New Cap Reinsurance Corporation Ltd (in liq) v A E Grant & Ors

Supreme Court of NSW|2008-02-22|Before: White J

CITATION : New Cap Reinsurance Corporation Ltd (in liq) v A E Grant & Ors [2008] NSWSC 1015

HEARING DATE(S) : 20 and 22 February 2008 and written submissions

CATCHWORDS : CORPORATIONS - insurance company - definition of insolvency - whether insurance liabilities are debts within the meaning of s 95A - whether a liability to pay unliquidated damages is a debt within the meaning of s 95A - conflict of authority - bound to hold that liability to pay unliquidated damages is not a debt within the meaning of s 95A - contingent debts within s 95A even where s 459D does not apply - CONTRACT - reinsurance policies - indemnity - nature of liability under an indemnity - whether always a liability to pay unliquidated damages for failure to protect indemnified party from loss - indemnity in respect of paid losses in respect of a quantified sum - in certain circumstances the pre-Judicature Acts remedy was on a common count for money paid rather than damages - liability lies in debt - CORPORATIONS - solvency - use of hindsight to value insurance liabilities - insurance liabilities were debts within meaning of s 95A - reinsurer insolvent

Corporations Act 2001 (Cth) Insolvency Act 1874 (Qld) LEGISLATION CITED : Bankruptcy Act 1966 (Cth) Companies Act 1961 (Cth) Life Insurance Act 1945-1950 (Cth)

New Cap Reinsurance Corporation Ltd (in liq) & Anor v Renaissance Reinsurance Ltd [2002] NSWSC 856; (2002) 192 ALR 601; 43 ACSR 65 Keith Smith East West Transport Pty Ltd (in liq) v Australian Taxation Office [2002] NSWCA 264; (2002) 42 ACSR 501 Bank of Australasia v Hall (1907) 4 CLR 1514 Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran [2005] NSWCA 243; (2005) 219 ALR 555; 54 ACSR 410; 23 ACLC 1666 Brooks v Heritage Hotel Adelaide Pty Ltd (1996) 20 ACSR 61 Re Kolback Group Ltd (1991) 4 ACSR 165 Lewis v Doran [2004] NSWSC 608; (2004) 208 ALR 385; 184 FLR 454; 50 ACSR 175; 22 ACLC 1009 Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation [2001] NSWSC 621; (2001) 53 NSWLR 213 Re Paine; Ex parte Read [1897] 1 QB 122 In re Blackpool Motorcar Co Ltd; Hamilton v Blackpool Motorcar Co Ltd (1901) 1 Ch 77 Box Valley Pty Ltd v Kidd [2006] NSWCA 26; (2006) 24 ACLC 471 Shephard v Australia & New Zealand Banking Corporation Ltd (1996) 41 NSWLR 431; (1997) 15 ACLC 1802 Shepherd v Australia & New Zealand Banking Group (1996) 14 ACLC 987 Hawkins v Bank of China (1992) 26 NSWLR 562 Insurance Commissioner v Associate Dominions Assurance Society Pty Ltd (1953) 89 CLR 78 In re London & Manchester Industrial Association (1875) 1 Ch D 466 Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 Miliangos v George Frank (Textiles) Ltd [1976] AC 443 Pettigrew v Commissioner of Taxation for the Commonwealth (1989) 89 ATC 4475; 20 ATR 625 Expo International Pty Ltd (in liq) v Chant [1979] 2 NSWLR 820 Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455 Edwards v Attorney General [2004] NSWCA 272; (2004) 60 NSWLR 667 Chief Commissioner of State Revenue v Reliance Financial Services Pty Ltd [2006] NSWSC 1017 Commissioner of Taxation of the Commonwealth of Australia v Simionato Holdings Pty Ltd (1997) 15 ACLC 477 Re Glendale Land Development Ltd (In liq) [1982] 2 NSWLR 563 CASES CITED : Re PMC Investments Pty Ltd (1991) 9 ACLC 1559 Markisic v Commonwealth of Australia [2007] NSWCA 92; (2007) 69 NSWLR 737 Alexander v Ajax Insurance Co Ltd [1956] VLR 436 Grant v Royal Exchange Assurance Co (1816) 5 M & S 439; 105 ER 1111 Castelli v Boddington (1852) 1 El & Bl 66; 118 ER 361 Luckie v Bushby (1853) 13 CB 864; 138 ER 1443 E Pellas & Co v Neptune Marine Insurance Co (1879) 5 CPD 34 Randall v Lithgow (1884) 12 QBD 525 Swan v Maritime Insurance Company [1907] 1 KB 116 Baker v Adam (1910) 15 Com Cas 227; [1908-10] All ER Rep 632; 102 LT 248 William Pickersgill & Sons Ltd v London & Provincial Marine & General Insurance Co Ltd [1912] 3 KB 614 Israelson v Dawson [1933] 1 KB 301 Jabbour v Custodian of Absentees Property of State of Israel [1954] 1 All ER 145 Chandris v Argo Insurance Co Ltd [1963] 2 Lloyd's Rep 65 Phoenix General Insurance Co of Greece SA v Halvanon Insurance Co Ltd [1985] 2 Lloyd's Rep 599 Edmunds v Lloyd Italico e L'Ancora Cia di Assicurazioni e Riassicurazioni SpA [1986] 2 All ER 249 Hartogen Energy Ltd v Cowley (Supreme Court of NSW, Rogers CJ Comm D, 27 July 1989, unreported BC8901911) Council of the City of Penrith v Government Insurance Office (1991) 24 NSWLR 564 Cigna Insurance Asia Pacific Ltd v Packer [2000] WASCA 415; (2000) 23 WAR 159 Odyssey Re (Bermuda) v Reinsurance Australia [2001] NSWSC 266; (2001) 19 ACLC 987 Israelson v Dawson [1933] 1 KB 301 Hansmar Investments Pty Ltd v Perpetual Trustee Co Ltd [2007] NSWSC 103; (2007) 61 ACSR 321 Jervis v Harris [1996] Ch 195 Australian Securities and Investments Commission v Edwards [2005] NSWSC 831; (2005) 220 ALR 148; 54 ACSR 583 Firma C-Trade SA v Newcastle Protection and Indemnity Association [1991] 2 AC 1 Hutchinson v Sydney (1854) 10 Exch 438; 156 ER 508 In re Richardson [1911] 2 KB 705

Commonwealth, Law Reform Commission, Report No. 45: General Insolvency Inquiry, (September 1988) ("Harmer Report") Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth) Paterson (ed), Australian Corporation Law: Principles and Practice (looseleaf) LexisNexis TEXTS CITED : Cross and Harris, Precedent in English Law, 4th ed (1991) Clarendon Press Halsbury's Laws of England, 4th ed, vol 20 Bullen and Leake's Precedents of Pleadings, 3rd ed (1868) Stevens and Sons Zakrzewski, "The Nature of a Claim on an Indemnity" (2006) 22 Journal of Contract Law 54

New Cap Reinsurance Corporation Ltd (in liq) & Anor PARTIES : v A E Grant & Ors, Lloyd's Syndicate No. 991

COUNSEL : Plaintiffs: B A Coles QS & P J Dowdy Defendants: NA

SOLICITORS : Plaintiffs: Henry Davis York Defendants: NA

42 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2351/02 New Cap Reinsurance Corporation Ltd (in liq) & Anor v A E Grant & Ors, Lloyd's Syndicate No. 991 JUDGMENT 1 HIS HONOUR: On 14 December 2006, I ordered that there be a separate determination of the issue of whether the first plaintiff ("NCRA") was insolvent on or from 8 January 1999 and 14 January 1999. This judgment determines that issue. 2 NCRA carried on business as a reinsurer. The second plaintiff, Mr Gibbons, was appointed administrator of NCRA on 21 April 1999 pursuant to a resolution of its directors under s 436A(1) of the Corporations Law. Mr Gibbons became the liquidator of NCRA on 16 September 1999 following a resolution of creditors (ss 439C and 446A of the Corporations Law). The winding-up is taken to have commenced on the day on which NCRA's administration began, that is, 21 April 1999 (ss 513B and 513C of the Corporations Law). In 2002, Mr Gibbons instituted 17 proceedings for orders under s 588FF of the Corporations Act 2001 (Cth). He alleged that in the six months ending on the relation-back day (that is 21 April 1999) NCRA entered into voidable transactions by making payments when the company was insolvent, and which constituted, so it was alleged, unfair preferences or uncommercial transactions, or both. In all of the proceedings, Mr Gibbons alleged that NCRA was insolvent at the time of the impugned payments. By the time of the hearing of the present application, all but two of the proceedings had been resolved. In one of the unresolved proceedings, the defendant has admitted that NCRA was insolvent at the relevant time so far as the claims against it were concerned. 3 In the present proceedings (2351/02), the liquidator seeks relief under s 588FF of the Corporations Act in respect of payments of US$2 million made on 8 January 1999 and US$3,980,600 made on 14 January 1999. 4 No appearance has been entered for the defendants who are members of a Lloyd's syndicate. In New Cap Reinsurance Corporation Ltd (in liq) v Renaissance Reinsurance Ltd [2002] NSWSC 856; (2002) 192 ALR 601; 43 ACSR 65, Barrett J held that a cause of action available under s 588FF of the Corporations Act for the recovery of an alleged preferential payment to an overseas party made when the company was insolvent is a cause of action which arises in this State. There is no question of jurisdiction. On 20 December 2002, orders were made for service of the originating process and supporting affidavit on the defendants at the address of their solicitors in London. On 17 October 2003, the plaintiffs were given leave to proceed against the defendants. 5 Following NCRA's incorporation on 11 October 1996, it was initially wholly owned by New Cap Reinsurance Corporation Holdings Ltd ("NCRH"), a company incorporated in Bermuda. Another subsidiary of NCRH was New Cap Reinsurance Corporation (Bermuda) Ltd ("NCRB"). The group was restructured into a vertical structure on 30 June 1998. NCRA became owned by a subsidiary of NCRB ("NCRe"). NCRB remained owned by NCRH. NCRA and NCRB both carried on business as reinsurers. NCRA was the primary writer of international reinsurance business for the group. NCRB also wrote international reinsurance business but primarily was a quota share reinsurer of NCRA. 6 When NCRA was placed into administration, draft financial statements had been prepared as at 31 December 1998. The financial statements had been subject to considerable audit scrutiny but had not been signed by the directors who, as at April 1999, expressed concern about increased claims reporting and apparent deterioration in liabilities. 7 In these proceedings, Mr Murray Smith of McGrath Nicol & Partners provided an expert accountant's report on the solvency of NCRA. He took the draft financial statements for the year ended 31 December 1998 as a "suitable anchor point for my review of NCRA's financial position subject to further review of key underlying assumptions and specifically [of] claims liabilities." I am satisfied that Mr Smith's use of the draft financial statements as an anchor point for review was appropriate. His conclusion that the draft financial statements were at the final stages of completion when NCRA was placed into administration was arrived at after reviewing the auditors' working papers and contemporaneous memoranda and correspondence. On 15 March 1999, NCRA requested a suspension of trading because its actuaries and auditors required a further week to finish the work necessary to complete the audited financial statements. The delay was attributed to its auditors and external actuarial consultants determining the impact of late reported claims at and after the year-end on the company's reserves and ultimate financial position. There was concern as to whether the financial statements could be presented on the basis that the group would continue as a going concern. This, and the adequacy of the provisions for future claims in the light of the high level of claims received in December 1998 were the issues which prevented finalisation of the financial statements. 8 NCRA reported an operating profit before tax of US$14,848,000 for the year ended 31 December 1997. Mr Smith noted that with the benefit of hindsight, it was clear that NCRA was under-reserved in 1997 and its results conversely overstated. He said: " NCRA then experienced further substantial underwriting losses in 1998 due to a combination of the losses arising from the business written in 1996 and 1997 and the effect of the major loss events detailed in Section 2.6. The increase in written premiums from 1997 to 1998 was approximately 9%. However the increase in gross incurred claims (undiscounted) in the same period was approximately 283%. " 9 The draft financial statements as at 31 December 1998 reported losses for that financial year of A$98,203,000, and net assets of A$48,918,000. Cash held as at 31 December 1998 was A$8,779,000. 10 The draft balance sheet stated the company's assets and liabilities in Australian dollars as follows: Current Assets 1998 A$'000 Cash 8,779 Receivables 233,230 Retrocession recoveries receivable 62,636 Deferred acquisition costs 9,597 Deferred retrocession premium 30,658 Investments 137,828 TOTAL CURRENT ASSETS 482,728

Non-Current Assets Retrocession recoveries receivable 198,348 Plant and equipment 1,784 TOTAL NON CURRENT ASSETS 200,132 TOTAL ASSETS 682,860

Current Liabilities Accounts payable 65,546 Outstanding claims 151,929 Unearned premiums 80,018 Deferred retro commission 3,244 Provisions 7,368 TOTAL CURRENT LIABILITIES 308,105

Non Current Liabilities Outstanding claims 325,837 TOTAL NON CURRENT LIABILITIES 325,837 TOTAL LIABILITIES 633,942

11 The most significant items are the provisions for outstanding claims (current and non-current) of A$477,766,000, and the provisions for current and non-current retrocession recoveries of A$260,984,000. 12 It is a feature of insurance and reinsurance business that there will be a timelag between the occurrence of the event giving rise to a liability under the policy and the insurer's liability becoming known, and between the liability becoming known and being fully quantifiable. Depending on the type of business, the time required for a full assessment of the extent of liability may be significant. It may be measured in years, not months. By way of example, a significant part of NCRA's business was providing reinsurance of insurers' liabilities under catastrophe policies. There were delays between the occurrence of the catastrophe, such as a hurricane, and the making of claims on the original policies of insurance. There would have been further delays before it could be determined that the insurer's level of claims liabilities was likely to reach the threshold at which the reinsurance policy would be triggered. As the reinsurance policies provided indemnity once the level of paid claims under the original policies reached a threshold, there would be further delays before NCRA became liable to pay. There would be still further delays before the full extent of its liability could become known. 13 Accounting standards and industry practice require insurers to make provision by way of estimates of liability for claims incurred but not reported (IBNR) or not enough reported (IBNER). Provisions for claims liabilities are not assessed merely by aggregating estimates of liability for individual claims, together with an estimate of IBNR. Actuarial analysis is used to estimate claims liabilities. Actuarial analysis is not based on the aggregation of estimates of individual claims. Rather, typically, claims liabilities are assessed by class of insurance using trends in aggregated data. For example, there may be an historical trend as to how claims liabilities develop over time for a particular class of business. An actuary may use such information in relation to earlier underwriting years to predict the future claims liabilities for later underwriting years. There may be market experience of loss ratios on particular classes of business for certain underwriting years. 14 The determination of an insurer's insurance liabilities involves the making of informed estimates of uncertain future outcomes. The determination of an insurer's insurance liabilities is quite different from, for example, the determination of the liabilities of a retailer or manufacturer, whose debts can usually be precisely ascertained. 15 On 2 June 2005, Mr Richard Wilkinson of KPMG Actuaries Pty Ltd prepared a valuation of the insurance liabilities of NCRA as at 31 December 1998 based on a high-level valuation of the liabilities as at 31 March 2003 and taking into account individual material movements in claims costs from that date to 31 December 2003. Mr Wilkinson is a fellow of the Institute of Actuaries of London and Australia, with extensive worldwide experience of actuarial practice in general insurance. The estimate of insurance liabilities was a central estimate without a prudential margin. That is, it was made on the basis that the estimate was equally likely to prove to be too high as too low than the actual experience. As there was more than 6 years' claims experience in respect of liabilities incurred as at 31 December 1998, the estimate could be made with considerable confidence. 16 Mr Wilkinson's review showed that the outstanding claims liabilities as at 31 December 1998 were A$984,201,000 and that the receivable for retrocession recoveries after allowance for bad debts was A$223,028,000. This was not an estimate of claims or recoveries then due and payable as at 31 December 1998, but of present and future liabilities under policies of reinsurance written before 31 December 1998 arising out of events which had occurred by 31 December 1998. The valuation of retrocession recoveries included a bad debt allowance of $259,200,000, a substantial part of which was referable to quota share reinsurance written by NCRB. NCRB reinsured 65 percent of NCRA's liabilities for the 1996 and 1997 underwriting years and 30 percent of its liabilities for the 1998 underwriting year. A provisional liquidator was appointed to NCRB on 22 April 1999 and orders have subsequently been made for its winding-up. The bad debt allowance adopted by Mr Wilkinson was 70 percent of moneys owed by NCRB to its creditors. He also assumed bad debts of 25 percent in respect of other retrocessions. 17 Based on the actuarial valuation, performed with hindsight, of outstanding claims liabilities and retrocession recoveries, NCRA had a deficiency of net assets as at 31 December 1998 of A$415,455,000, rather than a surplus of net assets as at that date of A$48,918,000 as shown in the draft balance sheet. 18 NCRA's outstanding claims liabilities as at 31 December 1998 included liabilities then due for payment. They also included claims which, as at 31 December 1998, had been advised by the reinsureds to NCRA as their estimate of future liability following the occurrence of an insured event, and also amounts which, as at 31 December 1998, had not been notified by reinsureds to NCRA. As at 31 December 1998, the company and its actuary were required to make an assessment of claims which had been incurred but not reported, or incurred but not enough reported. By 2005, Mr Wilkinson was satisfied that the case reserves then held were adequate and no additional IBNR liability was required for catastrophe claims. 19 NCRA used a computer system called SICS to record its insurance transactions and liabilities. It was described by a consultant to the liquidator who has been employed since September 2002 to assist with the run-off operations of NCRA, Mr Burdiss, as follows: " 7. SICS is an underwriting computer system which was developed in the United States specifically for the insurance and reinsurance industry. The system captures underwriting and claims information as contracts are written or claims received. It also records underwriting payments and receipts. It assists the user to store the information in a database in such a way that it is accessible and able to provide information on the basis of an individual contract or claim. It is necessary to use other software to generate 'hard copy' reports from the information inputted to the database via SICS. 8. SICS uses a B-Trieve database to store data entered into the system. This data is stored in various database tables. The data entered and maintained on the system includes: (a) Policy details, such as reference numbers, the underwriting year to which it pertains, details of the cedant, the premium terms, limits, class of business and geographical scope; (b) Technical transaction details, including the date of each transaction recorded, the type of transaction, the period the transaction covers, the due date of the transaction, the original currency and amount of the transaction (the system stores a US dollar equivalent value of each transaction); (c) Where a claim has been made, details of the claim such as the date of the loss, the date first reported and the nature of the loss, including classification of certain loses by a catastrophe code to identify large losses; (d) The system also records cash transactions, detailing the currency and amount of cash received and identifies the policies to which these cash transactions are allocated. " 20 Mr Smith has checked the data on the SICS system in respect of all large claims, that is, those in excess of US$500,000, against the original claims records. 21 Mr Burdiss gave evidence, which I accept, that the data on the SICS system was consistent with other reports generated by the system and with manual records against which he frequently cross-checks the data and that he has not found any material errors. 22 Mr Smith says, and I accept, that it was the invariable practice between NCRA and its reinsureds and between NCRA and its reinsurers to set off amounts owing in respect of premiums and claims and to settle the net balance. 23 Mr Smith described the liquidity position of NCRA as at 31 December 1999 as follows: Table 9 Amounts due and payable at 31 December 1998 A$ Large balances due and payable at 31 December 1998 13,514,356 Other amounts due and payable at 31 December 1998 44,633,705 Less: Amounts settled at 31 December 1998 (5,276,001) Quota share balance payable to NCRB 8,479,924 Total amount due and payable at 31 December 1998 61,351,984

Available funds at 31 December 1998 Cash at bank 8,779,388 Available investment funds (excluding collateral account) 7,165,555 Excess funds in collateral account 3,287,805 Available funds at 31 December 1998 19,232,748

Net deficit 42,119,236

24 The "large balances due and payable at 31 December 1998" referred to claims in excess of A$500,000. This represented four net sums due of US$8,292,542. For the reasons Mr Smith gives, I accept that the amounts were then due for payment. They comprised a net sum due to RCH of US$1,610,382 advised to NCRA on 11 November 1998. A sum of US$922,160 related to various claims arising from losses incurred or reported in September and October 1998. US$750,000 was due to Christensen and demanded by it on 22 October 1998. A net sum of US$5,010,000 was due and payable to Patrick by 31 December 1998 under a commutation agreement. The amount due to RCH was paid on 5 January 1999. The other three sums were paid on 15 January 1999 from funds referred to below. 25 The amount of A$44,633,705 represented claims each of which was less than A$500,000. This was considerably more than the amount entered on the SICS system as at 31 December 1998 as the amount of unsettled paid losses (US$13,479,834). This was due to a backlog in processing claims in the SICS system due to the volume of claims received. 26 The quota share balance payable to NCRB of A$8,479,924 was a net balance due on quota share agreements between NCRA and NCRB shown on statements raised for the quarter ended 30 September 1998 (US$5,203,365). Statements raised for the following quarter ended 31 December 1998 indicated a net balance due by NCRB to NCRA of A$23,036,937. Net balances on such statements were generally settled within 60 days of rendering the statement. The payments due by NCRB to NCRA were not paid because of the appointment of the inspector by the Registrar of Companies in Bermuda on 26 February 1999. 27 The balance sheet as at 31 December 1998 recorded cash of A$8,779,000 and investments totalling A$137,828,000. However, of this amount A$130,662,075 was held in a collateral account as security for the provision of letters of credit issued to certain reinsureds. That explains why only A$7,165,555 and A$3,287,805 of available funds in addition to cash at bank were available as at 31 December 1998. Mr Smith included the amount of A$3,287,805, which he calculated to be excess funds held in the collateral account, but noted that it was unclear whether the Chase Manhattan bank would have released those funds to NCRA. 28 There was little, if any, scope for NCRA to raise additional funding through selling or borrowing on the security of assets. The only fixed assets were plant and equipment. But they had a net value of A$1.78 million and consisted mostly of office fixtures and fittings and computer software which were necessary for the business. 29 NCRA had significant receivables as at 31 December 1998 recorded at A$233,230,000 in the draft balance sheet. Mr Smith observed that the single largest receivable was US$30 million (approximately A$47.5 million) owing to NCRA by its parent, NCRe, following the issue of a prospectus for a rights issue by NCRH dated 18 November 1998. The issue raised US$50 million, part of which was used to repay a loan facility with the Dresdner Bank. US$30 million was passed to NCRA by way of a perpetual notes issue to NCRe. It was not suggested that the notes issue created a debt payable to NCRe to be taken into account in determining NCRA's solvency. NCRA used the funds to settle outstanding claims liabilities. 30 Using data extracted from the SICS database, Mr Smith calculated that in the seven days from 1 to 8 January 1999, NCRA paid claims totalling A$6,523,925. After taking into account other amounts that became due and payable in that period, the amount due and payable by NCRA as at 8 January 1999 was A$54,068,682. Cash funds (including available investment funds and excess funds in the collateral account) as at 8 January 1999 totalled $12,140,308, a deficit of $41,928,374. 31 In the following week to 15 January 1999, claims totalling $37,991,573 were paid. The principal source of funds for these payments was the receipt of US$30 million (approximately A$47.5 million) on 12 January 1999. However, additional claims which became due and payable in that seven-day period, together with net reinstatement premiums payable by NCRA, totalled A$59,424,918, leaving a total amount due and payable as at 15 January 1999 of A$75,665,625. The available cash (including investment funds and excess funds in the collateral account) totalled A$23,990,437, a deficit of A$51,675,188. 32 In the following week, A$2,990,468 of claims were settled. Additional amounts totalling A$1,578,453 became payable. Available cash funds increased, presumably as the result of premium receipts. There remained a net deficit of A$44,210,168 between the amounts due and payable at the end of the period and the available funds. That pattern continued until administrators were appointed on 23 April 1999. Mr Smith summarised the net cash position, being the difference between available funds at the end of each week and the amounts due and payable at the end of each week, as follows: Table 30 Net cash position - surplus/(deficit) A$ 8 January 1999 (41,928,374) 15 January 1999 (51,675,188) 22 January 1999 (44,210,168) 29 January 1999 (39,047,407) 5 February 1999 (30,261,874) 12 February 1999 (30,347,410) 19 February 1999 (46,016,059) 26 February 1999 (52,811,933) 5 March 1999 (48,867,209) 12 March 1999 (39,643,581) 19 March 1999 (53,756,039) 26 March 1999 (43,733,672) 2 April 1999 (51,813,326) 9 April 1999 (61,112,081) 16 April 1999 (73,400,209) 23 April 1999 (80,507,847)

33 NCRA did not obtain further additional capital or write substantial new profitable business after 31 December 1998. Mr Smith concluded on the basis of the later actuarial assessment of claims, liabilities and reinsurance recoveries that NCRA had a balance sheet deficiency of around A$400 million during the period from 1 January 1999 to 21 April 1999. I accept that opinion. Mr Gibbons, the administrator, and subsequently the liquidator of NCRA, estimated in his report to creditors of 22 July 1999 that as at 30 April 1999, NCRA had a deficiency in net assets of US$203,124,119. In his report to creditors of 30 September 2004, that estimate had increased to US$332,195,188. 34 NCRA experienced financial difficulties from at least the second half of 1998 until the appointment of the administrator. A report to the board of NCRH from the NCRA management team dated 26 August 1998 stated that NCRA faced a "single all-encompassing hurdle toward future operation - Insufficient Capital". The report stated that, without an injection of additional capital, NCRA had insufficient capital to continue in its current form. They observed that the company needed US$73 million to reach a capitalisation of US$200 million which, together with other identified factors, would result in a triple B rating. That was said in the context of an optimistic assessment that the 1998 year showed "promise of generating profits" such that the company would be well-placed to take advantage of the 1999 renewal season. It was in the context of a half-yearly consolidated financial statement showing net assets of US$127,479,000 with gross outstanding claims liabilities of US$161,526,000. At the same time as the report, there was a large loss event known as Galaxy 10. Subsequent major loss events in September and October 1998. 35 The major loss events were Korean Airlines (5/8/97), Canadian ice storms (5/1/98), Galaxy 10 (25/8/98), Swiss Air (2/9/98), Global Star (9/9/98), Hurricane Georges (21/9/98), and Hurricane Mitch (28/10/98). As at 31 December 1998 NCRA was a relatively new player in the international reinsurance market. The markets to which it was exposed suffered major losses in the second half of 1998. 36 To a certain extent, these adverse events were reflected in the loss of A$98,203,000 recorded in the draft financial statements for the year ended 31 December 1998. With the benefit of hindsight, that loss was understated to the extent that claims liabilities, net of reinsurance recoveries, were understated. However, even without the benefit of a hindsight review, the difficulties being experienced by NCRA in the latter half of 1998 showed that the liquidity problems experienced in 1999 as summarised in the table set out at para [23] above, were not merely temporary. 37 In November 1998, a major insurance broker, AON, removed NCRA from its "Security Classification List". AON said that, should the proposed US$50 million capital-raising be successful, it would review its decision the following year, but much would depend on the allocation of the capital between the two underwriting entities. In March 1999, it advised that as the capital raised largely repaid debt, there was no material financial strengthening of the company and that NCRA remained unacceptable security so that no new renewal business would be placed with them. Another broker, Guy Carpenter, also put in place a requirement for written instructions from its clients in order for it to place any new or renewed business within NCRA. 38 Further evidence of NCRA's declining position was the requirement by a large number of reinsureds that letters of credit be issued to secure NCRA's obligations. This adversely affected its liquidity. 39 The capital made available to NCRA on 12 January 1999 was insufficient to restore its liquidity as shown on the table in para [23]. An inspector was appointed to NCRB on 26 February 1999. On 5 March 1999, APRA gave notice to NCRA to show cause why an investigator should not be appointed to it. On 4 March 1999, Duff & Phelps reduced its claims-paying ability rating to B from BBB+ and noted that its financial viability had come into question. Its unsecured subordinated converting notes were rated CCC indicating that there was a substantial risk that policy-holder obligations would not be paid when due. Trading in its shares and notes was suspended on 15 March 1999 following NCRA's inability to produce signed financial statements. Principles for Determining Insolvency of a Reinsurer 40 As a matter of commercial reality, NCRA was insolvent at all times from 31 December 1998. It had insufficient liquid funds to pay its insurance liabilities as they fell due for payment. Its liability to make future payments in respect of losses already incurred vastly exceeded its available assets. 41 The question of NCRA's solvency is to be determined by reference to s 95A of the Corporations Act. Section 95A of the Corporations Act provides: " 95A Solvency and insolvency (1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable. (2) A person who is not solvent is insolvent. " 42 "Debts" or "debt" are not defined. It seems absurd to suggest that an insurer's solvency should be determined without reference to its insurance liabilities. However, it may be said that that is the position by reason of two propositions. First, that the word "debts" in s 95A does not include a liability to pay unliquidated damages. Secondly, that NCRA's liabilities under its policies of reinsurance were to pay unliquidated damages, not debts. There is authority for both propositions. If both are correct, NCRA is not insolvent within the meaning of s 95A. There is a third question, which I will address first, namely, whether it is legitimate to use the hindsight valuation to determine the extent of NCRA's liabilities, even though their extent was not then known. 43 The test for solvency under s 95A, and therefore for insolvency, predominantly directs attention to a company's cashflow rather than making a simple "balance sheet" assessment of its assets and liabilities (Keith Smith East West Transport Pty Ltd (in liq) v Australian Taxation Office [2002] NSWCA 264; (2002) 42 ACSR 501 at 513 [33]). However, the value of a company's assets and the amount of its liabilities, not only its current assets and current liabilities, are relevant to its solvency, as is its capacity to obtain credit. 44 The reason s 95A primarily directs attention to the company's cashflow is that whilst the words "as and when they become due and payable" require looking into the future beyond the particular day on which the question of solvency or insolvency is to be determined, that usually involves looking only to the reasonably immediate future (Bank of Australasia v Hall (1907) 4 CLR 1514 at 1527; Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran [2005] NSWCA 243; (2005) 219 ALR 555; 54 ACSR 410; 23 ACLC 1666 at [103]; Brooks v Heritage Hotel Adelaide Pty Ltd (1996) 20 ACSR 61 at 65; Re Kolback Group Ltd (1991) 4 ACSR 165 at 169). In Lewis v Doran, Giles JA said (at [103]): " how far into the future will depend on the circumstances including the nature of the company's business and, if it is known, of the future liabilities. " 45 Unlike most businesses, an insurer receives its revenue, in the form of premiums, before incurring its major expenses, in the form of claims under the policies of insurance for which the premiums are received. An insurer who is forced to use premium income from newly written policies to meet its existing liabilities, leaving it without resources to meet future claims on those policies, is insolvent as a matter of "commercial reality and common sense" (Lewis v Doran [2004] NSWSC 608; (2004) 208 ALR 385; 184 FLR 454; 50 ACSR 175; 22 ACLC 1009 at [108]), even if there would be a considerable lapse of time before those claims arise. In Insurance Commissioner v Associate Dominions Assurance Society Pty Ltd (1953) 89 CLR 78, Fullagar J, sitting as a single Justice of the High Court, approved (at 92) a proposition stated by Mr Kay QC (as he then was) in argument in In re London & Manchester Industrial Association (1875) 1 Ch D 466 at 470, that: " the company is practically insolvent, as it has no reserve funds, no capital remaining to be called up, and can only, out of current income, meet existing liabilities on policies as they fall due to the injury of the other creditors whose claims are not yet matured. " 46 In Insurance Commissioner v Associated Dominions Assurance Society Pty Ltd, Fullagar J held a life insurance company to be insolvent because it would be unable to discharge in full claims which would arise under maturing policies, albeit, that that was not likely to happen until at least seven years after the date of the judgment. The judgment was in 1953. His Honour said (at 111): " ... The company is insolvent not merely in a technical sense but in a practical and commercial sense, not merely in slight degree but in very serious and substantial degree. This does not mean that it is unable at the moment to pay its debts as they fall due. It could, so far as the evidence goes, discharge its current liabilities tomorrow, and it will for some time to come be able to pay its policy holders in full as and when their claims mature. But it is highly probable - practically certain, I think, as matters stand - that it will in the not very distant future be unable to discharge in full claims under maturing policies. When that event will occur cannot in the nature of things, be precisely stated. I did not understand it to be suggested that it was likely to occur before 1960.

That being the position of the company, there is, in my opinion, a high degree of probability that, if it is not placed in liquidation, policy holders whose claims mature in the near future will be paid in full at the expense of those whose claims mature in the more distant future. ... "

Although the legislative context was different (see para [74] below), that does not detract from the force of his Honour's observations. Use of Hindsight to Value Liabilities 47 The reference by Giles JA in Lewis v Doran to giving consideration to future liabilities if they are known, noted in para [44], must be understood by reference to the type of case with which the court was concerned. The company whose insolvency was there in question was a building company. Giles JA, with whom Hodgson and McColl JJA agreed, said (at [103]): " Unexpected later discovery of a liability, or later quantification of a liability at an unexpected level, may be excluded from consideration if the liability was properly unknown or seen in lesser amount at the relevant time." 48 His Honour excluded from consideration a disputed claim from a subcontractor in respect of which there was a counter claim, where the disputed claim was of doubtful validity and was only established three years later after arbitration. 49 I do not understand Giles JA to be enunciating any general proposition applicable to all liabilities, whatever their nature. His Honour's comments have to be understood in the context of the facts of the case before him, as is made clear by the statement that later discoveries of a liability or later quantifications of a liability "may be excluded" not "must be excluded" from consideration if the liability was properly unknown, or was quantified at a lesser amount at the relevant time. 50 The present question is not whether it should reasonably have been suspected at a particular time that NCRA was insolvent, but whether in fact it was not able to pay its "debts" as and when they became due and payable. Assuming that NCRA's insurance liabilities as at 31 December 1998 and thereafter were "debts" within the meaning of s 95A, in my opinion, in determining whether NCRA was solvent, as distinct from whether it may reasonably have appeared that it was solvent, regard should be had to the quantum of its insurance liabilities as they are now known to be, even if it were reasonable at the time that NCRA not know the extent of those liabilities. 51 In Lewis v Doran, Palmer J at first instance said that where the question of solvency is to be determined retrospectively, the Court has the inestimable advantage of hindsight. His Honour said (at [108]): " Where the question is retrospective insolvency, the Court has the inestimable benefit of the wisdom of hindsight. One can see the whole picture, both before, as at and after the alleged date of insolvency. The Court will be able to see whether as at the alleged date of insolvency the company was, or was not, actually paying all of its debts as they fell due and whether it did, or did not, actually pay all those debts which, although not due as at the alleged date of insolvency, nevertheless became due at a time which, as a matter of commercial reality and common sense, had to be considered as at the date of insolvency. By reference to what actually happened, rather than to conflicting experts' opinions as to the implications of balance sheets, the Court's task in assessing insolvency as at the alleged date should not be very difficult. "

Although this paragraph was not specifically endorsed on appeal, nor was it specifically rejected. In my respectful opinion, it is correct. The use of hindsight shows that NCRA had liabilities of hundreds of millions of dollars more than was appreciated as at 31 December 1998. It would be a futile exercise to inquire whether NCRA's case estimates and the actuarial calculations of its liabilities were reasonably based, when it is now known with a far greater level of assurance what its liabilities were. 52 My conclusion as to NCRA's solvency does not depend on the correctness of this conclusion. Even if it is not legitimate to use hindsight to value NCRA's insurance liabilities, its cashflow difficulties summarised above demonstrate insolvency, provided, of course, that it is legitimate to have regard to such liabilities.

Do "Debts" in s 95A Include Liability to Pay Unliquidated Damages? 53 The plaintiff did not tender the policies under which NCRA was liable. There were many hundreds, if not thousands, of such insurance contracts. I have not counted the list. It might have been thought that such a course was impracticable. There was evidence that typically a reinsured would be reinsured in respect of a particular class and type of policy (e.g. catastrophe risks in respect of damage to property). NCRA issued an excess of loss reinsurance policy such that it became liable up to stated limits once the reinsured's level of paid claims triggered the relevant layer of insurance. The quantum of liability could be readily calculated. 54 However, because the contracts of reinsurance were contracts of indemnity, there is a question whether it is relevant to NCRA's solvency, as determined under s 95A, if its liabilities were to pay unliquidated damages, rather than in debt. 55 Having regard to the High Court's decision in Bank of Australasia v Hall, it might be thought that that would be an unnecessary inquiry. In that case, the High Court considered the meaning of the word "debts" in s 107 of the Insolvency Act 1874 (Qld). It provided: " Every conveyance assignment gift delivery or transfer of property or charge thereon made every payment made every obligation incurred and every judicial proceeding taken or suffered by any debtor unable to pay his debts as they become due from his own moneys in favour of any creditor or any person in trust for any creditor with a view of giving such creditor a preference over the other creditors shall if a petition for adjudication in insolvency be presented against such debtor within six months after the date of making taking paying or suffering the same and adjudication of insolvency be made on such petition be deemed fraudulent and void as against the trustee of the insolvent appointed under this Act but this section shall not affect the rights of a purchaser payee or incumbrancer in good faith and for valuable consideration. Provided that pressure by a creditor shall not be sufficient to exempt any transaction from the operation of this section. "

56 There was no definition of "debts" in the Insolvency Act, just as there is no definition of "debts" in s 95A. Section 107 was later reflected in s 122 of the Bankruptcy Act 1966 (Cth), although in that Act there was a definition of "debts" as including "liabilities". Until 1992, the various Companies Acts and the Corporations Law incorporated the unfair preference provisions of the Bankruptcy Acts by reference to s 122 of the Bankruptcy Act. The Corporations Law was amended in 1992 by the Corporate Law Reform Act 1992 (Cth). It inserted s 588FA dealing with unfair preferences. Nothing in the Harmer Report (Law Reform Commission, Report No. 45: General Insolvency Inquiry (September 1988)) or the Explanatory Memorandum to the Corporate Law Reform Bill 1992 expressed an intention that there should be any change to what was denoted by the word "debts" from that which had obtained under s 122 of the Bankruptcy Act. In Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation [2001] NSWSC 621; (2001) 53 NSWLR 213, Palmer J said (at 220 [32]) that: " In a claim for recovery of an unfair preference, the test of insolvency prescribed by the Corporations Act 2001 (Cth), s 95A(1) is no different in substance from that prescribed by its predecessors, s 95 of the Bankruptcy Act 1924 (Cth) and s 122(1) of the Bankruptcy Act 1966 (Cth) ." 57 In Bank of Australasia v Hall, the majority of the High Court held that the word "debts" in s 107 of the Insolvency Act included any liability of the debtor provable on his bankruptcy (per Griffith CJ at 1527, per Barton J at 1531, per O'Connor J at 1536-1537 and per Isaacs J at 1547, 1549). In concluding that the debtor was unable to pay his debts as they became due from his own moneys at the time of an impugned conveyance, the majority of the High Court took into account the debtor's liability to pay unliquidated damages for breach of warranty and fraudulent misrepresentation, which liability was established by judgment shortly after the impugned conveyance was made. 58 The conclusion that the debtor's liability to pay unliquidated damages was a debt for the purposes of the section was partly based on authorities which had held that in Bankruptcy statutes for the avoidance of preferential payments to creditors, a "creditor" meant anyone who could prove in the bankruptcy (Re Paine; Ex parte Read [1897] 1 QB 122; In re Blackpool Motorcar Co Ltd; Hamilton v Blackpool Motorcar Co Ltd (1901) 1 Ch 77). It was held that the same meaning should therefore be given to the word "debts" in an equivalent provision (at 1527, 1536-1537, 1546-1547). 59 A further basis for the conclusion that a wide construction of the word "debts" should be adopted was that such a construction gave effect to the object of the provision for the avoidance of preferences, which requires regard to be had to the position of all persons who would be entitled to claim on the bankrupt estate. Thus, O'Connor J said (at 1537) that: " The governing circumstance in all three sections [viz. ss 107, 108 and 109 of the Insolvency Act ] is the same, namely, that the debtor at the time of the transaction was unable to pay his debts as they became due out of his own moneys. Such a condition of affairs might well be described as impending insolvency, and the policy of the sections would appear to be that at such a crisis the debtor should not be allowed to so deal with his property as to prejudice the interests of those who, in the event of his subsequent insolvency, would be entitled to a share of it in distribution. In charging the Court with the duty of determining whether the debtor's affairs had reached that crisis at the time of the transaction impeached, it surely must have been intended that it should make as real an inquiry into the existence of the debts and of the moneys available to pay them as they became due as a man of business would make if he had to determine the same issue for himself, having due regard to the interests of all those who would be entitled to claim against his estate in the event of adjudication. " 60 On the authority of Bank of Australasia v Hall, there should be no doubt that regard can be had to all of the claims to which NCRA was liable which had been incurred up to the relevant dates for considering its solvency. It would be irrelevant whether NCRA's liabilities under its policies of insurance were characterised as a liability in damages or in debt. However they were characterised, the claims of its reinsureds would be provable in its liquidation. Section 553(1) of the Corporations Act provides that: " in every winding-up, all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company. " 61 However, in Box Valley Pty Ltd v Kidd [2006] NSWCA 26; (2006) 24 ACLC 471, the New South Wales Court of Appeal held that in determining whether a company was unable to pay its debts as and when they became due and payable within the meaning of s 95A, regard could not be had to a potential, but highly probable, liability to pay damages which the company would incur under an existing contract. There was no doubt that the company had a contingent liability to pay damages which would have been admissible to proof in its winding-up. However, it was held that such a liability was not a "debt" for the purposes of s 95A. Their Honours did not refer to Bank of Australasia v Hall, and I was informed by counsel that they were not referred to it. 62 In Box Valley Pty Ltd v Kidd, the company alleged to be insolvent traded in grains. The plaintiff was a supplier of grain. It had not been paid. It sued the directors for allowing the company to trade when it was insolvent. The company entered into contracts with the plaintiff to buy grain in late May and early June 2001. At that time it had looming liabilities under contracts which it had already entered into to sell white cottonseed at prices well below the then market price. These contracts were deliverable on 31 July 2001 and 17 August 2001. The company had contracted to supply 35,000 tonnes of white cottonseed at an average price of $182.24. It did not have the white cottonseed to supply and at the relevant dates at which it entered into contracts with the plaintiff, the market price for white cottonseed was $228-$250 a tonne. Its potential liability under its sale contracts was critical to its solvency. The company went into administration on 21 June 2001 when its director formed the view that a fall in the market price to below $184.24 was unlikely. 63 Bryson JA noted that the director's foresight was correct and there were huge claims for damages from the holders of defaulted forward sale contracts in the liquidation (at 476 [12]). Nonetheless, at the relevant time, the company was not under an existing liability to pay damages for breach of contract because its obligation to deliver under the forward contracts had not yet arisen. The Court of Appeal (Bryson and Basten JJA and Gzell J) unanimously held that the fact that the company had an impending liability to pay substantial damages which it would not be able to pay, did not mean that it was unable to pay its debts as and when they became due and payable within the meaning of s 95A. Bryson JA said (at 476-477 [14]): " The debts referred to in the test of solvency in s 95A are only part of the debts or claims provable in winding-up referred to in s 553(1); and for the purposes of s 588G the debts which come under consideration are not be identified in the case of an insolvent company with the debts provable referred to in s 553E. The word "debt" is used in s 95A of the Corporations Act without any supporting definition. An entitlement to claim damages for breach of a contractual obligation to sell and deliver goods is not a debt within the ordinary meaning of that word. " 64 His Honour also said (at 477 [15]), that "... an obligation ... which when it comes into existence will be an obligation for unliquidated damages, is not a debt" citing Shephard v Australia & New Zealand Banking Corporation Ltd (1996) 41 NSWLR 431 at 443-445; (1997) 15 ACLC 1802 at 1813-1814; Shepherd v Australia & New Zealand Banking Group (1996) 14 ACLC 987 at 997; Hawkins v Bank of China (1992) 26 NSWLR 562 at 572-578. Those authorities dealt with the expression "incur a debt" in s 556 of the Companies (NSW) Code. It appears that Bryson JA considered that the word "debts" in s 95A of the Corporations Act, should have the same meaning as it had in the phrase "incurs a debt" in s 556(1) of the Companies (NSW) Code. That section provided, in substance, that a person who was a director of the company, or took part in its management at a time when the company incurred a debt, was guilty of an offence if, at that time, there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due. The equivalent provision in the Corporations Act is s 588G. 65 If the Court's attention had been drawn to Bank of Australasia v Hall the same view may not have been taken that the words "debt" and "debts" should have the same meaning in the Corporations Act, whatever the context in which they are used. 66 Basten JA noted (at 488 [61]) that it was not argued that the company incurred a debt by entering into agreements to sell white cottonseed to third parties. His Honour observed that: " As the white cottonseed market rose, the likelihood of default under the sale contracts increased until it became at least highly probable, around 21 June 2001. The likelihood that the Company would therefore become liable to damages for breach of the sale contracts rose to a similar level. However, whilst a breach would have given rise to damages which were unliquidated, it could not be said that the Company had thereby incurred a debt. The position of the Company may, on that approach, have become commercially untenable, but it was not insolvent in the sense defined by s 95A, at any time prior to 15 June 2001 . 67 It would appear from this paragraph that his Honour was of the view that even when the liability for damages had crystallised, the liability to pay damages would not be a debt to be considered for the purposes of s 95A. 68 Gzell J, also referring to Hawkins v Bank of China, Shephard & Ors v ANZ Banking Corporation Ltd & Anor and to Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 concerning the distinction between a claim for unliquidated damages for breach of contract and a claim in debt, said (at [73]): " On the authorities, a claim for damages for breach of contract is not a debt for the purposes of the definition solvency and insolvency in the Corporations Act 2001 (Cth), s 95 A. " 69 His Honour did not refer to any authority which considered this question in the context of s 95A. 70 The facts in Box Valley Pty Ltd v Kidd were that no liability for damages had been incurred at the relevant time for determining the company's insolvency, although it was very likely that such a liability would be incurred soon thereafter. Mr B A Coles QC and Mr P J Dowdy, who appeared for the plaintiffs, submitted that the ratio of the decision was only that a potential future liability to pay damages for breach of contract was not a debt for the purposes of s 95A. However, the reasoning of each of the Judges of the Court of Appeal was that the likely liability to pay unliquidated damages, when it crystallised, would not be a liability to pay a debt, and was therefore not a liability to be taken into account under s 95A. Whilst the actual decision was that a potential future liability to pay unliquidated damages was not a debt within the meaning of s 95A, the essential reasoning for the decision was that even if the potential liability had been realised, a liability to pay unliquidated damages for breach of contract was not such a debt. This is the ratio of the decision even though the factual context was more narrow. 71 It appears to me, with respect, that Box Valley Pty Ltd v Kidd is inconsistent with Bank of Australasia v Hall. It was submitted by counsel for the liquidator that I should follow the earlier decision of the High Court. However, it is my duty to follow the later decision of the Court of Appeal. In Miliangos v George Frank (Textiles) Ltd [1976] AC 443, Lord Simon of Glaisdale said (at 478): " It is the duty of a subordinate court to give credence and effect to the decision of the immediately higher court, notwithstanding that it may appear to conflict with the decision of a still higher court. The decision of the still higher court must be assumed to have been correctly distinguished (or otherwise interpreted) in the decision of the immediately higher court ... Any other course is not only a path to legal chaos but in effect involves a subordinate court sitting in judgment on a decision of its superior court. That is contrary to law. "

(See also per Lord Wilberforce at 465, per Lord Cross of Chelsea at 497 and per Lord Fraser of Tullybelton at 503; Pettigrew v Commissioner of Taxation for the Commonwealth (1989) 89 ATC 4475 at 4484-4485; 20 ATR 625 at 635.) 72 It is therefore critical whether NCRA's insurance liabilities can properly be characterised as "debts" within s 95A and not unliquidated damages. Are Contingent Debts Included in s 95A? 73 A further question is whether the ratio of Box Valley Pty Ltd v Kidd is that contingent debts do not fall within s 95A. Section 459D provides that where, on an application under ss 232, 462 or 464 (viz applications to wind up on grounds of oppression or insolvency), the question arises whether the company is insolvent, the Court may take into account a contingent or prospective liability of the company. In Expo International Pty Ltd (in liq) v Chant [1979] 2 NSWLR 820, Needham J said (at 839) that: " It is interesting to note that, in deciding whether a company is unable to pay its debts on a winding up petition, the court is required to take into account 'the contingent and prospective liabilities of the company': s. 222(2)(c). It would be strange if a different test applied for determining the same factual question under s. 294. "

Section 222(2)(c) of the Companies Act 1961 (Cth) was the equivalent of the provision now found in s 459D of the Corporations Act . Section 294 of the Companies Act provided that a floating charge on the undertaking or property of the company created within six months of the commencement of the winding-up should, unless it were proved that the company, immediately after the creation of the charge, was solvent, be invalid except for the amount of any cash paid to the company at the time of, or subsequently to, the creation of, and in consideration for, the charge together with interest. 74 In Insurance Commissioner v Associated Dominions Assurance Society Pty Ltd, Fullagar J dealt with an application under s 59 of the Life Insurance Act 1945-1950 (Cth) for the winding-up of a life insurance company. No specific grounds for winding-up were enunciated in the section, but his Honour held that the discretion to order a winding-up should be exercised applying the general conception inherent in a winding-up on "just and equitable" grounds, having regard in particular to the grounds in s 55 on which the Insurance Commissioner could conduct an investigation, which investigation was a precondition to the Commissioner's applying for a winding-up order under s 59. The two relevant grounds were that the company "is, or is likely to become, unable to meet its obligations" and that a valuation of its statutory fund was less than its liabilities in respect of the fund. Fullagar J said (at 91-92): " I will only add at this stage that it seems clear to me, and I did not understand it to be disputed, that, for the purposes of s 55 and s 59 alike, it is necessary to have regard not only to present liabilities of a company but to future and contingent liabilities. "

Although the statutory context was different, his Honour's reasoning has generally been thought to indicate that contingent and prospective debts are to be taken into account for the purposes of s 95A ( Australian Corporation Law Principles & Practice , (looseleaf) LexisNexis at [5.4.0060]). 75 As s 95A refers to a person's inability to pay all the person's debts, there is no reason to exclude contingent or prospective debts. A contingent debt exists if there is an existing obligation out of which a liability on the part of the debtor to pay a sum of money will arise in a future event, whether it be an event that must happen or only an event that may happen (Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455 at 459). A prospective debt is one not immediately payable but which will certainly become due in the future on a date which is presently determined or which will be determined by reference to future events (Edwards v Attorney General [2004] NSWCA 272; (2004) 60 NSWLR 667 at 679, [59]). 76 In Edwards v Attorney General, Young CJ in Eq, with whom Spigelman CJ and Mason P generally agreed, said (at 679, [60]) that contingent or prospective creditors are taken into account in assessing solvency (although compare 684, [90]). 77 Section 459D permits contingent and prospective liabilities, not just contingent and prospective debts, to be taken into account in applications under ss 232, 462 and 464. That might be thought to support a wider construction of "debts" in s 95A. I agree with the plaintiff's submission that it would be strange if, in determining insolvency as defined by s 95A for the purposes of Pt 5.7B, the Court were not able to take into account contingent or prospective liabilities of a company when such liabilities are required to be taken into account when determining whether a company should be wound up on the ground of insolvency (Expo International Pty Ltd (In liq) v Chant quoted at para [73] above). 78 In Box Valley Pty Ltd v Kidd, the Court of Appeal did not refer to s 459D, nor did it address the question whether "debts" for the purpose of s 95A include contingent and prospective debts, where the question of solvency arises outside of applications falling within s 459D. Bryson JA noted (at 477 [15]) that in s 556 of the Companies Code (now s 588G) the reference to incurring a debt includes the incurring of a contingent debt (Hawkins v Bank of China). 79 A person who has an existing obligation to pay damages for breach of contract will become liable to pay a sum of money under a judgment if he or she is sued. The judgment will create a debt in substitution for the existing obligation to pay damages. Therefore, it might be thought that a liability to pay unliquidated damages is a contingent debt because the person liable can be subjected to judgment (Chief Commissioner of State Revenue v Reliance Financial Services Pty Ltd [2006] NSWSC 1017 at [36]). 80 Nor did the Court of Appeal in Box Valley Pty Ltd v Kidd refer to other cases in which a person with a claim to unliquidated damages has been held to be a creditor or contingent creditor (e.g. Commissioner of Taxation of the Commonwealth of Australia v Simionato Holdings Pty Ltd (1997) 15 ACLC 477; Re Glendale Land Development Ltd (In liq) [1982] 2 NSWLR 563; Re PMC Investments Pty Ltd (1991) 9 ACLC 1559). 81 It would have been arguable in Box Valley Pty Ltd v Kidd that the company owed a contingent debt, even if a liability to pay unliquidated damages could not qualify as a contingent debt. If the company defaulted under its forward sales contract, after giving notice, the purchaser was entitled to purchase the goods the company was required to supply, and to give notice of the amount of the loss to the company. Bryson JA and Gzell J accepted that if that were to happen, a debt would thereby be created, but it would not be created until those events happened and the notice were given by the purchaser under the contract. Prima facie, this would be sufficient to constitute a contingent debt in that there was an existing obligation (the forward contract) out of which a liability on the part of the company to pay a sum of money would arise in a future event, whether it be an event which must happen or only an event that may happen (Community Development Pty Ltd v Engwirda Constructions at 459), namely, default followed by the purchaser going into the market to purchase the commodity and giving the requisite notices. 82 The fact that these arguments were not considered, or at least not dealt with in the Court's reasons, does not mean that the Court of Appeal is to be taken to have rejected the proposition that "debts" in s 95A include contingent and prospective debts. It is only that "rule of law expressly or impliedly treated by the judge as a necessary step in reading his conclusion, having regard to the line of reasoning adopted" which constitutes the ratio of a decision (Cross and Harris, Precedent in English Law, 4th ed (1991) Clarendon Press at 72). It was not a step in the Court's reasoning that contingent debts do not fall within s 95A. Even if it were assumed that "debts" in s 95A do not include contingent debts, the case would not be authority for that proposition (Markisic v Commonwealth of Australia [2007] NSWCA 92; (2007) 69 NSWLR 737 at 748 [56]). 83 On the other hand, it was a necessary step in the Court's reasoning that unliquidated damages for breach of contract are not "debts" within the meaning of s 95A. The binding effect of that reasoning on a single judge cannot be sidestepped by arguing that such a liability can be characterised as a contingent debt. 84 It cannot be argued in the face of Box Valley Pty Ltd v Kidd that a person is unable to pay his debts as and when they become due and payable, if his financial resources will be more than fully consumed in discharging liabilities which are not debts. Provided the debtor is able to pay debts, even at the sacrifice of other financial liabilities, then, according to the reasoning in that case, the debtor is not insolvent. 85 It follows that if NCRA's insurance liabilities were to pay unliquidated damages for breach of contract, I am bound to hold that they are to be ignored for the purposes of determining whether NCRA was able to pay its debts as and when they became due and payable within the meaning of s 95A. Nature of NCRA's Insurance Liabilities 86 I did not have the benefit of submissions as to whether NCRA's insurance liabilities should properly be characterised as liabilities for unliquidated damages or in debt. 87 The liability of an insurer under a policy of indemnity insurance is typically a liability to pay unliquidated damages and is not a liability in debt (Alexander v Ajax Insurance Co Ltd [1956] VLR 436 at 445-450; Grant v Royal Exchange Assurance Co (1816) 5 M & S 439 at 442; 105 ER 1111 at 1112-1113; Castelli v Boddington (1852) 1 El & Bl 66 at 71-73; 118 ER 361 at 363-364; Luckie v Bushby (1853) 13 CB 864 at 877, 879, 880; 138 ER 1443 at 1448-1449; E Pellas & Co v Neptune Marine Insurance Co (1879) 5 CPD 34 at 40-41; Randall v Lithgow (1884) 12 QBD 525 at 529; Swan v Maritime Insurance Company [1907] 1 KB 116 at 124; Baker v Adam (1910) 15 Com Cas 227; [1908-10] All ER Rep 632; 102 LT 248 at 250; William Pickersgill & Sons Ltd v London & Provincial Marine & General Insurance Co Ltd [1912] 3 KB 614 at 621; Israelson v Dawson [1933] 1 KB 301; Jabbour v Custodian of Absentees Property of State of Israel [1954] 1 All ER 145 at 150; Chandris v Argo Insurance Co Ltd [1963] 2 Lloyd's Rep 65 at 73-74; Phoenix General Insurance Co of Greece SA v Halvanon Insurance Co Ltd [1985] 2 Lloyd's Rep 599 at 609; Edmunds v Lloyd Italico e L'Ancora Cia di Assicurazioni e Riassicurazioni SpA [1986] 2 All ER 249 at 250; Hartogen Energy Ltd v Cowley (Supreme Court of NSW, Rogers CJ Comm D, 27 July 1989, unreported BC8901911 at 8); Council of the City of Penrith v Government Insurance Office (1991) 24 NSWLR 564 at 568; Cigna Insurance Asia Pacific Ltd v Packer [2000] WASCA 415; (2000) 23 WAR 159 at [86]; Odyssey Re (Bermuda) v Reinsurance Australia [2001] NSWSC 266; (2001) 19 ACLC 987 at 992-994). 88 The only exception noted in the above authorities is the case of a total loss on a valued policy, (Alexander v Ajax Insurance Co Ltd at 445-446; Odyssey Re (Bermuda) v Reinsurance Australia at 992 [15]). Both Chandris v Argo Insurance Co Ltd and Odyssey Re (Bermuda) v Reinsurance Australia concerned claims by insureds or reinsureds to be indemnified in respect of losses they had paid. Edmunds v Lloyd Italico e L'Ancora Cia di Assicurazioni e Riassicurazioni SpA may have been in the same category, but it does not appear from the report whether the money due by the reinsurer was in respect of moneys already paid by the reinsureds. 89 In Jabbour v Custodian of Absentees Property of State of Israel, Pearson J said (at 150-151): " Such a claim is unliquidated because the plaintiff has to prove the amount, and even after an adjustment of the amount the plaintiff (unless he chooses to sue on an account stated) must still prove the amount, using the adjustment as evidence because it involves an admission by the insurer, but such evidence might be rebutted, for instance, by proof of a mistake ... But the word 'damages' is puzzling and seems to be used in a rather unusual sense, because the right to indemnity arises, not by reason of any wrongful act or omission on the part of the insurer (who did not promise that the loss would not happen or that he would prevent it) but only under his promise to indemnify the insured in the event of a loss ...

The explanation of the use of the expression 'unliquidated damages' to describe a claim for an indemnity under an insurance policy may be wholly or partly afforded by the old form of pleading in assumpsit, alleging a breach by non-payment, as in Castelli v Boddington . But, as the only wrong admitted by the insurer is his failure to pay a sum due under a contract, the amount of which has to be ascertained, he seems to be in much the same position as the person who owes and has failed to pay a reasonable price for goods sold and delivered or a reasonable remuneration for work done or services rendered. The claim is for unliquidated damages, but the word 'damages' is used in a somewhat unusual sense. "

90 On the other hand, in Phoenix General Insurance Co v Halvanon Insurance Co Ltd, Hobhouse J said (at 609): " It must also be remembered that an action by an assured under a policy is an action for unliquidated damages and the cause of action accrues as soon as the loss to be indemnified occurs (see Chandris v Argo Insurance Ltd [1963] 2 Lloyd's Rep 65). What the plaintiff is enforcing is not the primary obligation of performance, but the secondary obligation to pay damages in the absence of performance."

But as Pearson J said in Jabbour , the right of indemnity may exist where there is no wrongful act or omission on the part of the insurer. 91 Four reasons are advanced in the authorities as to why a claim on a policy of indemnity insurance is a claim for unliquidated damages and not in debt. First, where the insured has not paid the loss in respect of which the indemnity is given, the insurer's obligation can be satisfied otherwise than by paying money to the insured. The promise of indemnity could be fulfilled by the insurer paying the third party to whom the insured is liable (Israelson v Dawson [1933] 1 KB 301 at 306). 92 This reasoning does not apply where the reinsurer's indemnity is in respect of losses paid by the reinsured. 93 The second reason is that it is necessary for the insured to prove the quantum of the loss. Even if there is an adjustment which settles the amount of the loss, that is not necessarily conclusive. The adjustment is only evidence of the amount of damages (Luckie v Bushby at 879, 880; 1449; Jabbour v Custodian of Absentees Property of State of Israel at 150; Alexander v Ajax Insurance Co Ltd at 450). 94 But there is no difficulty of calculation where the indemnity is in respect of paid losses. The only questions are: what is the scope of the indemnity and how much has been paid? Once it is established that the indemnity applies, the calculation involves no element of assessment (Box Valley Pty Ltd v Kidd at [14] or of opinion or estimation (Hansmar Investments Pty Ltd v Perpetual Trustee Co Ltd [2007] NSWSC 103; (2007) 61 ACSR 321 at [59]). A claim may lie in debt although the quantum is not ascertained at the date of contract. It is sufficient that it is ascertainable when payment is due (Jervis v Harris [1996] Ch 195 at 203). There are greater difficulties of quantification for a claim to recover a quantum meruit for the reasonable price of goods sold and delivered or reasonable remuneration for work done. But such quantum meruit claims are "debts" for the purposes of insolvent trading provisions of the Corporations Act (Australian Securities and Investments Commission v Edwards [2005] NSWSC 831; (2005) 220 ALR 148; 54 ACSR 583 at [77]-[86]). They are liquidated demands (Alexander v Ajax Insurance Co Ltd at 440). 95 The third reason is that a claim for an indemnity under an insurance policy was in assumpsit alleging a breach of contract by non-payment (Jabbour v Custodian of Absentees Property of State of Israel at 150, citing Castelli v Boddington). 96 However, so far as my researches go, in none of the pre-Judicature Act insurance cases was the claim for indemnity in respect of paid losses. In Firma C-Trade SA v Newcastle Protection and Indemnity Association [1991] 2 AC 1, Lord Brandon of Oakbrook said (at 28): " There is no doubt that before the passing of the Supreme Court of Judicature Acts 1873 and 1875 there was a difference between the remedies available to enforce an ordinary contract of indemnity (by which I mean a contract of indemnity not containing any express 'pay to be paid' provision) at law on the one hand and in equity on the other. At law the party to be indemnified had to discharge the liability himself first and then sue the indemnifier for damages for breach of contract . In equity an ordinary contract of indemnity could be directed to be specifically performed by ordering that the indemnifier should pay the amount concerned directly to the third party to whom the liability was owed or in some cases to the party to be indemnified: see Johnston v Salvage Association (1887) 19 QBD 458 at 460 per Lindley LJ and British Union and National Insurance Co v Rawson [1916] 2 Ch 476 at 481-482 per Pickford LJ. There is further no doubt that since the passing of the 1873 and 1875 Acts the equitable remedy has prevailed over the remedy at law. " (My emphasis.) 97 The authorities cited by his Lordship do not establish that the only remedy at law was in damages for breach of contract. 98 Lord Goff of Chieveley said (at 35-36): " I accept that, at common law, a contract of indemnity gives rise to an action for unliquidated damages, arising from the failure of the indemnifier to prevent the indemnified person from suffering damage, for example by having to pay a third party. I also accept that, at common law, the cause of action does not (unless the contract provides otherwise) arise until the indemnified person can show actual loss: see Collinge v Heywood (1839) 9 Ad & El 633, 112 ER 1352. This is, as I understand it, because a promise of indemnity is simply a promise to hold the indemnified person harmless against a specified loss or expense. On this basis, no debt can arise before the loss is suffered or the expense incurred; however, once the loss is suffered or the expense incurred, the indemnifier is in breach of contract for having failed to hold the indemnified person harmless against the relevant loss or expense. There is no condition of prior payment but the remedies available at law (assumpsit for damages, or possibly in certain circumstances the common count for money paid) were not efficacious to give full effect to the contract of indemnity. It is for this reason that equity felt that it could, and should, intervene. If there had been a clear implied condition of prior payment, operable in the relevant circumstances, equity would not have intervened to enforce the contract in a manner inconsistent with that term. Equity does not mend men's bargains; but it may grant specific performance of a contract, consistently with its terms, where the remedies at law are inadequate. This is what has happened in the case of contracts of indemnity. As a general rule, 'Indemnity requires that the party to be indemnified shall never be called upon to pay' (see Re Richardson, Ex parte Governors of St Thomas's Hospital [1911] 2 KB 705 at 716 per Buckley LJ) and it is to give effect to that underlying purpose of the contract that equity intervenes, the common law remedies being incapable of achieving that result. " (My emphasis.) 99 His Lordship recognised that "in certain circumstances" the indemnified party's remedy was not in damages but on a common count for money paid. That was so where the indemnified party had paid the loss in respect of which the indemnity was given (Halsbury's Laws of England, 4th ed, Vol 20 at [315]; Bullen and Leake's Precedents of Pleadings, 3rd ed (1868) Stevens & Sons at 43-44, 175). In Hutchinson v Sydney (1854) 10 Exch 438; 156 ER 508, the question was whether a defendant liable as acceptor on a bill of exchange could set off expenses incurred as a director of a company in respect of which the plaintiff had agreed to indemnify him. The right of set-off depended on whether the defendant's claim under the indemnity was a liquidated demand. Pollock CB, giving the judgment of the Court of Exchequer said (at 440-441): " The undertaking of the plaintiff was to indemnify the defendant against all expenses which he might incur by reason of his acting as director. Then, if he has been compelled to make certain payments in consequence of his so acting, the plaintiff is bound to repay him, and there is a debt for which money paid would lie. At the trial, I doubted whether this agreement was not a mere undertaking to indemnify, upon which the defendant ought to bring a special action for the breach of that contract; but I am now satisfied, that, under the terms of it, the defendant might maintain an action for money paid, and is therefore entitled to set off his claim. " 100 The fourth reason is that the insured or reinsured is entering a secondary obligation to pay damages (Phoenix General Insurance Co v Halvanon Insurance Co Ltd at 609). But this is merely a corollary of the proposition that the insured's or reinsured's remedy is by way of damages. It does not explain why that must be so in all cases. 101 A contract of indemnity insurance is often, perhaps usually, characterised as one under which the insured is entitled to be protected from loss. In In re Richardson [1911] 2 KB 705, Buckley LJ said (at 716) "Indemnity requires that the party to be indemnified shall never be called upon to pay." Where that is the nature of the contract, then the insurer is liable in damages if the insured is not protected from loss, because the insurer has failed to perform its primary obligation. 102 Such a promise can and should be distinguished from a promise to redress or compensate the indemnified party for losses sustained (and a fortiori paid) by that party. In the former case the indemnifier is liable in damages for his breach of contract in not preventing the loss. In the latter he can be sued in debt for the recovery of what he promised to pay (Jervis v Harris at 202-203; see generally Zakrzewski, "The Nature of a Claim on an Indemnity" (2006) 22 JCL 54). 103 This distinction was not drawn in either Chandris v Argo Insurance Co Ltd or Odyssey Re (Bermuda) v Reinsurance Australia. In the former case it was conceded that the action on a marine policy was an action for unliquidated damages (at 73), even though the insurance was of a proportion of sums which the assured was liable to pay in consequence of collision and did pay (at 66, 68). However, in Odyssey Re (Bermuda) v Reinsurance Australia the issue was whether a claim by the reinsured under the policy was a claim in debt or unliquidated damages. 104 Windeyer J held that a reinsurer's liability under a policy of reinsurance to pay the "Ultimate Nett Loss", as defined in the relevant policy of insurance, was a liability for unliquidated damages and was not a debt which could support a statutory demand. The definition of "Ultimate Nett Loss" referred to the sum paid by the reinsured in settlements of all losses, subject to certain adjustments. His Honour followed the various decisions referred to in para [87] above to the effect that an insured's cause of action under a contract of indemnity is a cause of action for unliquidated damages and not in debt, except if the claim is for total loss under a valued policy. His Honour cited with approval the statement by Sir John Donaldson MR in Edmunds v Lloyd Italico (at 250) that as a matter of law, a claim under a contract of insurance is a claim for damages for breach of contract. After observing that Sir John Donaldson MR drew no distinction between an original policy of insurance and a policy of reinsurance, Windeyer J said (at 993 [17]): " I consider I should follow these clear decisions which have been accepted for many years. Any decision that the word debt in s459E of the Corporations Law should be interpreted so as to encompass the claim in question here would need to be made by a higher court, particularly as payment by the reinsured does not trigger an automatic obligation on the reinsurer to pay. "

105 It is clear that Windeyer J did not consider that the fact the reinsured was seeking to enforce a claim to be indemnified in respect of losses which it had paid, meant that its claim was in debt rather than for unliquidated damages. However, it does not appear that his Honour was asked to consider an argument that the claim to recover upon a promise of indemnity to compensate the reinsured for amounts which the reinsured had paid the reinsured was enforcing a "primary obligation of performance", not a secondary obligation to pay damages in the absence of performance (Phoenix & General Insurance Co of Greece v Halvanon Insurance Co Ltd at 609). Nor does it appear to have been argued that the reinsured's claim was maintainable on a common indebitatus count for money paid. Such a claim is not a claim for unliquidated damages. Liability on such a claim would clearly, in my view, constitute a "debt" for the purposes of s 95A. 106 In Cigna Insurance Asia Pacific Ltd v Packer, Pidgeon J said (at [87]) that: "It may be arguable that the accepted rule that a claim under a policy of insurance is a claim for unliquidated damages may be limited to indemnity policies and might not apply where there is an agreement to pay a fixed sum. "

However, there may be a claim for a liquidated sum even though the sum is not fixed by the contract. It is enough that it is ascertainable without the need for assessment, at the time payment is due ( Jervis v Harris at 203). 107 Although, as observed earlier in these reasons, the plaintiff did not tender the policies of reinsurance, it is clear from other evidence, in particular the evidence of claims settlements, that NCRA's obligation was to pay to its reinsureds the amount, or a proportion of the amount, that the reinsured had paid above the excess at which the relevant layer of cover was triggered. For the reasons I have given, I consider that NCRA's liability to pay those sums was a primary obligation and constituted debts for which the count of money paid would lie. When NCRA paid its reinsureds, the payments were made in discharge or reduction of its liabilities under its contracts of reinsurance. It was not paying damages, because it had not refused or failed to provide indemnity. 108 I acknowledge the weight of the authority that a cause of action by an insured or a reinsured under a policy of indemnity insurance or reinsurance, other than a valued policy for a total loss, is a cause of action for unliquidated damages and not debt. However, in none of the authorities was the present point argued. Even in Odyssey Re (Bermuda) v Reinsurance Australia it does not appear that the particular point was argued that an indemnity against paid losses could be recovered on a common count for money paid. The authorities have treated all such contracts in the same way, irrespective of the nature of the indemnity. 109 In my respectful view, there is no warrant for assuming that all contracts of indemnity insurance are to the same effect. If the decision in Odyssey Re (Bermuda) v Reinsurance Australia was inconsistent with the view I have formed, judicial comity would require that I follow that decision unless convinced it was plainly wrong. I certainly do not think that decision was plainly wrong. Indeed, as Windeyer J observed that payment by the reinsured did not trigger an automatic obligation of the reinsurer to pay, I have no reason to doubt its correctness. Windeyer J did not have to consider the particular matters I consider to be persuasive, and I do not consider that judicial comity requires me not to give effect to these reasons. 110 In my view, the moneys NCRA owed under its policies of reinsurance were debts within the meaning of s 95A, and a cause of action by a reinsured for the recovery of amounts payable under the contracts of reinsurance would not properly be classified as a cause of action for unliquidated damages. 111 As the liabilities arose under the contracts of reinsurance and were to be discharged by performance of those contracts, as distinct from their being liabilities which arose on the contracts being breached, I do not consider that Box Valley Pty Ltd v Kidd requires the liabilities to be excluded. 112 For these reasons I consider that the insurance liabilities of NCRA to indemnify its reinsureds in respect of paid losses are "debts" within the meaning of s 95A. Once it is found that NCRA's liability to indemnify its reinsureds in respect of paid losses were "debts" within the meaning of s 95A, it follows that its future liabilities to pay claims once the level of paid losses reach the required level to trigger a layer of insurance were contingent debts, assuming of course that the relevant event which triggered the reinsured's liability to its insured, and hence its contingent right to claim on its policy of reinsurance, had occurred. For the reasons already given, I consider that such contingent debts can be taken into account in determining solvency. 113 It follows that NCRA's insurance liabilities can be taken into account in determining its solvency. 114 For the reasons I have given, once NCRA's insurance liabilities are taken into account, it can readily be concluded that it was insolvent at all relevant times from 31 December 1998, including as at 8 January 1999 and 14 January 1999. I answer the separate question yes, as at and from both dates.

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Insolvency Act 1874(Qld)

Companies Act 1961(Cth)

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Judgment (33 paragraphs)

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