New Cap Reinsurance v Chase Manhattan [1999] NSWSC 808 | Case summary

1 HIS HONOUR: The plaintiff, New Cap Reinsurance (Bermuda) Ltd (Provisional Liquidator Appointed) ('New Cap Bermuda') is a reinsurer formed and licensed in Bermuda. It is not registered as a foreign company in Australia, though it is a 'supervised body corporate' for the purposes of the Insurance Act 1973 (Cth) as it is a company connected with an Australian authorised insurer: ss 3, 49A, 49B. Its parent, New Cap Reinsurance Corporation Holdings Ltd, was also formed in Bermuda but it is registered as a foreign company in Australia and has been listed on the Australian Stock Exchange. 2 On 22 April 1999 John McKenna, of Ernst & Young in Bermuda, was appointed provisional liquidator of the plaintiff by the Supreme Court of Bermuda in proceedings to wind up the plaintiff for insolvency and on the just and equitable ground. On 3 June 1999 Young J appointed John Gibbons, of Ernst & Young in Sydney, to be the plaintiff's Australian provisional liquidator in proceedings brought by the present plaintiff (in provisional liquidation) and Mr McKenna as a provisional liquidator (see Re New Cap Reinsurance Corporation Holdings Ltd (1999) 17 ACLC 1024). In doing so he took into account a letter of request by the Supreme Court of Bermuda made under s 581(3) of the Corporations Law and found that the plaintiff carried on business in New South Wales and Victoria and was, therefore, a Pt 5.7 body for the purposes of Corporations Law. An order for the appointment of provisional liquidators has also been made in the United Kingdom and temporary restraining orders have been obtained in New York. 3 The reasons why Mr McKenna sought the appointment of an Australian provisional liquidator should be noted. They are set out in his affidavit in support of the application heard by Young J. The plaintiff has acted as reinsurer for some Australian companies and may have substantial assets and security arrangements in Australia. It has a quota share treaty in place with its Australian sister subsidiary, and has obtained retrocessional coverage with Australian reinsurers. Various contracts have involved Australian brokers. In those circumstances Mr McKenna's view was that an Australian provisional liquidator could locate and get in Australian assets and corporate records, make investigations and take other steps to protect the company's Australian assets, and deal with the company's bankers (The Chase Manhattan Bank in Sydney) whom Mr McKenna had attempted to contact without success. Further, the appointment of an Australian provisional liquidator would prevent and stay proceedings against the plaintiff, giving time for the Australian provisional liquidator and Mr McKenna to investigate various matters including the inter-corporate relationships between the plaintiff and the Australian subsidiary. This might assist the provisional liquidators to deal with the Australian creditors and to prevent creditors from taking precipitous actions in drawing down letters of credit. Mr McKenna said that he intended that the Australian provisional liquidator would be ancillary to the proceedings in Bermuda. 4 In the present proceedings, brought by summons filed on 21 June 1999, the plaintiff is New Cap Bermuda and the defendants are The Chase Manhattan Bank ('Chase') and Chase Capital Markets Fiduciary Services Australia Ltd ('Chase Fiduciary Services'). Neither the Bermudan nor the Australian provisional liquidator is a party. The plaintiff seeks orders to the effect that the defendants hold no security interest in respect of certain assets, including a USD107 million account held in Chase's Sydney branch. Essentially, the plaintiff contends that the charging clause in a security document called the 'Collateral Agreement', as amended, does not on its proper construction provide security for either defendant with respect to the plaintiff's assets including the USD account. 5 From 21 June 1999 until 3 August 1999 the defendants were subject to interlocutory orders given on the basis of a limited undertaking and acknowledgment by the plaintiff. Replacement orders where made yesterday as I shall explain. 6 On 20 July 1999, on the motion of Mr Gibbons as Australian provisional liquidator in the Australian provisional liquidation proceedings for New Cap Bermuda, I gave directions under s 479(3) of the Corporations Law that Mr Gibbons was justified in commencing and prosecuting the present proceedings and causing the plaintiff to provide an acknowledgment to the defendants which I shall describe. I delivered my reasons for judgment on that matter on 21 July 1999. 7 The interlocutory orders in the present proceedings, as extended on several occasions, restrained the defendants until 5pm on 3 August 1999 from altering the existing arrangements under which the rights and liabilities of the parties under the Collateral Agreement are administered, and the funds on deposit on any account with Chase relating to the Collateral Agreement are held; and from exercising rights to replace Chase Fiduciary Services as the collateral agent under the Collateral Agreement. Although the first order did not prevent the defendants from taking such enforcement action against funds held under the Collateral Agreement as they may lawfully be entitled to take, the practical effect of the interlocutory orders has been to require the defendants to retain in New South Wales or Victoria the assets held by the defendants under the Collateral Agreement, which were in either of those States on 21 June 1999. The interlocutory hearings in the present proceedings have been conducted on the basis that those assets included the USD107 million account held with Chase's Sydney branch. As the price for obtaining the interlocutory orders, the plaintiff has given an undertaking as to damages which is limited to its assets in New South Wales and Victoria. 8 By its application heard on 29 July 1999, the plaintiff sought to replace the interlocutory orders with similar though narrower orders which would operate until further orders rather than to a specified date. The orders which it sought on that day would restrain the defendants from taking any step which may have the effect that the location of the funds on deposit in the USD account may be moved outside New South Wales, otherwise than by exercising certain specified powers which arise under the Collateral Agreement while an event of default is continuing. They would restrain Chase from replacing Chase Fiduciary Services as the collateral agent. 9 At the hearing on 29 July 1999 the plaintiff offered the same limited undertaking as was then in place. In addition, consistently with my directions of 20 July 1999, the plaintiff offered an acknowledgment that if the defendants successfully defend the proceedings, any surplus collateral held by them pursuant to the Collateral Agreement secures any obligation to the plaintiff to pay damages pursuant to the undertaking and any obligation to pay costs awarded in the proceedings. 10 This acknowledgment was expressly sought by the defendants' solicitors by letter of 14 July 1999. In that letter the solicitors asserted that as the plaintiff was in default, they were entitled to enforce the security by deploying the funds elsewhere at a higher rate of return. They said the measure of damages Chase may suffer by reason of continuance of the injunction is the difference between the return Chase is presently earning on the investment and the return it would otherwise enjoy if it were able to enforce the security. Chase estimated the loss in respect of the plaintiff to be approximately USD280,000 per annum. The letter does not give any information about the alternative investment which would produce a higher return for Chase and, in particular, it does not say whether the higher return could be obtained if the location of the new investment were to remain in Australia. This is a significant issue because the new orders sought by the plaintiff would allow reinvestment provided the location of the investment remains in New South Wales or Victoria. 11 The solicitors required an undertaking by the plaintiff that the surplus collateral held by the defendants, amounting to approximately USD5.5 million, secures the plaintiff's obligation under the undertaking to pay damages and may be used for payment of any costs ordered to be paid by the plaintiff. The defendants' costs to that time, apparently not limited to the present proceedings, were estimated at USD450,000. 12 I do not express any view about the legal effect of an acknowledgment that a fund secures an obligation arising under such an undertaking. I note, however, that the defendants have not contended that the acknowledgment offered by the plaintiff fails to comply with the defendants' solicitors' requirements in the letter of 14 July 1999. To the extent that the letter may have sought a broader security with respect to costs other than the legal costs of the present proceedings, I do not see how the provision of such a security would be justified in the context of undertakings and acknowledgments given by the parties for the purpose of interlocutory relief in these proceedings. In fact the acknowledgment offered by the plaintiff at the hearing on 29 July 1999 was limited to costs ordered to be paid by it in these proceedings. 13 The question for me to determine at the hearing on 29 July 1999 was whether the replacement interlocutory orders should be made as proposed by the plaintiff. Counsel for the defendants expressed concern that for the purposes of the plaintiff's undertaking, the funds in the USD account with Chase's Sydney branch may arguably not be an asset within New South Wales. But the plaintiff said that the undertaking is intended to relate to those funds whatever their situs, as a matter of technical legal analysis, may be; and consequently the plaintiff proposed to amend the undertaking so that the assets to which it was limited would specifically include the funds on deposit in that account. I took the view that this amendment to the undertaking should be made, to avoid doubt. The amendment having been made, it was clear that the undertaking would be enforceable with respect to those funds including that part of the funds which is surplus capital. After the hearing on 29 July 1999 I formed the view that, subject to one matter which I shall explain later, the interim orders sought by the plaintiffs should be made for the following reasons. 14 First, in my opinion, the plaintiff has raised a serious question to be tried as to whether the security which the defendants assert over the plaintiff's Australian assets is valid and applicable to the USD account. I dealt with the plaintiff's case in my reasons for judgment on Mr Gibbons' application for directions, handed down on 21 July 1999. I concluded (at par 26) that important issues of law and construction reasonably arise out of the material before the Court, which included material concerning the plaintiff's claims in the present proceedings. I took the view that the Court's determination of those issues could have the effect that substantial assets would be available to satisfy the claims of the plaintiff's unsecured creditors. My findings imply that the 'serious question to be tried' criterion for interlocutory relief, expounded in such well-known cases as Kolback Securities Limited v Epoch Mining NL (1987) 8 NSWLR 533, is satisfied. No contrary submission was made at the hearing on 29 July 1999. I note that this is not a case where the decision on interlocutory relief in a practical sense will determine the substance of the matters in issue. 15 The question was, therefore, one as to the balance of convenience. McLelland J said in Kolback (at 535): 'Where a plaintiff's entitlement to ultimate relief is uncertain, the Court, in deciding to grant or refuse an interlocutory injunction, must consider what course is best calculated to achieve justice between the parties in the circumstances of the particular case, pending the resolution of the uncertainty, bearing in mind the consequence to the defendant of the granting of an injunction in support of relief to which the plaintiff may ultimately be held not to be entitled, and the consequence to the plaintiff of the refusal of an injunction in support of relief to which the plaintiff may ultimately be held to be entitled...' 16 In my view there are three factors which weigh in favour of the plaintiff. The first relates to s 116 of the Insurance Act 1973 (Cth) which states: 'In the winding up of a body corporate authorised under this Act to carry on insurance business, or in the winding up of a supervised body corporate, the assets in Australia of the body corporate shall not be applied in the discharge of its liabilities other than its liabilities in Australia unless it has no liabilities in Australia.' 17 The interpretation and application of this section is not a simple matter, but its substantial effect is clear enough. Once the liquidator of such a body corporate overcomes the difficulties involved in identifying its assets and liabilities 'in Australia', those creditors have absolute priority, over creditors whose liabilities are not 'in Australia', to be satisfied out of the assets in Australia. 18 The plaintiff is, as I have said, a supervised body corporate for the purposes of this provision. Prima facie, it appears to have very substantial assets in Australia, if one includes the USD account which is the subject of the dispute in these proceedings. The USD account is maintained by Chase's Sydney branch. At least arguably, the chose in action constituted by the account (if it is a true bank deposit account), or the fund of USD107 million to which the account relates, is located within this State. If the plaintiff succeeds in the present proceedings it will hold this asset free from any claim to security by the defendants. 19 There are also some inter-corporate loans and shareholdings with respect to other New Cap group entities which are, at least arguably, located in Australia, and probably other operating assets of lesser value. 20 Thus, at the present time, if the plaintiff were to succeed in the present proceedings and go into liquidation, its creditors with Australian liabilities would receive a priority which could well be a substantial advantage to them, assuming that the plaintiff's worldwide assets are insufficient to pay unsecured creditors in full. Pending determination of the proceedings, it is desirable to maintain the status quo by preventing the defendants from taking steps which would alter the priority of Australian liabilities over non-Australian liabilities with respect to the most substantial Australian asset, which is the very subject matter of the proceedings. 21 Although my reasoning on this issue is directed to the balance of convenience on the facts of the present case, I see some analogy between this issue and the matters considered in Re Northland Services Pty Limited (1978) 18 ALR 684; Re National Employers' Mutual General Insurance Association Ltd (In Liq) (1995) 15 ACSR 624, 627; and Re Bank of Credit and Commerce International SA (No 10) [1997] Ch 213. 22 Secondly, I take into account some recent developments in litigation in Bermuda which affects New Cap Bermuda. By a summons dated 22 July 1999 and returnable on 12 August 1999, the present defendants seek orders of the Supreme Court of Bermuda against Mr McKenna as provisional liquidator of the present plaintiff. The orders would revoke the letter of request, partly upon the basis of which Young J made orders for the plaintiff's provisional liquidation in Australia, or modify the letter to the effect that Mr Gibbons as Australian provisional liquidator should not pursue the present proceedings, and/or modify the letter to the effect that Mr Gibbons should not pursue a Notice of Motion filed by him in the Equity Division proceedings in which Young J made his orders (Proceedings No 2388/99). That Notice of Motion seeks to restrain the present defendants from pursuing the Bermudan proceedings. The Notice of Motion has been stood over generally by me on the plaintiff's application, with liberty to apply. 23 At issue between the parties, therefore, is the question whether the dispute as to the efficacy of the defendants' alleged security over the USD account should be heard and determined by this Court. It appears to me important to preserve the status quo pending the resolution of that matter or, at least, pending the clarification of procedural means by which that matter is to be determined. 24 Thirdly, it appears to me from the evidence that the undertaking and acknowledgments by the plaintiff relate to assets, the value of which is sufficient to cover any claim to damages and costs of these proceedings which the defendants may have in the event that the plaintiff fails in the proceedings and the undertaking is called upon. As I have mentioned, the defendants estimate their loss relevant to the interlocutory relief in the present proceedings at USD280,000 per annum plus costs. I regard this as a maximum amount because as I have said, the new injunctions will not prevent reinvestment if there is no change in locality. The evidence indicates that there is substantial surplus collateral in the order of USD5.5 million, in addition to the inter-corporate loans and shareholdings and any other Australian corporate assets, all of which are covered by the plaintiff's undertaking. It seems to me that in these circumstances, the limited undertaking and acknowledgment by the plaintiff will provide reasonable protection to the defendants, subject to one other matter to which I shall turn. 25 The defendant say that since the plaintiff in these proceedings is the company rather than its Bermudan or its Australian provisional liquidator, there is no good reason for confining the plaintiff's undertaking as to damages in any way. This, they say, is a contractual dispute in respect of which the fact that the plaintiff is in provisional liquidation is insignificant or irrelevant. 26 They rely on the decision of Young J in Southern Tablelands Insurance Brokers Pty Limited (in liq) v Schomberg (1986) 11 ACLR 337. In that case proceedings were commenced by an insolvent company in liquidation and its liquidator. The plaintiffs sought an interlocutory injunction, but their counsel was instructed to give only an undertaking by the company as to damages limited to assets of the plaintiff without any undertaking being offered by the liquidator. 27 Young J acknowledged that there have been some cases in which interlocutory relief has been ordered without requiring that an undertaking be given. One example relied upon by the plaintiff in the present case is where the plaintiff is impecunious and supported by legal aid, and seeks a Mareva order as in Allen v Jambo Holdings Ltd [1980] 1 WLR 1252 and Szentessy v Woo Ran (Australia) Pty Limited (1985) 65 ACTR 98. Another example more closely analogous to the present circumstances is provided by cases where interlocutory injunctions have been granted at the suit of a liquidator without any requirement that the liquidator give a personal undertaking as to damages: John Arnold's Surf Shop Pty Ltd (in liq) v Heller Factors Pty Ltd (1979) 22 SASR 20; Clinton Credits Pty Ltd (in liq) v John McLeay Pty Ltd & Mount (1983) 32 SASR 389 (though it is not clear from the report whether the liquidator in the John Arnold case was a party to the proceedings, and in the Clinton Credits case the liquidator was a party to the appeal but not a party at first instance). 28 Young J observed, nevertheless, that the circumstances in which it is not just and reasonable that an undertaking should be given are extremely rare. It follows, say the defendants, that there being nothing exceptional about this case the usual undertaking should be given by the plaintiff and it should be given without qualification. 29 The plaintiff says that this is an exceptional case because of the international nature of the operations of the plaintiff and the existence in various jurisdictions of orders for provisional liquidation. In particular, the plaintiff draws attention to the fact that the Australian provisional liquidation is limited to assets in New South Wales and Victoria and that the present proceedings are being conducted, pursuant to directions given by this Court on 20 July 1999, by the Australian provisional liquidator in the company's name. In those circumstances, says the plaintiff, it is appropriate that the undertaking be limited to the Australian assets. The plaintiff distinguishes the Southern Tablelands case on the basis that here an undertaking (though limited) is offered, and so the Court is not asked to proceed in a way which leaves the defendants unprotected. Indeed, as I have indicated, the evidence shows that the assets to which the undertaking relates appear to be ample to cover the defendants' estimate of loss. 30 The plaintiff refers to the decision of Millett J in Re DPR Futures Ltd [1989] 1 WLR 778. In that case proceedings were brought by liquidators against the directors of a company and an application was made for Mareva orders. The liquidators were not prepared to offer an unlimited undertaking as to damages because, they said, they did not have the authority to commit their firm to the 'theoretically open-ended liability' that the giving of an unlimited undertaking would entail. Moreover, they did not have recourse to an indemnity by a substantial creditor to support their undertaking, because there were no large creditors but instead, several thousand creditors from whom an adequate indemnity could not be obtained. The liquidators also gave evidence of an unsuccessful attempt to secure insurance for the undertaking. The amount under the control of the liquidators was approximately 3 million of which it was likely only 2 million would be available to protect them in respect of their potential liability under the undertaking. The liquidators therefore offered an undertaking limited to 2 million. 31 His Lordship held that in the circumstances the provision of that undertaking was adequate. He said (at 758) that: 'A liquidator cannot be criticised for refusing to risk his personal assets by giving an unlimited cross-undertaking. It is right to require him to give an undertaking of an amount commensurate with the size of the company's assets and to take the risk that he may not be authorised by the court to have recourse to them to meet his liabilities.' 32 In the present case the undertaking offered at the hearing on 29 July 1999 was a limited undertaking by the company rather than by its provisional liquidator. After the hearing it occurred to me that the plaintiff's undertaking as to damages may not be sufficient to protect the defendants in the manner evidently intended by the plaintiff's counsel in his submissions. My concern was that the undertaking creates only an unsecured obligation against the plaintiff - indeed, an unsecured obligation with limited recourse. It does not create any security or proprietary interest with respect to the plaintiff's assets located in New South Wales and Victoria. The acknowledgment may or may not create a security interest in the surplus collateral, and may or may not be open to challenge as a voidable transaction under the applicable insolvency law, but I leave those questions to one side and proceed, for the purposes of the present analysis, as if the only protection offered to the defendants were the plaintiff's limited recourse undertaking. The plaintiff is in provisional liquidation in several countries and there is some financial evidence that it is insolvent. If the plaintiff's undertaking is no more than an unsecured obligation, the defendants would rank as unsecured creditors of the plaintiff if the plaintiff goes into liquidation and they claim damages pursuant to the undertaking. The inadequacy of that protection might have led me to refuse further interlocutory relief even if the balance of the convenience were to favour the plaintiff in all other respects, except for a modification to the undertaking which the plaintiff subsequently offered. 33 Because of my concern, I met with counsel in chambers on 30 July 1999 and conveyed the problem to them. At a further hearing on 3 August 1999 the plaintiff modified the undertaking previously proposed, by offering as well an undertaking in similar though different terms by Mr Gibbons as provisional liquidator. The plaintiff submits that such an undertaking may be given by the provisional liquidator without any steps being taken to join him as a party to the proceedings. I agree with this submission, having regard to the observations by Young J in the Southern Tablelands case at 341 and older English authorities including Rosling & Flynn Ltd v Guarantee & Trust Company (1903) 47 Sol J 255 and Westminster Association Ltd v Upward (1880) 24 Sol J 690; see also ICF Spry, Equitable Remedies (5th ed, 1997) pp 485-486. 34 In the present circumstances the giving of the undertaking by the provisional liquidator rather than merely by the plaintiff company is of significance. Since the giving of the undertaking is a proper step for the provisional liquidator to take in proceedings designed to get in and protect the assets of the company in provisional liquidation, any payment which he may be required to make should the undertaking be called upon is a cost or expense incurred by him in the course of the provisional liquidation. A provisional liquidator is a 'relevant authority' for the purposes of s 556 of the Corporations Law. That being so, an amount paid by him pursuant to the undertaking has the priority over other unsecured debts given by s 556(1)(a). In addition, case law indicates that a provisional liquidator has a right of recoupment from those assets of the company in provisional liquidation which are under his administration, and this right is supported by an equitable lien in his favour for expenses as well as remuneration: Nationwide News Ltd v Samalot Enterprises Pty Limited (1986) 5 NSWLR 227, 230-231; Shirlaw v Taylor (1991) 5 ACSR 767, 776. Though it is unnecessary for me to reach a firm view, it appears also that the creditors in whose favour the undertaking has been given would be entitled to enforce the lien against those assets of the company by subrogation: Re London United Breweries Ltd [1907] 2 Ch 511; RP Meagher, WMC Gummow and JRF Lehane, Equity Doctrines and Remedies (3rd ed, 1992) par 930. Even without a right of subrogation, it appears to me that these principles would provide adequate and reasonable protection in the present circumstances. 35 In summary, it appears to me that the balance of convenience clearly weighs in favour of the granting of the relief sought by the plaintiff, upon the basis of the plaintiff's undertaking and acknowledgment supported by an undertaking in similar terms by the Australian provisional liquidator. Therefore, I decided yesterday to make the orders sought. 36 I should add that the form of the orders sought by the plaintiff was varied between the hearings on 29 July and 3 August 1999 but the thrust of the orders is, for relevant purposes, the same. The defendants did not consent to the orders, but they made no submissions at the hearing on 3 August 1999 with respect to the terms of the orders. 37 On 3 August 1999 the plaintiff also sought leave to file in Court and have determined instanter a further application under s 479(3) of the Corporations Law for directions to the effect that Mr Gibbons, as provisional liquidator, would be justified in providing an undertaking as to damages in the manner in which he, in fact, offered it. Mr Gibbons' undertaking is limited to the amount ultimately available to him (net of his appropriate costs, charges, expenses and remuneration entitlements) as provisional liquidator of the plaintiff out of the assets of the plaintiff pursuant to his rights as provisional liquidator (including such rights as may exist in relation to funds in the USD account). 38 I considered the principles which apply to an application for such directions in my reasons for judgment handed down on 21 July 1999. I thought it appropriate then to give directions to Mr Gibbons to the effect that he would be justified in causing the plaintiff to give a limited undertaking as to damages and in causing the plaintiff to give the acknowledgment which I have described. Implied in that conclusion was the proposition that the present proceedings are appropriate proceedings for the provisional liquidator to conduct in this jurisdiction (see par 26 of my reasons for judgment). It appears to me to follow, especially having regard to the additional matters which were put to me at the hearings on 29 July and 3 August 1999, that the application for a further direction made on 3 August 1999 should succeed. At yesterday's hearing, I therefore gave a direction in the terms sought. 39 I also ordered yesterday that the costs of the application for further interlocutory relief until further order and the Notice of Motion for directions heard yesterday be costs of the proceedings.

New Cap Reinsurance v Chase Manhattan

At a glance

Court

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Judgment (8 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (5)

Cited By (3)