1799/01 HIH INSURANCE LTD
1815/01 HIH UNDERWRITING AND AGENCY SERVICES LTD
1810/01 HIH CASUALTY & GENERAL INSURANCE LTD
1806/01 CIC INSURANCE LTD
1805/01 FAI INSURANCE LIMITED
1808/01 FAI GENERAL INSURANCE COMPANY LTD
JUDGMENT
1 On 17 December 2003, I heard applications by Mr McGrath and Mr Macintosh in their capacity as liquidators of each of HIH insurance Limited, HIH Underwriting and Agency Services Limited, HIH Casualty & General Insurance Limited, FAI General Insurance Company Limited, CIC Insurance Company Limited and FAI Insurance Limited. In each case, the liquidators sought the approval of the court under each of s.477(2A) and s.477(2B) of the Corporations Act 2001 (Cth) in relation to aspects of proposed deeds styled "cancellation deed" and "deed of indemnity", plus directions under s.479(3). Subsequently, leave was granted to amend the original applications by adding a corresponding claim in respect of an amending or supplemental deed dated 16 February 2004. I heard further brief submissions on 17 February 2004.
2 The liquidators were represented on the hearing of the application on 17 December 2003 by Mr S J Gageler SC. Leave was given for Mr Enright, solicitor, to make submissions on behalf of the Commissioner of the State of California Department of Insurance without joinder of the Commissioner as a party. Those submissions supported the grant of the relief sought by the liquidators. Mr Buchanan, solicitor, appeared for the liquidators on 17 February 2004 and Mr Enright again appeared for the Commissioner.
3 The cancellation deed, the deed of indemnity and the supplementary deed have already been entered into. The first is dated 12 November 2003, the second 1 December 2003 and the third 16 February 2004. There is, however, in each case a suspensory provision declaring that the deed is of no force or effect unless and until the Supreme Court of New South Wales "has approved the terms of this deed in relation to each of" the parties in liquidation to which I have referred or, if the approval of the court is not obtained in respect of any of those parties, "the relevant party has waived in writing this condition". It was made clear in the course of submissions that the approvals envisaged by this clause are approvals under ss.477(2A) and 477(2B), although this is not explicitly stated. I am nevertheless satisfied that, whatever may be the effect and operation of the suspensory condition among the parties to the deed, its existence is sufficient to justify the conclusion that, pending its satisfaction or waiver, the act of agreement with which each section is concerned should be regarded as not having occurred: see Re HIH Casualty & General Insurance Co Ltd [2002] NSWSC 1036; Re FAI Traders Insurance Co Pty Ltd [2002] NSWSC 1080.
4 The parties to the cancellation deed, in addition to the six Australian companies in liquidation, are four non-Australian companies in the HIH Group (including that administered by Mr Enright's client) , all of which are in liquidation or provisional liquidation, three non-HIH companies operating in the reinsurance industry (Hannover Rueckversichervings-Aktiengesellschaft, Hannover Reinsurance (Ireland) Limited) and a company called Treaty Services Pty Limited "in its capacity as trustee of the Loss Portfolio Trust".
5 The cancellation deed relates to pre-existing contracts that are ostensibly or, at least, nominally reinsurance contracts. Each such contract was made between one of the reinsurers to which I have referred and HIH Underwriting and Agency Services Limited ("HUAS"), the latter company being the trustee of a trust for the benefit of HIH Group operating insurers. The trust is distinct from the Loss Portfolio Trust under which Treaty Services Pty Limited hold certain moneys on trust for the reinsurers and HUAS. The cancellation deed contains recitals which it is acknowledged that certain payments were made by HIH Group companies to the reinsurers and Treaty Services and that "it may be arguable that HUAS is or may be entitled to make a claim under the Agreement". It is then recited:
"J. The parties wish to enter into this deed to settle between them, in the manner and to the extent provided for in this deed, any claims, including all existing and potential future claims, which any of them may be entitled to make arising out of or in connection with any of the Agreements, including any claim any of them can presently bring under any of the Agreements, and to settle and extinguish any right of commutation under any of the Agreements."
6 The operative provisions of the cancellation deed cancel the pre-existing contracts as of the date on which the deed's conditions precedent are satisfied. Mutual releases follow. Provision is then made for a payment of $22,050,000 (plus an interest component) by one of the reinsurers to HIH America or as it directs; and for a payment of $63,407,216.01 (plus an interest component) and the delivery of certain marketable securities, in each case by Treaty Services Pty Limited to certain of the HIH Group companies in liquidation in stated proportions. The Reinsurance Benefit Trust is also terminated. By the supplemental deed, the payment obligation is made to extend to a balancing item to ensure that no residue is left with Hannover Re Ireland.
7 The cancellation deed has not been conceived entirely in isolation. Each of the pre-existing contracts contemplated the possibility that it may be commuted or terminated by mutual agreement. There is in each case a specification, in general terms, of the basis on which any such consensual commutation will take effect. Matters are, however, somewhat complicated by a number of informal agreements and side letters that came into existence over a number of years. These collateral arrangements are examined in some depth in Part III of a joint opinion dated 20 June 2002 given to the liquidators by Mr Gageler SC and Mr M R Speakman of counsel. That section covers no less than 34 pages.
8 The joint opinion concludes that the so-called reinsurance contracts were, in reality, "a means by which funds of companies within the HIH Group were, for a fee, to be placed into a managed fund to be returned with interest after October 2009", noting that that conclusion had previously been expressed by both Arthur Andersen and Trowbridge Consulting. The joint opinion says that, despite the nomenclature of "reinsurance", there is "simply no transfer of risk". The joint opinion goes on to state that HUAS, as trustee, holds the commutation rights and any proceeds of them on trust for the participating HIH Group companies in proportion to their contributions.
9 The deed of indemnity is a deed between Treaty Services Pty Limited, HUAS, HIH Casualty and General Insurance Limited and FAI General Insurance Company Limited. By that deed, the parties other than Treaty Services agree to indemnify Treaty Services against any tax liability that could have been recouped by it out of funds held by it, being funds that are to be distributed in accordance with the cancellation deed.
10 Against this background, I turn to the claims made by the liquidators of each of the six Australian companies. They are, as I have said, claims based on ss.477(2A), 477(2B) and 479(3) of the Corporations Act.
11 Section 477(2A) is concerned with a liquidator's power to "compromise a debt to the company". It says that a liquidator must not "compromise a debt to the company", in the absence of court approval, if "the amount claimed by the company" is more than $20,000. Section 477(2B) says, in a similar way, that a liquidator must not enter into an agreement on the company's behalf, in the absence of court approval, if obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance more than three months after the agreement is entered into. The application based on s.477(2A) is advanced in relation to the cancellation deed. The application based on s.447(2B) is advanced in relation to both the cancellation deed and the deed of indemnity, as is the application for directions under s.479(3).
12 Case law emphasises that s.477(2A) applies only in relation to a "debt" strictly so called. In some cases where the claim in question has not been a "debt" as such, courts have declined to grant approval under the section because such approval is unnecessary: see, for example, Re Luxtrend Pty Ltd [1997] 2 QdR 86; Re Tietyens Investments Pty Ltd (1999) 31 ACSR 1. In other cases, it appears that a strict approach of that kind has not been taken: see, for example, Re Oliver Davey (Pacific) Pty Ltd [1999] VSC 241. I have no doubt that, if the relevant claim is unquestionably not a "debt" as such, the correct approach is to dismiss any application under s.477(2A) as unnecessary. But that approach should be taken only in a clear-cut case. This is because s.477(2A) goes to the existence of a liquidator's power. Each of s.477(1) and 477(2) begins with the words "Subject to this section", so that a power conferred by one of those provisions (including the power to compromise debts and claims conferred by s.477(1)(d)) simply does not arise, in a case dealt with by s.477(2A) or s.477(2B), unless court approval is given. It should follow, in my view, that the course of dismissing a s.477(2A) application on the basis that the particular claim is not, strictly speaking, a "debt" should be followed only in the clearest of cases.
13 In the present case, the true nature of the so-called reinsurance contracts is the subject of close and detailed analysis in the joint opinion. That opinion makes it clear that certain aspects of the apparent transactions were not, in reality, as they seemed to be and that the true contractual intent is to be gathered, in part at least, from sources outside the formal documents. Such uncertainties of characterisation are, in my view, sufficient to warrant a view that the contractual rights arising from the agreements and their adjuncts are sufficiently likely to entail (or include) "debts" that the court should proceed on the basis the liquidators prefer, namely, that their power to compromise, by resort to the commutation mechanisms, should be put beyond doubt by s.477(2A) approval, assuming that it is otherwise appropriate to grant that approval.
14 Section 477(2B) is concerned with the period within which contractual obligations are to be discharged by performance. In the case of the cancellation deed, there is provision for a sequence of implementation steps which may take more than three months. There are also dispute resolution and other machinery provisions which, if invoked, may not be fully performed within the three month period. In the case of the deed of indemnity, the agreement to indemnify is not limited in time. The liquidators power to make the agreements embodied in both deeds therefore depends on the grant of approval under s.477(2B).
15 This brings me to the approach that the court is to take in deciding whether to grant approval under s.477(2A) or s.477(2B). Although the two provisions deal with different aspects of a liquidator's powers, both are concerned to ensure that the court exercises some oversight of the liquidator's actions and, in effect, confers or completes the necessary power only where it sees that a case for exercise of the power in the particular circumstances has been sufficiently shown. The court's assessment must be made in light of the purposes for which liquidators' powers exist. One overriding purpose is to serve "the interests of those concerned in the winding up - here the creditors" (Re Spedley Securities Ltd (1992) 9 ACSR 83 per Giles J); the other is to do whatever needs to be done "for the proper realisation of the assets of the company" or to assist its winding up (Re G A Listing & Maintenance Pty Ltd (1994) 15 ACSR 308 per Young J). The court does not concern itself with the commercial desirability of the transaction. As Giles J said in the Spedley Securities case (above):
"The court pays regard to the commercial judgment of the liquidator. That is not to say that it rubber stamps whatever is put forward by the liquidator but, as is made clear in Re Mineral Securities (Australia) Ltd [1973] 2 NSWLR 207 at 231-2, the court is necessarily confined in attempting to second guess a liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct."