses necessary or desirable to do so, including, but not limited to: (a) providing their cooperation to the HIH Royal Commission; (b) the preparation of statements of evidence in chief which the HIH Royal Commission proposes to adduce from the liquidators and any other persons from KPMG, KPMG Actuaries Pty Ltd and the firm of KPMG in London who are or have been involved in the liquidation or provisional liquidation of companies forming part of the HIH group of companies; (c) appearing by their solicitors and counsel at such of the hearings of the HIH Royal Commission as may affect the conduct of the liquidation and/or the interests of creditors and to represent such persons described in (b) above who give statements of evidence in chief to the HIH Royal Commission; and (d) the taking of such steps in connection with the HIH Royal Commission as are desirable to protect the interests of creditors, to further the orderly winding up of the companies and to fulfil their statutory duties. on the basis that the Liquidator's maintain records, so far as is reasonably practicable, of: (e) the costs of, and expenses incurred in, so participating and assisting the HIH Royal Commission; and (f) the benefits, insofar as they are able to be identified, of so participating and assisting the HIH Royal Commission, including benefits relating to the costs that may be able to be saved from so participating and assisting the HIH Royal Commission, and taking into account the extent to which the HIH Royal Commission cooperates in any information sharing arrangements compatible with the powers of the HIH Royal Commission and the Liquidators' powers and duties.

In the event that it appears to the Liquidators that the Liquidators' continued cooperation with the HIH Royal Commission in the manner requested by the HIH Royal Commission is (or is likely to) no longer be in the interests of the creditors or the beneficial winding up of the company, the Liquidators are to apply for further directions.

The Liquidators have liberty to apply for further directions.

The costs of this application be costs in the winding up.

Last Modified: 11/07/2001 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

(2001) 39 ACSR 645 Reported Decision : [2001] NSWSC 997 [2001] ACL Rep 120 NSW 146

COUNSEL : B Coles, QC (Applicant) R Shankland (solicitor) (Commonwealth) SOLICITORS : Blake Dawson Waldron (Applicant) CATCHWORDS : CORPORATIONS - liquidator seeking directions to co-operate with Royal Commission - Relevant principles. LEGISLATION CITED : Corporations Act 2001 (Cth) s478; s533; s556 Douglas-Brown v Furzer (1994) 13 ACSR 756 CASES CITED : Re Just Juice; James v Commonwealth Bank (1992) 37 FCR 445 Re New Cap Reinsurance Corporation Holdings Limited [2001] NSWSC 835 Price v Price (1904) 29 VLR 719; 25 ALT 215; 10 ALR 86 DECISION : Directions given.

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