2351/02 NEW CAP REINSURANCE CORPORATION LIMITED & ANOR v A E GRANT & ORS, LLOYD'S SYNDICATE NO 991
JUDGMENT
The principal claim
1 These proceedings were commenced by originating process filed on 19 April 2002. They arise out of the winding up of New Cap Reinsurance Corporation Limited ("NCRA").
2 The plaintiffs are NCRA and its liquidator, Mr Gibbons. The defendants are A E Grant and numerous other persons named in a schedule to the originating process. They are (or were at relevant times) the persons associated together as the members of Lloyd's Syndicate No 991.
3 Mr Gibbons became the administrator of NCRA under Part 5.3A of the Corporations Law on 21 April 1999. By operation of s 446A of the Corporations Law, he became liquidator under a creditors voluntary winding up on 16 September 1999. By force of the transitional provisions in Division 6 of Part 10.1 of the Corporations Act 2001 (Cth), the winding up and its consequences and incidents are now governed by that Act.
4 The principal relief sought in the originating process is an order that the defendants pay money. The order sought is, in terms, an order that the defendants pay money to the plaintiffs but since the originating process makes it plain that the proceedings are brought under s 588FF(1) of the Corporations Act, the situation is in truth one in which Mr Gibbons, as liquidator, seeks an order that the defendants pay money to NCRA.
5 If the claim for an order for the payment of money by the defendants to NCRA is successful, questions about enforcement of the order will need to be addressed. An amended interlocutory process filed by the plaintiffs on 17 December 2008 raises those questions.
6 The plaintiffs' application was heard on 17 December 2008. Written submissions were, by leave, subsequently filed. Judgment was reserved on 2 March 2009.
Statutory provisions
7 Key provisions of the Corporations Act relevant to the plaintiffs' claim for an order under s 588FF(1) should be quoted. With the exception of the definition of "transaction", the provisions are within Part 5.7B headed "Voidable Transactions".
8 Section 9 defines "transaction", for the purposes of Part 5.7B, as follows:
" 'transaction' , in Part 5.7B, in relation to a body corporate or Part 5.7 body, means a transaction to which the body is a party, for example (but without limitation):
(a) a conveyance, transfer or other disposition by the body of property of the body; and
(b) a charge created by the body on property of the body; and
(c) a guarantee given by the body; and
(d) a payment made by the body; and
(e) an obligation incurred by the body; and
(f) a release or waiver by the body; and
(g) a loan to the body;
and includes such a transaction that has been completed or given effect to, or that has terminated."
9 Section 588FA, so far as is relevant, provides:
"A transaction is an unfair preference given by a company to a creditor of the company if, and only if:
(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and
(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;
even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency."
10 Section 588FC relevantly provides:
"A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company … and:
(a) any of the following happens at a time when the company is insolvent:
(i) the transaction is entered into;"
11 Section 588FE(2), dealing with transactions of a company entered into on or after 23 June 1993, applies if the company is being wound up. It provides:
"The transaction is voidable if:
(a) it is an insolvent transaction of the company; and
(b) it was entered into, or an act was done for the purpose of giving effect to it:
(i) during the 6 months ending on the relation-back day; or
(ii) after that day but on or before the day when the winding up began."
12 Section 588FF(1) is the central provision. It is in these terms:
"Where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:
(a) an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction;
(b) an order directing a person to transfer to the company property that the company has transferred under the transaction;
(c) an order requiring a person to pay to the company an amount that, in the court's opinion, fairly represents some or all of the benefits that the person has received because of the transaction;
(d) an order requiring a person to transfer to the company property that, in the court's opinion, fairly represents the application of either or both of the following:
(i) money that the company has paid under the transaction;
(ii) proceeds of property that the company has transferred under the transaction;
(e) an order releasing or discharging, wholly or partly, a debt incurred, or a security or guarantee given, by the company under or in connection with the transaction;
(f) if the transaction is an unfair loan and such a debt, security or guarantee has been assigned--an order directing a person to indemnify the company in respect of some or all of its liability to the assignee;
(g) an order providing for the extent to which, and the terms on which, a debt that arose under, or was released or discharged to any extent by or under, the transaction may be proved in a winding up of the company;
(h) an order declaring an agreement constituting, forming part of, or relating to, the transaction, or specified provisions of such an agreement, to have been void at and after the time when the agreement was made, or at and after a specified later time;
(i) an order varying such an agreement as specified in the order and, if the Court thinks fit, declaring the agreement to have had effect, as so varied, at and after the time when the agreement was made, or at and after a specified later time;
(j) an order declaring such an agreement, or specified provisions of such an agreement, to be unenforceable."
13 Under s 588FF(3), an application under s 588FF(1) must be made within a particular limitation period. Section 588FF(3) is in these terms:
"An application under subsection (1) may only be made:
(a) during the period beginning on the relation-back day and ending:
(i) 3 years after the relation-back day; or
(ii) 12 months after the first appointment of a liquidator in relation to the winding up of the company;
whichever is the later; or
(b) within such longer period as the Court orders on an application under this paragraph made by the liquidator during the paragraph (a) period."
The plaintiffs' case
14 The basic proposition advanced by the plaintiffs is that two payments made by NCRA to the defendants - a payment of US$2,000,000 on 8 January 1999 and a payment of US$3,980,600 on 14 January 1999 - constituted "voidable transactions" within the meaning of s 588FE. The steps said to lead to such a conclusion are, first, that the making of each payment by NCRA was a "transaction" to which NCRA and the defendants were parties; second, that each such transaction was an "unfair preference" given by NCRA to the defendants (s 588FA); third, that NCRA was insolvent in January 1999 when each transaction was entered into so that the transaction is an "insolvent transaction" (s 588FC); and, fourth, that the transaction was made within the period of six months ending on the "relation-back day" in relation to the winding up of NCRA
(s 588FE(2)(b)).
15 The plaintiffs further say that, because of the matters just outlined, the court must be satisfied in the way mentioned in s 588FF(1), so that the power to make an order under that section is exercisable and should be exercised. The particular order sought is an order under s 588FF(1)(a) that the defendants pay to NCRA an amount equal to the aggregate paid to them under the transactions in question.
The statutory cause of action
16 Section 588FF(1) appears in Division 2 of Part 5.7B which was introduced into the corporations legislation with effect from 23 June 1993 and is headed "Voidable Transactions". It is important to note the structure of the section. The statutory jurisdiction it confers is only exercisable "on the application of a company's liquidator". The company itself is not a competent applicant although, in some cases, it may be an appropriate party to the proceedings in which its liquidator makes an application.
17 Among the orders that s 588FF(1) empowers the court to make on the liquidator's application are orders "directing" or "requiring" a person to pay money or transfer property to the company of which the applicant is liquidator: see s 588FF(1)(a), (b), (c) and (d) (as I have said, the order sought in this case is an order under s 588FF(1)(a) directing payment by the defendants to NCRA). Other orders may require persons to confer less direct financial benefits on the company, for example, by freeing the company from a debt, security or guarantee (s 588FF(1)(e)), by indemnifying the company (s 588FF(1)(f)) or by suffering avoidance, variation or unenforceability of an agreement (s 588FF(1)(h), (i) and (j)). In all these other cases, the court's order will alter a legal relationship between the company and another person; and it will do so to the benefit of the company and to the detriment of the other person. It is for that reason that it will be appropriate for the company to be a party to the proceedings initiated by the liquidator. In a common law derivative action brought by a shareholder, the company is joined as a defendant so that it may be "bound by the result of the action": Spokes v The Grosvenor and West End Railway Terminus Hotel Co Ltd [1897] 2 QB 124 at 128. In the present context, where the liquidator, who is the only competent applicant, is able to control actions of the company, the appropriate course is for the company to be a co-plaintiff so that, if and when the court makes, on the liquidator's application, an order within one of the classes mentioned, the company, as a party, will be "bound by the result of the action".
18 One type of order contemplated by s 588FF(1) does not entail payment of money to the company or variation of the legal relationship between the company and another person. Section 588FF(1)(g) allows the court to make an order varying or regulating a person's right to prove a debt in the winding up. When winding up commences, a creditor's right to prove in the winding up replaces pre-existing rights against the company: Motor Terms Co Pty Ltd v Liberty Insurance Ltd [1967] HCA 9; (1967) 116 CLR 177. In a s 588FF(1)(g) case, therefore, the court's order merely redefines the basis on which the person's right is to be taken into account by the liquidator for the purposes of allocation of benefits in the administration of the estate. It is the right of proof arising upon and by virtue of winding up that a s 588FF(1)(g) order may modify.
19 The important point is that, although Division 2 of Part 5.7B of the Corporations Act is, according to its heading, concerned with "voidable transactions", its provisions do not operate upon concluded transactions so as to deprive them of efficacy or effect. Neither the statutory provisions nor orders of the court made under them cause the relevant "transaction" to be "void" (although the particular type of order authorised by s 588FF(1)(h) may cause "an agreement constituting, forming part of, or relating to" the relevant transaction to be "void"). On the contrary, the provisions direct the court to take transactions as it finds them. If a particular transaction has particular characteristics, the court has statutory jurisdiction to make one or more of the orders specified in s 588FF(1). I would venture to repeat here what I said in Hall (as Liquidators of New Tel Ltd) v Ledge Finance Ltd [2005] NSWSC 645 at [12]:
"Despite use of the word 'voidable' as a label in Part 5.7B and references, in general parlance about Part 5.7B, to the 'avoidance' of transactions and the 'recovery' of moneys related to transactions, the statutory provisions are not concerned with undoing transactions or re-arranging the financial relationships of parties to transactions, vis-à-vis those transactions themselves. They do not involve reliance on contractual rights or the contractual consequences of events. The liquidator, in pursuing the statutory cause of action, does not sue upon a contract or for restitution consequent upon the invalidity of a transaction. Nor is the liquidator affected by any vitiating elements to which a transaction may be subject, except to the extent that those elements may be shown by a defendant to make unavailable the 'transaction' foundation for the liquidator's claim, in the sense that there never was in truth a transaction (even one liable to be rescinded or declared void). The liquidator's task is merely to prove facts justifying a conclusion that the company became party to a 'transaction' described in s.588FA, s.588FB, s.588FC or was the borrower under a loan described in s.588FD. If any of those things is proved and if, in addition, elements are shown as referred to in a sub-section of s.588FE such as to cause the transaction to be given by s.588FE the statutory designation 'voidable', the liquidator has access to the statutory jurisdiction conferred on the court by s.588FF(1)."
20 As Palmer J observed in Tolcher v National Australia Bank Ltd [2003] NSWSC 207; (2003) 174 FLR 251 at [10], a s 588FF(1) order vindicates "not property rights which the company itself would have had prior to liquidation, but rather statutory rights which the liquidator alone has under" the statutory scheme in consequence of winding up.
21 The purpose of an order under s 588FF(1)(a) for the payment of money to a company in liquidation is not to compensate or make whole that company. The section does not create a proprietary right of any kind in the company: New Cap Reinsurance Corporation Ltd v Faraday Underwriting Ltd [2003] NSWSC 842; (2003) 177 FLR 52 at [38]: Re Harris Scarfe Ltd [2006] SASC 277; (2006) 203 FLR 46 at [26]. As with preference avoidance provisions in bankruptcy, the objective is to adjust the rights of creditors among themselves in such a way as to eliminate the effects of favourable treatment afforded to one or more creditors, to the exclusion of others, in the period immediately before an insolvent administration commences. As is said at paragraph 11.400 of M G R Gronow "McPhersons Law of Company Liquidation", fifth edition (current looseleaf):
"the focus on [sic] the relief that is available (under s 588FF(1)) where a payment or transaction is voidable under the Division is to enable the restoration to the company of money and other property that has been alienated, and to relieve it of the burden of liabilities of the kind mentioned."
Non-appearance by the defendants
22 Before the elements of the plaintiffs' claim are addressed, it is relevant to note that the defendants have filed no appearance. They are resident outside Australia and did not seek to take part in the proceedings. In correspondence with the liquidator's solicitors, the defendants have made it clear that they do not submit to the jurisdiction of this court.
23 On principles discussed in New Cap Reinsurance Corporation Ltd v Renaissance Reinsurance Ltd [2002] NSWSC 856; (2002) 192 ALR 601, however, the cause of action under s 588FF(1), if established, must be accepted as having arisen in New South Wales. If the case that NCRA and its liquidator advance is made out, it will be found that it was in New South Wales that NCRA depleted its resources by making the two payments to the defendants and took all the steps necessary on its part to transmit funds to the defendants in the United Kingdom accordingly. That will mean that the s 588FF(1) cause of action is one that arose in New South Wales, so that service of the originating process outside New South Wales was authorised by Part 10 rule 1A(a) of the Supreme Court Rules 1970 or, after 15 August 2005, rule 11.2 and item (a) of Schedule 6 of the Uniform Civil Procedure Rules 2005.
24 On 20 December 2003, orders for substituted service were made allowing the defendants to be served through their solicitors in London. Service in accordance with those orders has been proved. Leave to proceed was granted on 17 October 2003.
25 I am satisfied that there was no obstacle to the court's hearing the plaintiffs' s 588FF(1) claim on 17 December 2008 in the defendants' absence and that there is no obstacle to its now proceeding to determine that claim. Indeed, the court must do so. I shall, however, mention in due course matters raised in correspondence on the defendants' behalf in response to the claim.
The payments
26 A key factual question must now be addressed. Did NCRA, as the plaintiffs allege, make payments of US$2,000,000 and US$3,980,600 to the defendants on 8 January 1999 and 14 January 1999 respectively?
27 An affidavit sworn on 19 April 2002 by Mr Hutchison, a partner in Mr Gibbons' firm, includes copies of NCRA internal documents that led to payments of US$2,000,000 and US$3,980,600 by NCRA to the defendants on 8 January 1999 and 14 January 1999 respectively. These show that those sums were transmitted by electronic funds transfer to A E Grant Underwriting Agencies Ltd on the relevant dates in respect of a "Contract Name" described as "A E Grant Syn 991".
28 Banking records annexed to Ms Merrick's affidavit of 25 September 2003 establish that the source of the two payments was NCRA's foreign currency account 100630436USD115601 with Commonwealth Bank of Australia, Sydney.
29 I am satisfied that the electronic transfers of funds on 8 January 1999 and 14 January 1999 were payments by NCRA to the defendants; also that the payments were sourced from funds of NCRA held in New South Wales. This finding is relevant to the jurisdictional matter referred to at paragraph [23] above.
The elements of the cause of action - "transaction"
30 Having established that the payments upon which the plaintiffs rely were made by NCRA to the defendants, it is necessary to examine separately the several elements that make up the s 588FF(1) cause of action. The first of these is that there is a "transaction". There can be no doubt that NCRA, by making each of the January 1999 payments to the defendants, entered into a "transaction" with the defendants. The s 9 definition of "transaction" is broad. It gives as one example of a transaction to which a body is party "a payment made by the body". The making by NCRA of each of the payments in question is thus within the "transaction" definition.
The elements of the cause of action - timing
31 There next arises the question of timing posed by s 588FF(2)(b). In the particular context, the question is whether the relevant transaction was entered into within the period of six months ending on the "relation-back day". The question arises in that form in this case because each of the transactions was a simple payment, as distinct from something more complex which might have entailed a series of acts.
32 The "relation-back day" in relation to a winding up of this type is the day specified in paragraph (b) of the s 9 definition of "relation-back day", that is, the day on which Division 1A of Part 5.6 deems the winding up to have begun. The provisions within Division 1A of Part 5.6 applicable to this case are s 513B(d) and s 513C. They fix, as the commencement of the winding up, the day on which the antecedent voluntary administration began.
33 As I have said, Mr Gibbons became the administrator of NCRA under Part 5.3A of the Corporations Law on 21 April 1999 and the liquidator under a creditors voluntary winding up on 16 September 1999. Because the voluntary administration began on 21 April 1999, it is that day that is the "relation-back day" in relation to the winding up.
34 Each transaction consisting of the making of a payment by NCRA to the defendants in January 1999 therefore occurred within the period of six months ending on the "relation-back day".
The elements of the cause of action - insolvency
35 The next question arises from s 588FC: was NCRA "insolvent" when each transaction was entered into in January 1999?
36 That question was decided at an earlier stage of the proceedings. The matter became the subject of an order for separate determination made in December 2006. In a comprehensive judgment delivered on 30 September 2008, White J determined that NCRA "was insolvent at all relevant times from 31 December 1998, including as at 8 January 1999 and 14 January 1999": see New Cap Reinsurance Corporation Ltd v A E Grant & Ors, Lloyd's Syndicate No 991 [2008] NSWSC 1015; (2008) 221 FLR 164.
The elements of the cause of action - "creditors" and "unsecured debt"
37 For each of the payments under consideration to be an "unfair preference" given by NCRA, as referred to in s 588FA(1) (so that it is capable of being, in terms of s 588FC, an "insolvent transaction" of NCRA), it must be established that, at the time the payment was made, the defendants were a "creditor" of NCRA and that the payment resulted in the defendants, as creditor, receiving from NCRA, in respect of "an unsecured debt" owed by NCRA to the defendants, more than the defendants would have received from NCRA in respect of the debt if the transaction were set aside and the defendants were to prove for the debt in the winding up of NCRA.
38 Before the hypothesis regarding proof in a winding up is addressed, attention must be given to two central and related matters, namely, the status of the defendants in January 1999 as a "creditor" of NCRA and the existence at that time of an "unsecured debt that [NCRA] owes to [the defendants]".
39 The evidence shows that NCRA had incurred contractual liabilities to the defendants under a whole account reinsurance contract entered into in January 1997. NCRA was the reinsurer and the defendants were the reinsured. Significant losses were incurred during the 1997 and 1998 policy years. In December 1998, the parties to the reinsurance contract entered into a commutation agreement. That agreement was evidenced by memoranda signed for the defendants and bearing the stamp of NCRA by way of its assent, together with slip endorsements for the 1997 and 1998 years.
40 The agreement was for commutation at a 92.5% discount, so that US$5,980,760 became owing by NCRA to the defendants, by way of sums of US$2,697,380 and US$3,283,380, both of which were expressed to be due and payable on 31 December 1998.
41 The effect of the commutation was that NCRA became obliged to pay to the defendants on 31 December 1998 the fixed and quantified sums of US$2,697,380 and US$3,283,380 expressly provided for in the commutation agreement and was thereby relieved of all liability under the reinsurance contract. The defendants thereupon ceased to have rights under the reinsurance contract. On the making of the commutation agreement, there thus arose, on the part of the defendants and as a matter of contract, two liquidated claims properly regarded as debts.
42 It follows that, on and after 31 December 1998, there existed two debts owing, due and payable by NCRA to the defendants, one of US$2,697,380 and the other of US$3,283,380. Each was an unsecured debt. The defendants were a creditor of NCRA because of the existence of those debts.
43 The two payments made by NCRA to the defendants in January 1999 totalled US$5,980,600. This was US$160 less than the indebtedness of US$5,980,760 created by the commutation agreement. It must nevertheless be accepted that the payments were made in discharge of that indebtedness. NCRA's internal records show an "amount outstanding" of US$3,380,760 after payment of the US$2,000,00 and an "amount outstanding" of "Nil" after payment of the US$3,980,600.
44 The conclusion must be that
(a) before the payments of January 1999 were made, NCRA owed to the defendants the two sums of US$2,697,380 and US$3,283,380 by reason of the commutation agreement made in December 1998;
(b) those sums were due and payable by NCRA to the defendants on 31 December 1998;
(b) there were accordingly, in January 1999, unsecured debts totalling US$5,980,760 owed by NCRA to the defendants, who were accordingly creditors of NCRA;
(c) the payments made by NCRA to the defendants on 8 January 1999 and 14 January 1999 caused the defendants, as creditors, to receive, in respect of those unsecured debts, a total of US$5,980,600; and
(d) by making those payments to the defendants, NCRA entered into "transactions" with the defendants.
The elements of the cause of action - the s 588FA(1)(b) hypothesis
45 Once this point has been reached, it can be said that the January 1999 payments will be regarded as an "unfair preference" within s 588FA(1) if the amount of US$5,980,600 received by the defendants in respect of their unsecured debts is greater than the amount receivable by the defendants upon the hypothesis stated in s 588FA(1)(b), that is, if the payments were set aside and the defendants were to prove for the debts in a winding up of NCRA. On this hypothesis, an additional US$5,980,600 would be available to a liquidator of NCRA for deployment in the winding up and the debts and claims proved in the winding up would be increased by US$5,980,600.
46 Mr Gibbons states in his affidavit of 24 November 2008 that, as at 1 January 2008, the estimated net deficiency of NCRA was US$198,449,924. He does not believe that anything has occurred since 1 January 2008 to warrant any significant change to this estimate. It follows that, in the winding up of NCRA as it stands, unsecured creditors will receive very substantially less than 100 cents in the dollar even if available assets are increased by US$5,980,600 and the proved debts and claims of unsecured creditors are increased by the same amount.
47 It is, however, by no means clear that the question posed by s 588FA(1)(b) is to be approached by reference to the circumstances of the particular winding up presided over by the liquidator by whom the s 588FF(1) application is made. Section 588FA(1)(b) directs attention to the circumstances that would prevail "if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company". The reference is to "a" winding up, not "the" winding up: see generally the discussion at paragraph 11.780 of M G R Gronow, "McPhersons Law of Company Liquidation", fifth edition (current looseleaf).
48 There is no need, in the present case, to pursue this matter. For the reasons stated at paragraph [46] above, an approach to the s 588FA(1)(b) question based on the circumstances of the actual winding up now in progress produces a positive answer to that question - in other words, the answer that the US$5,980,600 actually received was more than the defendants would have received if the payments of that amount by NCRA were set aside and the defendants had proved in the actual winding up. It is clear that the question will also receive a positive answer if regard is had to a hypothetical winding up commencing when the payments were made in January 1999.
49 In saying this, I do not mean that the financial consequences in an assumed winding up commencing in January 1999 would have been identical with those that have arisen in the actual winding up that commenced some three months later on 21 April 1999. Rather, I mean that, if in a hypothetical winding up that commenced in January 1999 an additional US$5,980,600 had been available to the liquidators and additional debts of US$5,980,600 had been provable, the situation would still have been one in which the defendants realised, in respect of their debts of US$5,980,600, less than the US$5,980,600 they in fact received by virtue of the January 1999 payments. I say this because of both White J's conclusion that NCRA was insolvent in January 1999 and his Honour's specific findings in New Cap Reinsurance Corporation Ltd v A E Grant & Ors, Lloyd's Syndicate No 991 (above) as to NCRA's financial position at that very time. Those findings were stated thus at [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."
50 White J went on (at [32]) to refer to events in the weeks following the particular week mentioned:
"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: