New Cap Reinsurance v Faraday Underwriting [2003] NSWSC 842 | Case summary

New Cap Reinsurance v Faraday Underwriting [2003] NSWSC 842 | Case summary | Zoe

CATCHWORDS : CORPORATIONS - Liquidators - winding up of reinsurance company - priority of claims under Insurance Act 1973 and Corporations Law and Corporations Act - whether s116(3) of Insurance Act subject to direct or implied repeal by Corporations Act - whether priority rights under Insurance Act rights or obligations under s8 of Acts Interpretation Act 1901 (Cth) - whether rights to be determined at commencement of winding up CORPORATIONS - rights of creditors - application of and construction of s562A of the Corporations Act - interaction between that section and s116(3) of the Insurance Act - CORPORATIONS - Liquidators - costs and expenses of liquidation - out of which funds payable - INSURANCE - insurance companies insolvent insurance company subject to winding up - priorities under s 116(3) of Insurance Act 1973 - whether repeal and renactment of s116 operated to bear on existing rights and obligations - whether contrary intention expressed by amending Act - meaning of liabilities in Australia under s116(3) and s31 of the Insurance Act Acts Interpretation Act 1901 (Cth) s8, s8A, s15AA Commonwealth of Australia Constitution Act, s109 Companies Act 1928 (Vic) s448 Corporate Law Reform Bill LEGISLATION CITED : Corporate Law Reform Act 1992 Corporations Act 2001 (Cth) s562A Corporations Law s447, s513, s554, s555, s556, s562, s562A, s588 General Insurance Reform Act 2001 Sch 2 Insurance Act 1973 s 31, s116 Lugano Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters 1988, s3 Agnew v Länsförsäkringsbolagens AB [2001] 1 AC 223 Banco de Portugal v Waddell (1880) 5 App Cas 161 Butterell v The Douglas Group Pty Limited (2000) 35 ACSR 398 Cambridge Credit Corporation Limited v Lissenden (1987) 8 NSWLR 411 Cleaver v Delta American Reinsurance Co [2001] 2 AC 328 Ex Parte Coote (1949) 48 SR(NSW) 179 Fisher v Madden (2002) 54 NSWLR 179 Fleet Motor & General Insurance Co (Australia) Pty Limited v Tickle [1984] 2 ACLC 282 Hague v Hague (No 2) (1965) 114 CLR 98 In Re Federal Building Assurance Co Limited [1932] VLR 301 In re E J Morel (1934) Limited [1962] 1 Ch 21 In re Northern Counties of England Fire Insurance Co (1880) 17 Ch D 337 In Re Oriental Steam Co (1874) LR 9 Ch App 557 In Re Russo - Asiatic Bank [1934] Ch 720 Jabbour v The Custodian of Israeli Absentee Property [1954] 1 WLR 139 Mathieson v Burton (1971) 124 CLR 1 CASES CITED : McCaughey v Commissioner of Stamp Duties (1945) 46 SR(NSW) 192 N A Kratzmann Pty Limited (in liquidation) v Tucker (No 2) (1968) 123 CLR 295 New York Life Insurance Company v The Public Trustee [1924] 2 Ch 101 Pace Tasmania Pty Ltd (in liquidation) v FAI General Insurance Company Ltd (Prov Liq Apptd) [2001] TASSC 112 Palmdale Insurance Limited (in liq) (No. 3) [1986] VR 439 Re Dominion Insurance Co of Australia Limited [1980] 1 NSWLR 271 Re Helbert Wagg & Co Limited [1956] Ch 323 Re National Employers Mutual General Insurance Association Limited (1995) 15 ACSR 624 Re NC Capital Limited (1999) 32 ACSR 418 Re Standard Insurance Company Limited [1968] QdR 118 Re Unit 2 Windows [1985] 1 WLR 1383 Re Universal Distributing Co Ltd (In Liquidation) (1933) 48 CLR 171 Saltergate Insurance Co Limited (No. 2) [1984] 3 NSWLR 389 SJP Formwork (Aust) Pty Limited (in liq) v Deputy Commissioner of Taxation (2000) 34 ACSR 604 Steinberg v Herbert (1988) 14 ACLR 80 Tolcher v National Australia Bank (2003) 44 ACSR 727 Wight & Ors v Eckhardt Marine GmBH [2003] UKPC 37 New Cap Reinsurance Corporation Limited (In Liquidation) (First Plaintiff) John Raymond Gibbons (As liquidator of the first plaintiff) (Second Plaintiff) PARTIES : Faraday Underwriting Limited (former "DP Mann Limited") (First Defendant) Gerling Global Reinsurance Company of Australia Pty Limited (Second Defendant) NC Re Capital Limited (In Liquidation) (Third Defendant) FILE NUMBER(S) : SC 6094 of 2001 Mr B Coles QC with him Mr D Robertson (Plaintiffs) Mr M Walton SC with him Mr P Whitford and Mr J Hogan-Doran (First Defendant) COUNSEL : Mr R B S Macfarlan QC with him Mr S A Goodman (Second Defendant) Mr S Epstein SC (Third Defendant) Mr M Aldridge SC - by leave to make submissions on behalf of Australian Prudential Regulatory Authority Henry Davis York (Plaintiffs) SOLICITORS : PricewaterhouseCoopers Legal (First Defendant) Clayton Utz (Second Defendant) Deacons (Third Defendant)

6094/01 NEW CAP REINSURANCE CORPORATION LIMITED (IN LIQUIDATION) & ANOR V FARADAY UNDERWRITING LIMITED AND ORS JUDGMENT Outline 1 This judgment deals with questions which have arisen in the winding up of New Cap Reinsurance Corporation Limited (In Liquidation) (NCRA). The first important matter for determination is whether or not s116(3) of the Insurance Act 1973 which was in force prior to 1 July 2002 (the Old Insurance Act) applies to the liquidation or whether it was repealed by express repeal by the General Insurance Reform Act 2001 or by implied repeal by the Corporations Law or the Corporations Act 2001; and if it was repealed whether rights or obligations were preserved by s8 of the Acts Interpretation Act 1901 so as to bear upon rights the parties here have as creditors in the liquidation. If s116(3) does apply the further question arises as to the proper interpretation of s116(3) of the Old Insurance Act. The second matter of importance is the effect s562A of the Corporations Act has upon the winding up whether or not s116 of the Old Insurance Act bears upon rights in the winding up. There are numerous other questions upon which the liquidator seeks directions. 2 My determination of some of the early s116 questions may make some of the directions sought unnecessary. For the most part however I have dealt with the direction in deference to the very careful arguments which have been put and in case my decision is taken on appeal. Parties 3 This is really test litigation, the defendants being joined by agreement not as representative parties, but as parties having particular and sometimes contrary interests so far as the relief by way of declaration and directions sought by the liquidator is concerned. The first defendant represents certain Lloyds Underwriting syndicates. It reinsured certain insurance risks with NCRA. It is a London based company. The second defendant is an Australian reinsurer which reinsured some of its risk by way of retrocession agreement with NCRA. The third defendant is a creditor of NCRA in liquidation. Its debt does not arise under any policy of insurance. The Australian Prudential Regulatory Authority (APRA) was given leave to make submissions through counsel. 4 Each of the parties has provided very helpful written submissions which set out the contentions on each of the questions. In view of the opposing positions and the large number of questions for decision I will deal with the questions without specifically referring to the written and oral submissions but nevertheless dealing with the arguments advanced on each side. Mr Coles QC, senior counsel for the liquidator has very helpfully put forward the questions and general arguments and has in addition in most cases argued for or at least supported a particular conclusion especially if there was no other contradictor or supporter. His written submissions have been especially valuable. Facts 5 NCRA was incorporated on 11 October 1996. Its principal shareholder was another Australian company, NC Re Corporation Limited, now in liquidation, (NC Re), the third defendant. NC Re is wholly owned by a Bermuda company New Cap Reinsurance Corporation Bermuda Limited (NCRB) (now in liquidation) which is in turn owned by another Bermuda company also in liquidation. 6 The business of NCRA was writing international reinsurance. On 21 April 1999 Mr Gibbons, the second plaintiff, was appointed voluntary administrator and on 16 September 1999, by resolution of creditors it was resolved the company be wound up and Mr Gibbons thereupon became liquidator. 7 NCRA itself took out reinsurance cover (outward reinsurance) for part of its liabilities under the inwards reinsurance policies issued by it. The recoveries under those policies by the liquidator are substantial and further substantial recoveries are expected. Nevertheless there will be a substantial deficiency in NCRA. How that deficiency will be borne as among insurance creditors of NCRA and as between insurance creditors and general creditors gives rise to the necessity for these proceedings. 8 NC Re is a general creditor of NCRA for US$30 million. That sum was borrowed by NC Re from NCRB on 31 December 1998 and re-lent on that day to NCRA by way of perpetual subordinated loan on the terms of a perpetual unsecured note instrument which provided for its governing law to be that of New South Wales. 9 NCRA had only one office. That was in Sydney. NC Re is an Australian company. It is accepted that the debt under the notes was a liability of NCRA in Australia. Where under legislation preference in the winding up is given to creditors who claim under liabilities in Australia, the interest of the third defendant to have as restrictive an interpretation as possible placed on the class of creditors. Where there is a question of whether some priority is given to insurance creditors as opposed to general creditors it is in the interests of the third defendant to argue for an inclusive class of creditors both insurance and general. 10 The originating process in this action refers to two reinsurance contract claims under reinsurance contracts issued by NCRA in favour of the first defendant. The policy TY165A for the 1998 year was a property excess of loss reinsurance contract for that year. The cover was in respect of events or losses occurring anywhere arranged through brokers in England and Canada. NCRA had no specific facultative outwards reinsurance in respect of liability under the policy, but it did purchase outwards excess of loss and quota share reinsurance to protect its liability under general business classes. The policy included an arbitration clause which provided for the seat of the arbitration to be in London and for enforcement of awards in the High Court of Justice in England or in a court of competent jurisdiction in any territory in which the defaulting party "is domiciled, has assets or carries on business". It is not a Scott v Avery clause. There was in addition a clause nominating London brokers as the intermediary through whom all transactions and communications were to take place. 11 The second policy was relevant to a claim under a facultative reinsurance contract in respect of an original insured AK Steel Corporation where the direct broker (between original insured and insurer) was Johnson and Higgins Limited in London, the facultative broker (between original insurer and reinsurer) was Willcox Johnson and Higgins Reinsurance Brokers Limited, also in London, the underwriters who were reinsured with NCRA were various Lloyds syndicates and the local broker (between facultative broker and reinsurer) in Australia was Australian Independent Reinsurance Services Pty Limited. The original events insured against could only happen outside Australia. There was no facultative reinsurance protection for the contract. There was, however, some recovery under a whole account quota share reinsurance. I will return to these policies when considering the interpretation of s116(3) of the Insurance Act. 12 The second defendant, Gerling Global Reinsurance Company of Australia Pty Limited was insured with the NCRA under a policy of reinsurance. As any payment to it under a policy with NCRA would be made in Australia there is no doubt its claim was a liability in Australia. It is therefore in its interests to have a narrow construction put upon the class of creditors whose claims are held to be liabilities of NCRA in Australia. In addition the Gerling liability was covered by NCRA with an outwards quota share agreement with NCRB. Gerling would benefit by a finding of narrow pooling under a question I will come to later. Legislation

Does s116(3) of the Old Insurance Act bear upon the winding up? 20 This question raises matters of implied repeal, direct repeal, retrospective operation and existing rights and obligations. At the commencement of the winding up the provisions of the Old Insurance Act, so far as they were inconsistent with the Corporations Law, prevailed over the Corporations Law for the reasons set out in paragraph 18. The argument is that on the passing of the Corporations Act s513, s554, s555, s556, s562 and s562A operated so as to bring about an implied repeal of s116(3). The question should first be considered without taking into account the provisions of s8 and s8A of the Acts Interpretation Act. Repeal by implication needs to be reasonably obvious before it comes about. There is no doubt that the Corporations Act is a specific Act dealing with companies including the winding up of companies and that the opening words of s555 are "except as otherwise provided by this Act". On the other hand the Old Insurance Act is an act specific to insurance companies with s116(3) being limited to the winding up of such companies. As I will explain later it is not impossible for both s116(3) and s562A to bear upon a situation and to both have some effect and a different effect depending upon which takes priority. One gives priority through geographic facts, the other priority to particular class (insured) claimants against particular class (reinsurance) assets. They are not so inconsistent as to require a finding of implied repeal. The repeal, and reinstatement of s116 in the New Insurance Act is at least inconsistent with the implied repeal or for that matter intended repeal by the Corporations Act. I find there was no implied repeal. 21 The next question is the effect of the repeal of s116(3) of the Old Insurance Act in 2002 and its re-enactment in a form not applicable to NCRA. It is not applicable as s11 of the New Insurance Act defines general insurer as a body corporate that is authorized under s12 to carry on insurance business in Australia and NCRA has no such authority. It was argued that the transitional provisions indicate a retrospective intention other than as expressed by the transitional provisions thereby indicating a contrary intention within s8 of the Acts Interpretation Act. It is convenient to deal with the s8 question as I think it determines the matter. First however, the repeal of the section in the Old Insurance Act and its reinstatement so far as s116(3) is concerned by s116(3) of the New Insurance Act indicates a continuance and a prospective operation of the repeal. It would be strange to legislate for an interregnum. Second, the transitional provisions in Schedule 2 to the New Insurance Act are not contrary to an intention to retain existing rights. They are appropriate to insurers in run down mode, or to companies that, while they may not presently fulfil all the requirements of the New Insurance Act, are not thought to be a risk, and are thought to be capable of compliance within a limited period. 22 On the basis that there is no contrary intention expressed in the New Insurance Act the question is whether s8(c) of the Acts Interpretation Act means that the creditors' claims are to be dealt with on the basis of s116(3) of the Old Insurance Act. Thus the question is whether or not s116(3) of the Old Insurance Act gave rise to any right, privilege, obligation or liability. From the point of view of a creditor entitled to priority under the Old Insurance Act it is argued that there was a right to have that creditor's claim dealt with so as to give effect to s116(3) priority. From the position of the liquidator it is said by the same creditors that there was obligation on the liquidator to deal with claims on the basis of the s116(3) priority and that this right and this obligation are maintained through s8(c). 23 It has been established that rights are not restricted to proprietary rights: Mathieson v Burton (1971) 124 CLR 1 at 12. But whether rights or obligations are the centre of attention, the relevant question is whether or not a creditor entitled to s116(3) priority at the date of the commencement of the winding up had any entitlement to have his or her proof of debt dealt with on the basis of the law in force at the commencement of the winding up. In support of this contention, counsel for Gerling and NC Re point to the provisions of ss554 and 555 of the Corporations Act which are predicated on rights accruing as a result of a debt due or a contingent liability at the commencement of the winding. Two Australian cases support the contentions of the second defendant which are supported by the third defendant. These are Steinberg v Herbert (1988) 14 ACLR 80 and Fisher v Madden (2002) 54 NSWLR 179. The first of these cases was a decision of the Full Court of the Supreme Court of Western Australia. At issue so far as is relevant here was the priority in a winding up for payments due to an employee of the company, who was its managing director, in respect of leave of absence. This case involved priorities on receivership but the same principles would have applied to a winding up. At the date of the commencement of the receivership there was a sum of $22,000 due to the former managing director for long service leave not taken. After that date and before an application for directions by the liquidators came on for hearing by the court the relevant State legislation was amended to provide that priority claims in respect of leave of absence were restricted to $1,500 in respect of a certain category of employee into which the managing director fell. While the decision was a majority decision, all the judges dealt with the legislation on the basis that it affected rights. Wallace J, who was in the minority considered that it was clear that the later legislation was an amendment and not a repeal but in any event it was clearly intended to have retrospective operation. Brinsden J held that there was no retrospective intent. So far as what could be described as the s8(c) question, but under the relevant state legislation he said at pages 89-90: So far as the argument goes that the right to payment had not vested in or accrued to the appellant and therefore the section as amended applied to him I do not believe any question of vesting enters into the resolution of the matter. I adopt perhaps a simplistic approach. That is based entirely on the construction of s 331(1) and (2). They read, and relevantly read, at the date the receiver was appointed, that he "shall pay, out of the property coming into his hands, the following debts or amounts in priority . . ., any debt or amount that in a winding up is payable in priority to other unsecured debts pursuant to paragraph 441(g)". The order of priority (and the extent of that priority) was fixed at the date the receiver was appointed. The provision in sub-s (2) that the receiver shall pay out of the property coming into his hands debts in priority set out, is a provision which requires him to pay the preferential creditors out of any assets coming into his hands as receiver: Westminster Corporation v Haste [1950] Ch 442 at 447. If he has had any assets out of which this payment could have been made, (and he has), he is under a liability in tort to pay it to the creditor entitled. The relevant date therefore is the date of appointment of the receiver and it is at that date the order of priority is determines in accordance with the provisions of s 331(2) as they appeared at the date of this receiver's appointment. The fact that subsequently the order of priority is varied, or the amount of priority reduced, is irrelevant since the amended provisions of s 331(2) were not the provisions having effect as at the date of appointment. Kennedy J was of the same opinion. At page 96 et seq he said: The cross-appeal The cross-appeal raises a quite separate question. Section 331(2) of the Code imposes upon a receiver, or other person taking possession or assuming control of property of a company, to pay out of the property coming into his hands the specified debts in the stated priorities. Obviously enough, that is a statutory duty and it has been held that a receiver who neglects to provide for such payments will be held personally liable in damages to preferential creditors who have not been paid:. See Woods v Winskill [1913] 2 Ch 303; Westminster Corp v Haste [1950] Ch 442; Westminster City Council v Treby [1936] 2 All ER 21 and Inland Revenue Commissioners v Goldblatt [1972] Ch 498. It is a statutory duty imposed upon a receiver from the time of his appointment and must give rise to a correlative entitlement on the part of preferential creditors, although it may not be a right to immediate payment . (my underlining)

It appears to me to be unnecessary to embark upon any detailed consideration of whether the effect of the 1985 Act was to repeal s 441(1)(g) so as to attract the provisions of s 29 of the Companies and Securities (Interpretation and Miscellaneous Provisions) (WA) Code and consequently preserving, unless the contrary intention appears in the 1985 Act, any rights which the appellant had acquired or which had accrued, or any obligation incurred by the receivers. Whilst it is true that; in form, s 441(1)(g) was repealed and a new provision was substituted, the new provision followed very closely the wording of the earlier provision, and was designed only to impose a limitation with respect to the preferred claims of "excepted" employees. In Mathieson v Burton (1971) 124 CLR 1 at 10, although he accepted that, in determining whether an enactment involves a repeal of earlier legislation, it is the substantial effect which it produces and not the linguistic method by which it produces it which is important: as to which see Beaumont v Yeomans (1934) 34 SR(NSW) 562 per Jordan CJ at 569, Windeyer J was of the view that "an amendment which permanently reduces the ambit of any of the provisions of an Act involves a repeal of it in part. That is because after the amendment the statute no longer operates as it formerly did: and the only way by which a statute which has come into operation can cease to operate is by repeal, express or implied; or by its expiry in the case of a temporary statute; or by something that was made a condition of its continued operation coming to an end. An Act that excludes from the operation of a former Act some matter formerly within its purview thus repeals it pro tanto, that is to say 'in part'." A somewhat different approach was adopted in the same case by Gibbs J, at 20-2, although he also referred to Ku-ring-gai Municipal Council v Attorney General (NSW) (1957) 99 CLR 251 at 265, in which it is indicated that a provision such as s 29 applies as much to a repeal to make way for a substituted provision as to a simple repeal. However; as counsel for the respondents acknowledged, nothing turns upon this question in the present case, because there is, at common law, a general rule that a statute changing the law ought not, unless the intention appears with reasonable certainty, to be understood as applying to facts or events that have already occurred in such a way as to confer or impose or otherwise affect rights or liabilities which the law had defined by reference to the past events: per Dixon CJ in Maxwell v Murphy (1957) 96 CLR 261 at 267. 24 In Fisher v Madden, a decision of the Court of Appeal of this State, Meagher JA referred to Steinberg with apparent approval when dealing with and accepting the submission that in a receivership, and it would follow from his reasoning in a winding up, all claims and debts had to be listed and valued at the one date; and that rights to priority payments were just that, namely rights to take in priority to other creditors, coupled with an obligation by the liquidator to give effect to those rights. The decision of Sheller JA at least at page 191 was to the same effect. 25 After judgment here was reserved, and while I was considering these reasons, Senior Counsel for the plaintiff quite properly drew my attention to the Privy Council decision in Wight & Ors v Eckhardt Marine GmBH [2003] UKPC 37. The essential facts of that case were that the respondent, Eckhardt Marine, had sold a tanker to a Bangladesh company for scrap. The purchasing company was to provide a letter of credit for the purchase price opened 10 days before the arrival of the vessel in Bangladesh and to provide a deposit of 10% by way of a guarantee if the letter of credit was not opened. The guarantee was provided by the Chittagong, Bangalesh branch of Bank of Credit Commerce International (Overseas) Ltd (BCCI(O)) a bank incorporated in the Cayman Islands. Notice of expected arrival was given on 5 July 1991, but on that day BCCI(O) was closed down worldwide. The letter of credit was not opened. A call was made on the guarantee but no payment was made. 26 An order for the winding up BCCI(O) was made in the Cayman Islands on 14 January 1992 pursuant to a petition issued on 22 July 1991. The Government of Bangladesh determined not to take part in a scheme proposed by the liquidators in the Cayman Islands which could have resulted in equal treatment of creditors. Instead it established a new bank, Eastern Bank Limited, under a legislative scheme pursuant to which all assets and liabilities of BCCI(O) in Bangladesh were transferred to Eastern Bank and the liabilities of BCCI(O) in Bangladesh became liabilities of Eastern Bank. Eckhardt lodged a proof of debt with the liquidators in the Cayman Islands. This was rejected on the basis that the claim had been assumed by the Eastern Bank. An appeal against the rejection of the proof of debt was dismissed on the ground that the proper law of the debt was Bangladesh, that that law had extinguished the cause of action against BCCI(O) and substituted a new claim against Eastern Bank so that no debt could be proved. The Court of Appeal of the Cayman Islands allowed an appeal on the basis that the validity of the debt was governed by its situs, that the situs was arguably Bangladesh but upon the making of the winding up order the debt became a claim to participate in the distribution of assets in the Cayman Islands which became the situs of the claim which could not be affected by the Bangladesh scheme. On appeal to the Privy Council this decision was reversed. 27 After determining that by the law of Bangladesh the debt owing by BCCI(O) to Eckhardt was discharged their Lordships moved to consider the matters relevant here, namely the fact that the winding up order was made before the Bangladesh scheme took effect. The argument was that Eckhardt had a debt due under the proper law (that of Bangalesh) at the date of winding up which could not be divested by a change in the proper law. As this is an important matter it is necessary to quote some paragraphs of the judgment of the Privy Council which was delivered by Lord Hoffmann commencing at paragraph 21: 21. Central to both these arguments is the proposition that the right to share in a liquidation is a new right which comes into existence in substitution for the previous debt and is governed by the law of the place where the liquidation is taking place, rather in the way that obtaining a judgment merges the cause of action in the judgment and creates a new form of obligation, namely a judgment debt, governed by its own rules of enforceability.

Their Lordships therefore consider that the winding up order had no effect upon Eckardt's debt, its situs or its proper law. Under the principle of universality, it was at the date of the order provable in the winding up notwithstanding that its lex situs and proper law were both the law of Bangladesh. But they consider that the right to participate at any stage in the process of collective enforcement by liquidation depends upon being a creditor. So when the debt was discharged under its proper law, it ceased to provable in the Cayman Islands liquidation and was properly rejected. Their Lordships will therefore humbly advise Her Majesty that the appeal should be allowed and the order of Murphy J restored. The respondent must pay the liquidators' costs in the Court of Appeal and before their Lordships' Board. 29 How does this bear upon Australian law. It can be accepted that a creditor at the commencement of winding up who ceases to be a creditor before a proof of debt is lodged, cannot prove. But that goes to status and entitlement to claim. Does it mean that s116(3) under the Old Insurance Act confers no rights or gives rise to no obligations which bring s8(c) of the Acts Interpretation Act to bear. The two decisions to which I have referred are to the contrary. My duty as a trial judge is to follow the Australian decisions being decisions of either a Full Court or Court of Appeal. This is not a question of whether or not a debt is due. The debt has not been extinguished. In the Privy Council case the debt due by the company in liquidation had been extinguished. There could be no question of whether or not the legislation was retrospective as its purpose was to operate retrospectively to extinguish one debt and to substitute another. That is what the decision held. It is not the winding up which creates the rights. It is the Old Insurance Act which creates the right, in the event of a winding up, to have priority given to certain debts and to require the liquidators to give effect to that priority. As counsel for the liquidator said - I think quite correctly - an injunction would go against the liquidators to restrain a distribution contrary to s116(3) of the Old Insurance Act when in force. That is the obligation, and the right, which I consider continue in accordance with the decisions which I have discussed. It follows from this that I conclude that priority creditors under s116(3) of the Old Insurance Act are entitled to have their priority recognized by the liquidator in distribution of the Australian assets and I so find. I should add that the hindsight principle is relevant only to valuation of contingent debts and that in any event a careful reading of In Re Northern Counties of England shows that the revaluation came about because the provisions of the relevant Companies Act in the United Kingdom at that time incorporated the provisions of the Bankruptcy Act 1966 which required notice to be taken of events occurring during the winding up - in that case the destruction by fire of the insured property. Are provable claims under policies TY165A for the 1998 underwriting year and FC3A for the 1997 and 1998 underwriting years liabilities in Australia of NRCA for the purposes of s116(3) of the Insurance Act? 30 Unless s31(4) is an exclusive definition claims under both policies would be liabilities in Australia under the general law. Liability in respect of a chose in action is normally where the debtor resides. NRCA resides in Australia and only in Australia. Unless there is some different law relating to liability under policies of insurance that is an end to the matter. Jabbour v The Custodian of Israeli Absentee Property [1954] 1 WLR 139; New York Life Insurance Company v The Public Trustee [1924] 2 Ch 101. In Hague v Hague (No 2) (1965) 114 CLR 98 at 136, Windeyer J said that a debt made payable at the particular place may sometimes be regarded as being located at that place "but only it seems where the debtor has a place of residence there" referring to Re Helbert Wagg & Co Limited [1956] Ch 323. Reliance was placed by counsel for the second defendant on the judgment of Jordan CJ in Ex Parte Coote (1949) 48 SR(NSW) 179 at 184 where the following passage appears: Thus, a simple contract debt is locally situated where the debtor resides, unless it is agreed to be paid in a particular place, in which case it may be locally situated at that place. 31 This referred back to an earlier decision of the then Chief Justice in McCaughey v Commissioner of Stamp Duties (1945) 46 SR(NSW) 192 at 201 where the same passage appears interspersed with supporting authorities. Although counsel for the second defendant relied on those authorities particularly In Re Russo - Asiatic Bank [1934] Ch 720, none of them is contrary to Hague v Hague which I should follow, nor to Jabbour. Clarke J in Cambridge Credit Corporation Limited v Lissenden (1987) 8 NSWLR 411 referred to in the passage from Ex Parte Coote just set out. That was a case of multiple Lloyds Underwriters normally situated overseas with an insured with offices in many Australian States. Whatever problems arose there I consider it to be clear that the liability is situated where the defendant resides, at least where there is only one place of residence. I should add that the contracts in issue here do not provide for payment in a particular place, even though the Schedule B contract has an arbitration provision with the seat of arbitration being London. The fact that in most instances payment is made by the reinsurer to the facultative broker or to the introducing broker does not bear on the matter any more than would be the position if industry custom were for payment to the insured where the insured resided. Leaving aside various provisions for service out of the jurisdiction if a creditor wishes to enforce a liability it will usually be necessary to do so where the debtor resides. I think it clear that the words "may be locally situated at that place" as they appear in Coote and McCaughey only mean that can be the situation if the debtor has an office or business in that place. 32 There was an argument that Lissenden was applicable in the case of the Schedule B policy because there were multiple insurers. That was not the position. The contract with NCRA was for fifty percent of the risk reinsured. Another company may have signed for the other fifty percent but if it did so then it was under a separate contract. 33 The next question is whether s31(4) is an exclusive definition of liabilities in Australia. In the long run, it was not argued by counsel for the first or second defendant that it was, although that argument was advanced for the third defendant and counsel for the second defendant said it was exclusive for insurance liabilities. The sub-section is not a definition section. Its effect is to extend the range of liabilities in Australia beyond those which would exist under the rules of Private International Law. Are "liabilities in Australia" under s116(3) of the Old Insurance Act limited to insurance liabilities? 34 The answer to this question is "No." First, s116(4) refers to s31 as having effect not s31(4). Second, s31 as it appears in Part III of the Old Insurance Act was relevant to the question of authority to carry on insurance business and to ensure that an authorised insurer was solvent. For that purpose all liabilities are taken into account. In the case of NRCA it seems that all creditors, whether insurance or not will therefore be treated equally as all liabilities will be situated in Australia. That of course would not have been the position had NRCA been a company with places of business other than in Australia. Directions sought in relation to s116(3) of the Insurance Act 35 The matters so far dealt with provide the answers as to which of the declarations sought in respect of the s116 application should be made. These cover the directions under paragraph 1, 2 and 3 which overlap with the declarations numbered 1 to 3 sought in respect of s116 under the fourth amended originating process. Remaining s116 Directions Direction 4 - A direction that the liquidator would be justified in distributing funds representing the proceeds of collection or realization of assets situated outside of Australia on the basis that those proceeds are not to be regarded as assets in Australia for the purpose of s116(3) of the Insurance Act through having been transferred or remitted to Australia in ordinary course of administration. 36 This direction should be given. The s116(3) priority is not to be artificially obtained by transfer of funds from overseas into Australia. Assets in Australia must on any fair basis be assets in Australia when the winding up commences subject to any further consideration when winding up follows an administration. Direction 4A. That the liquidator would be justified in distributing funds representing the proceeds of assets realised in the liquidation on the basis that, where assets outside Australia were realised by the administrator of NCRA during the course of the voluntary administration of NCRA and the proceeds of realisation were deposited into bank accounts maintained by the administrator in Sydney prior to 16 September 1999, those proceeds have not become assets in Australia for the purposes of section 116(3) of the Insurance Act 1973. 37 Section 116(1) refers to an insurance company which "is begun to be wound up". Under the Corporations Law and the Corporations Act ss513B(b) and 513C the winding up of NCRA is deemed to have begun on the day on which the administration began. While it does not decide the question the decision of Santow J in Re NC Capital Limited (1999) 32 ACSR 418 seems to proceed on the basis that the date of commencement of winding up under s116(3) is the date determined by the Corporations Act. He did not have to decide that and I do not think it would be correct. The date of commencement of winding up was, in 1973, in the case of the court winding up, when the proceedings commenced and in the date of a voluntary winding up when the resolution was passed. However, the wording of s116(1) which in 1973 was "commenced to be wound up" was altered in 1997 to "begun to be wound up" although on what basis that was thought to be better grammatically, I do not comprehend. Nevertheless I consider that for the purpose of s116 an insurer previously under administration is begun to be wound up when the relevant resolution of creditors is passed thereby bringing the administration to an end. As a company can carry on insurance business while under administration the prohibitions under s116(1)(a) can only apply when the creditors resolve on a winding up. The introductory words to s116(1) namely, "begun to be wound up" cannot be anything different from "date of commencement of the winding up" in s116(1)(a). Fleet Motor & General Insurance Co (Australia) Pty Limited v Tickle [1984] 2 ACLC 282 supports this conclusion. It follows that the direction should not be made. Direction No. 5. A direction that the liquidator would be justified in distributing the proceeds of assets realised in the liquidation on the basis that any moneys recovered pursuant to the provisions of Part 5.7B of the Corporations Act are available to be distributed to creditors of NCRA without regard to section 116(3) of the Insurance Act 1973. 38 Such recoveries are not assets in Australia at the date of commencement of winding up as meant by s116 of the Insurance Act. If a successful claim is made by a liquidator then the proceeds of such claim will be paid to the company in accordance with the general scheme of s588FF. The claim is nevertheless a claim by a liquidator after commencement of the winding. It may bring into existence the funds in Australia available for distribution, but that does not make the claim an asset of the company at winding up. The rights of the liquidator to recover funds for the company are statutory rights and not proprietary rights in the company at the date of the commencement of the winding up: N A Kratzmann Pty Limited (in liquidation) v Tucker (No 2) (1968) 123 CLR 295; SJP Formwork (Aust) Pty Limited (in liq) v Deputy Commissioner of Taxation (2000) 34 ACSR 604 and Tolcher v National Australia Bank (2003) 44 ACSR 727. Direction No 6. A direction that the liquidator would be justified in distributing the proceeds of assets realised in the liquidation on the basis that any interest earned on deposits of the proceeds of realisation of assets does not itself constitute an asset in Australia for the purposes of section 116(3) of the Insurance Act 1973

39 For the same reason that assets brought into Australia after the commencement of the winding up are not to be treated as Australian assets for the purpose of s116(3) interest earned on such repatriated assets should be treated in the same way. So far as interest is earned on the proceeds of the realization of assets in Australia at the date of liquidation is concerned, the position is not so clear. The answer should be the same for any income producing asset or account. For instance a real estate investment property earning rent should be treated in the same way as a bank account earning interest. In In Re Federal Building Assurance Co Limited [1932] VLR 301, there was under consideration s448 of the Companies Act 1928 (Vic) which is the forerunner of s116(3). It seems to have been assumed in that case that interest on assets in Victoria was part of the Victorian assets in respect of which payment of liabilities in Victoria was to be made in priority to payment of other liabilities. That view also seems to have been accepted in Re National Employers Mutual General Insurance Association Limited (1995) 15 ACSR 624, though in neither case was interest earned after the date of the commencement of the winding up specifically referred to, but against that no payments in one case in respect of liabilities outside of Victoria or in the other liabilities outside Australia was allowed. It must be assumed that interest was earned on the Victorian or Australian assets at the commencement of the winding up which would lead to the conclusion that if Australian assets are in the first place to satisfy Australian liabilities then the fruit of those assets should also be available for that purpose. The direction should not be given. An amended direction could be given if sought. Direction No 7. A direction that the liquidator is not prevented by the provisions of s 116(3) of the Insurance Act from charging against the fund representing the proceeds of collection or realisation of assets in Australia the costs and expenses of the winding up (including the remuneration of the liquidator). Direction No 7A. A direction that, to the extent the assets of NCRA the proceeds of which have been realised by the liquidator consist both of assets in Australia and other assets, the liquidator would be justified in allocating the burden of the expenses receiving priority under s556(1) of the Corporations Act rateably between the proceeds of assets in Australia and the proceeds of other assets. 40 The question which arises under these directions is how should the costs of the winding up be borne. Section 116(3) must be approached on the basis that a liquidator is not expected to work for nothing. It follows that if an insurance company had all its assets in Australia and all its liabilities in Australia and there was a deficiency the liquidator must be entitled to recover the costs and expenses of the liquidation out of the assets of the company prior to satisfying in part the liabilities in Australia. He is so entitled not because those expenses are a "liability in Australia" but on the authority of Re Universal Distributing Co Ltd (In Liquidation) (1933) 48 CLR 171. A close reading of s116(3) indicates that applying Australian assets to the costs of the liquidator is not an application of assets to liabilities outside Australia. 41 So far as direction 7 is concerned there is no basis upon which the whole of the liquidator's expenses of the winding up should be borne by the assets in Australia. On the other hand there is no reason why those costs should be borne rateably by the assets in Australia and the assets outside Australia as suggested in 7A. The costs and expenses involved in one collection may be substantially more than the costs and expenses involved with another collection. I am of the view that it is a matter for the liquidator to charge the costs fairly against the two funds having regard to the work involved collecting the assets in Australia and the assets outside Australia and in paying the liabilities having regard to a fair apportionment and spread of the general costs of the winding up. Whether or not a rateable apportionment would be a proper apportionment is for the liquidator to determine in due course. Neither of the directions sought should be made in the terms set out. However, as it seems that all creditors will claim in respect of liabilities in Australia there is no point in formulating a different direction. Direction 8(a) A direction that, following the distribution by the liquidator of the proceeds of realisation of all "assets in Australia" to creditors preferred under section 116(3), the liquidator would be justified in distributing the balance of the proceeds of realisation of assets by withholding any further dividend distribution to creditors preferred under section 116(3) whilst the balance of the proceeds are distributed to all other creditors until they have received a dividend of equal proportion to that received by the preferred creditors out of the Australian assets, and then making a pari passu distribution of any remaining proceeds to all creditors.

42 The questions here relate to the distribution of assets after distribution of assets in Australia to satisfy liabilities in Australia. The questions of course assume that the liabilities in Australia would not be satisfied out of the assets in Australia which at least in view of my decision on the meaning of liabilities in Australia, is the position. As it seems likely from my earlier determinations that all creditors will be treated equally in distribution of Australian assets, the question may be academic. However, in case the matter goes further it is probably desirable that I provide an answer. 43 This is a difficult question. A (c) distribution would appear to be the most unfair and the one most contrary to the proportionate distribution required by ss501 and 555 of the Corporations Law and Corporations Act. A (b) distribution would be the one most in accord with the position of secured creditors under s554E of the Corporations Act. An (a) distribution accords most closely with ss501 and 555 of the Corporations Law and Corporations Act. For the purposes of this question s562A is not being taken into account. 44 Section 116(3) differs from ordinary priority in a winding up provided for by s556 of the Corporations Act. Because the priorities under s556 are rated it is assumed either that the assets will be consumed at some step in paying the priority claims or some of them or that after such payments there will be a surplus available for rateable distribution. Section 116(3) secures Australian assets for payment of Australian liabilities but there is no reason to think that its effect is to place creditors entitled to the benefit of s116(3) in the same position as secured creditors under the Corporations Act let alone an even stronger position. Re Standard Insurance Company Limited [1968] QdR 118 raised questions as to distributions in a winding up in Queensland of a foreign company incorporated in New Zealand also being wound up in New Zealand. Under local Queensland law in such a case land in Queensland was to be applied in the first instance to payment of debts contracted in Queensland in priority to other debts of the company. The case was one involving the giving of directions to the local liquidator but its effect was to hold that the Queensland creditors who received priority were not to be entitled to rank for any further dividend until all other creditors had received a dividend which would bring them up to a level of the dividend paid to the Queensland preferred creditors. This hotchpot type principle was applied following the cases of Banco de Portugal v Waddell (1880) 5 App Cas 161 and In Re Oriental Steam Co (1874) LR 9 Ch App 557. I consider that is the principle that should be applied to the distribution in this case. I do not consider that the decision in Re: National Employers Mutual General Insurance Association Limited (in liq) contradicts this principle so far as a s116(3) priority is concerned. While it is usually stated that the hotchpot principle applies only in cases where winding up is proceeding in more than one jurisdiction the Standard Insurance case was determined on a somewhat wider basis and more recently in Cleaver v Delta American Reinsurance Co [2001] 2 AC 328, the Privy Council in discussing the hotchpot authorities and whether they had a wider application, appears to have thought they might have a wider application by saying at page 340 the principles applies only to assets which under English Law are regarded as forming part of the estate in liquidations thereby coming to the control of a liquidator thus distinguishing them from assets subject to security. Corporations Act declarations and directions 45 The discussion on the directions sought will determine which declarations should be made. Direction No 10 10(a) A direction that the liquidator would be justified in treating a contract of reinsurance as one to which the provisions of section 562A of the Corporations Act 2001 are not applicable whenever the relevant contract or contracts of insurance insured under the contract of reinsurance are themselves contracts of reinsurance.

46 The answer to this direction will also determine whether the declaration in paragraph 12 of the fourth amended originating process should be made. Section 562A of the Corporations Act (or Corporations Law) is set out in paragraph 15 of this judgment. The section was introduced as a result of the Harmer Report and the recognition that the direct matching provisions of s562 as in place prior to 1992 were not satisfactory for contracts of reinsurance. It had been held that a contract of insurance under s562 in its pre-1992 form and as it existed in earlier manifestations of the Companies Acts included a contract of reinsurance. Re Dominion Insurance Co of Australia Limited [1980] 1 NSWLR 271; Saltergate Insurance Co Limited (No. 2) [1984] 3 NSWLR 389 and Palmdale Insurance Limited (in liq) (No. 3) [1986] VR 439. 47 I think it is clear that a contract of reinsurance extends to reinsurance of a contract of reinsurance. While such a contract may be referred to from time to time and often as a retrocession that is not enough to decide that in the absence of an express statement that a contract of reinsurance extends to a retrocession agreement that s562A does not apply. The evidence of Mr Girvan is that retrocession is just a name for an outwards reinsurance contract. 48 The next question is whether a relevant contract of insurance in s562A(1) extends to or includes a contract of reinsurance, a relevant contract of insurance being defined in s562A(8). Section 562 assumes that a contract of insurance would embrace a contract of reinsurance if it were not excluded. "Relevant contract of insurance" is not expressed to exclude a contract of reinsurance and as in general and as the evidence shows a reinsurance contract is regarded as a contract of insurance I consider that s562A applies to a contract of reinsurance of a contract of reinsurance. Counsel for the plaintiff in his helpful argument referred to the decision of the House of Lords in Agnew v Länsförsäkringsbolagens AB [2001] 1 AC 223 where it was held that the term "insurance" in s3 of the Lugano Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters 1988, which was incorporated into English law for certain purposes, did not include reinsurance, which is of interest as questions relating to jurisdiction matters seem often to be decided on the basis that courts generally wish to assume jurisdiction to themselves. In any event it was said in that case it was a question of construction of the relevant legislation in that case having regard to its intended and stated purpose. I consider that when ss562 and 562A are read together then contract of insurance as it applies under s562A can include a contract of reinsurance. Direction 11 - A direction that the liquidator would be justified in distributing the proceeds of assets realised in the liquidation on the basis that section 562A of the Corporations Act 2001 is applicable to reinsurance recoveries under all reinsurance contracts whether facultative reinsurance contracts, treaty reinsurance contracts or any other kind of reinsurance contract. 49 The direction should be given. If the section referred purely to facultative reinsurance then there would have been less reason for the amendment to s562 and the inclusion of s562A. There was no real argument against this and I think the answer is clear. The policy in Schedule A is treaty reinsurance and the policy in Schedule B a facultative reinsurance contract. There is nothing in the section to suggest that it applies to one and not to the other, or that it does not apply to quota share contract, all of which on the evidence are included in the meaning of contract of reinsurance. Direction 12. 12(a) A direction that the liquidator would be justified in distributing the proceeds of assets realised in the liquidation on the basis that section 562A of the Corporations Act 2001 confers an entitlement in respect of a reinsurance recovery on those Insurance Creditors whose claims against NCRA have actually produced that reinsurance recovery for NCRA and only in respect of that specific reinsurance recovery.

50 These three alternatives have been described as narrow matching, narrow pooling and broad pooling. 51 The section was introduced as a result of the Harmer Report but not in accordance with it. That Report recognized that the direct matching provisions of s562 as in force prior to 1992 were not satisfactory for contracts of reinsurance, which as I have said have been held to be contracts of insurance under s562 in its pre-1992 form and in the earlier manifestations under the Code and earlier Companies Acts. 52 Narrow matching can be set aside. Apart from anything else if that were the proper interpretation there would be no need for the amendment to s562 nor for s562A. The contending constructions are therefore narrow pooling or broad pooling and the answer is not necessarily clear. Without reference to authority I would consider that s562A(1) creates a fund, namely the proceeds of a reinsurance policy giving cover against liability to pay under a contract or under contracts of insurances entered into before the commencement of the winding up; and then when s562A(2) does not apply, s562A(3) provides that the persons entitled to share in that fund in the specified proportions are all persons to whom an amount is payable by NCRA under a policy of insurance entered into before the commencement of the winding up. Leaving aside retrocession for the moment, that means that if insurer A is liable to insured persons B, C and D under policies of insurance and that liability or part of it has been reinsured with reinsurer E and reinsurance payments are received then not only would B, C and D be entitled to share in those reinsurance payments paid to A by E under the contract of reinsurance but that all persons insured under original insurances issued by A would be entitled to share in the reinsurance recoveries. The same situation will apply to insurers reinsured with NCRA where NCRA has itself reinsured its liability under its original policy of reinsurance. This interpretation comes, I think, from a consistent application of s562A(8) to the defined expression where it appears in s556(2)A. 53 The Harmer Report dealt with this subject at paragraphs 762 to 764 as follows: 762. Proposal in DP 32. The Commission sought views on whether there should be no change to s447 in its application to insurance company liquidations. The Commission received a lengthy and most detailed joint submission from a large group of reinsurers arguing that s447 should not apply to reinsurers. The submission pointed out that when the English equivalent of s447 was first enacted, contracts of reinsurance were specifically excluded. This is still the position in England. However, when the Companies Act 1936 (NSW) which was said to be based on the English legislation was enacted, the provision excluding reinsurance did not appear. The principal argument put forward in the submission for excluding reinsurance from the operation of s447 is that reinsurance arrangements are fundamentally different from insurance polices. While individual policies of insurance may be specifically reinsured where there is a large or unsecured risks it is much more common for reinsurance to cover classes of policies with the reinsurer agreeing, for example to pay a proportion of the risk or all claims exceeding a specified amount. Not all primary insurance policies will be covered by reinsurance. The decision to reinsure will depend on the overall portfolio of risks of an insurance company. When s447 is applied to the winding up of an insolvent insurance company it allows insureds whose policies are covered by some form of reinsurance to obtain a special priority, whereas those with policies not so covered will rank with other unsecured creditors. The submission suggests that the Dominion Case has created uncertainty among liquidators and reinsurers which has led to the need for court directions, legal costs and additional expenditure on the part of liquidators and reinsurers. The submission further argues that the application of s447 in this way is contrary to the fundamental principle of equal distribution and that no valid reasons have been advanced to justify departure from that principle.

[1097]

The Harmer Report recommended that, unless a court orders otherwise, section 562 should not apply to a contract of reinsurance. The Report also recommended that the court should take into account, in deciding whether to make an order, the circumstances under which the contract of reinsurance was entered into, including any contract, arrangement or understanding between the insured and the company that the company would reinsure the risk, and any prejudice likely to be suffered by the insured if the order is not made. 55 The explanatory memorandum accompanying the Corporate Law Reform Bill was in the same terms so far as it relates to this subject. Thus although the Harmer recommendation was not followed in full, as it recommended that in the absence of special order, there should be no priority claims to proceeds of reinsurance policies so that those proceeds would be available for distribution to all creditors, Parliament decided otherwise and retained priority for insurance creditors. It is not at all clear that paragraph 1096 of the explanatory paper covering this matter, and noted in the Report at paragraph 947 of the explanatory memorandum, is an accurate reflection of the Harmer Report as those paragraphs relate to insurance creditor claims rather than total creditor claims. Nevertheless the explanatory memorandum and the stated paragraphs do point towards a legislative intention that all policy holders should share in the reinsurance proceeds. When one considers excess of loss or treaty policies of reinsurance that is the most sensible construction, there being no reason why claims first made but unpaid should be in a worse position than later claims triggering a reinsurance recovery. 56 I turn now to consider two cases. In 35 v The Douglas Group Pty Limited (2000) ACSR 398, Young J considered the effect of s562A. In that case on the facts the only funds of the insolvent insurer were likely to be the proceeds of reinsurance and the liability reinsured was liability to pay over $350,000 in respect of any particular claim. His Honour on the question of declaratory relief had to decide whether the reinsurance payments received by the liquidator: (a) form a pool of funds for the benefit of all insurance creditors of CEASA, irrespective of whether or not their claims against CEASA exceed $350,000;

(d) form a separate pool of funds in respect of each policy year for the benefit of only those insurance creditors of CEASA whose claims exceed $350,000 and were notified within that policy year. 57 None of the counsel appearing argued for (a) and it was not discussed which was a pity as it is supported by the liquidator and the second defendant. His Honour rejected the narrow matching interpretation under (c) so the contest was between (b) and (d). In that case the liquidator was supporting (b) and was represented by Mr Gleeson. Mr Gee QC appeared for a class creditors who had been supporting (d), drawing attention to the fact that insurance policies were usually annual policies. Young J said at page 405, paragraph 31: 31. The choice must therefore be between Mr Gleeson's submissions and Mr Gee QC's. Of the two, I prefer Mr Gee QC's. This is because Mr Gee QC's submissions take into account that with reinsurance, one is looking at an annual contract and that to just average claims over every insurance year where the policies of reinsurance may be on different terms seems to me to produce an arbitrary result just for the sake of simplicity. To my mind, the intent of the section is that "reinsurance payment" in subs (3) means a reinsurance payment for a particular claims year and what one does is to work out the net payments received from reinsurers in a particular year, and that each claimant in that year gets the fraction of that money as set out in subs (3). 58 In Pace Tasmania Pty Ltd (in liquidation) v FAI General Insurance Company Ltd (Prov Liq Apptd) [2001] TASSC 112, Cox CJ dealt with an interlocutory application for discovery of policies of reinsurance a question arising whether their existence could bear upon the applicant's rights. At paragraph 6 he said: … S562A was inserted into the Corporations Act (previously Corporations Law) in 1992 and provides (subject to subs(4)) that where a company is insured under a contract of re-insurance against liability to pay amounts in respect of a relevant contract or contracts of insurance and money is received in respect of liability by the company or the liquidator under the contract of re-insurance, the proceeds are payable rateably to those entitled under the relevant contract or contracts of insurance. Subs(4) provides that the Court may order otherwise where it is considered just and equitable in the circumstances. Mr Tree argues that the effect of s562A is, subject to subs(4) thereof, to create a pool of re-insurance moneys from which all claimants under insurance policies may share whether or not the re-insurance arrangement directly affects their particular policy of insurance. This, he submits, was the purpose of the amendment as agitation for law reform had suggested that subject to the matters addressed in subs(4) there was no just reason why some policy holders should have the benefit of re-insurance while others did not and the explanatory memorandum issued at the time the amendment was debated seems to contain an acknowledgment of that being the purpose. Nevertheless, the wording of the section is not free from ambiguity and indeed suggest to me that the funds are to be payable to holders of insurance policies which are the subject of re-insurance contracts, they being (arguably) the "relevant contracts of insurance" for the purposes of s562A. In Butterell v The Douglas Group Pty Ltd & Ors (2000) 35 ACSR 398, Young J rejected the contention that the re-insurance moneys available in that case were to be divided between all creditors under insurance policies effected with the debtor company irrespective of whether or not the re-insurance arrangement affected them and made a declaration that the re-insurance pool was for a limited class of insured. When I say he rejected the contention, I should add that none of the parties before him put that contention to him, nor had any interest to do so and he merely observed that:

14(b) A direction that the liquidator would be justified in distributing the proceeds of assets realised in the liquidation on the basis that a claim under an inwards reinsurance contract which has not been (and will not be) the subject of any proof of debt in the liquidation does not constitute an amount payable under a relevant contract of insurance and should not be included in the "total amount owed" for the purposes of application of the formula in subsection 562A(3). 61 Section 562A is included in Division 6 of Part 5.6 of the Act. Division 6 is headed "Proof and ranking of claims". Only claims and debts the circumstances giving rise to which occurred before the commencement of the winding up are admissible to proof. Section 553(1) and the set off provisions under s553C limit claims to the balance of account as admissible to proof. In addition s554 sets out the general rule that the amount of the debt or claim admissible to proof is to be computed as at the date of commencement of winding up. 62 It is against these provisions that the general rule as to proportionate payment, s555 - subject to the specific provisions for priority payments - must be considered. As I have said if no amount is payable under a policy at the relevant date then no claim can be admitted to proof under that policy. It follows of course that "a particular amount owed" is restricted as the definition makes clear as to amounts payable under a relevant policy. In the same way "total amount owed" should relate to amounts payable under relevant contracts which amounts can be the subject of a proof of debt. 63 It is to the advantage of the unsecured creditors to have "total amount owed" construed so as to include as much as possible because then the fractional shares which the liquidator is bound to pay under s562A(3) will not exhaust the fund to which s562A(1)(b) is directed. It might be thought it was fairer to construe "total amount owed" as widely as possible. For instance one person insured under a reinsurance policy, itself subject to reinsurance, may have the liability to him under the first policy secured by letter of credit. If the letter of credit is called upon to satisfy the claim under the policy then presumably the assets of the first reinsurer provided as security to the letter of credit provider will themselves be used to satisfy that security thereby diminishing the general funds of the first reinsurer. If the amount payable under the first policy is not included under "total amount owed" the general creditors would suffer and the insurance creditors would, on one basis, gain a windfall. As against this the policy behind s562A appears to be to secure reinsurance recoveries for insurance creditors. With considerable hesitation I will decide this question accordingly. "Total amount owed" under the definition means total of all amounts payable, which seems to me to mean total of the amounts which can be subject to proof. Amounts reduced by set off, payment out of other security or by prior payment cannot be included in "total amount owed". Direction 15 - A direction that, following the distribution by the liquidator of the proceeds of realisation of reinsurance recoveries to creditors preferred under section 562A, the liquidator would be justified in distributing the balance of the proceeds of realisation of assets (including any proceeds of reinsurance recoveries not required to be distributed pursuant to the provisions of section 562A): (a) by withholding any further dividend distribution to creditors preferred under section 562A whilst the balance of the proceeds are distributed to all other creditors until they have received a dividend of equal proportion to that received by the preferred creditors out of reinsurance recoveries, and then making a pari passu distribution of any remaining proceeds to all creditors.

(c) pari passu to all creditors ignoring the fact that certain creditors have already received a dividend out of reinsurance recoveries under section 562A. 64 This question is somewhat similar to that raised by direction 8, but of course concerns priority given under a different Act and there is a significant difference brought about by s562A(6). Whatever that sub-section does it makes it perfectly clear that the priority payment under s562A is not the only payment to which a preferred insurance creditor is entitled. As the receipt of a priority payment does not affect the rights of the person in respect of the balance of that person's claim under the policy of insurance I think it clear that it is the amount of the balance to which attention must be given. In those circumstances the third alternative can be put to one side. As a priority creditor is entitled to prove for the balance of the claim, there does not seem to be any reason why in respect of that balance it should not be treated proportionately with all other creditors in accordance with s555 of the Act. In other words it would be treated in a conceptually similar way to a secured creditor under s554E, although if that were intended it could have been said. There is no need to give any attention to the decision to which I came under s116(3) of the Insurance Act. So far as this question is concerned it is to be determined entirely within the provisions of the Corporations Act or Corporations Law. I point out that a similar provision to s562A(6) is in s562(2). It is fair to say that nothing is clear about these sections but I consider that the best construction is that the priority insurance creditor is allowed to prove for the balance not satisfied by the priority and in respect of that balance to be treated proportionately with all other non-priority creditors. Direction 15A - A direction that, in circumstances where a creditor's claim in the winding up of NCRA is composed of two or more claims at least one of which is an insurance claim which is entitled to participate in a distribution under section 562A of the proceeds of a reinsurance recovery, and that creditor's claim has been partially satisfied by a set-off against other sums owing by the creditor to NCRA (and those sums do not consist of unpaid premiums directly applicable to one or more insurance claims), the liquidator would be justified in distributing the proceeds of assets realised in the liquidation on the basis that the set-off has operated to reduce each of the various claims constituting the creditor's total claim by an equal proportion. 65 The only equitable way to proceed would be to distribute the set off proportionately between the priority and non-priority claims or amounts. That was the conclusion reached by Walton J in Re Unit 2 Windows [1985] 1 WLR 1383, where he gave careful consideration to the question as he was not following a dictum of Buckley J in In re E J Morel (1934) Limited [1962] 1 Ch 21. I agree with the decision with Walton J and with respect, his reasons. It follows that the direction should be given. Direction 17 - A direction that the liquidator would be justified in distributing the proceeds of assets realised in the liquidation on the basis that, where the application of section 116(3) of the Insurance Act 1973 would require the proceeds to be distributed in a way different to that which would be required pursuant to s562A of the Corporations Act: (a) the provisions of section 562A of the Corporations Act prevail; (b) the provisions of section 116(3) of the Insurance Act prevail.

66 As I said earlier I consider that the rights of the parties here and creditors generally must be determined in accordance with the law in force at the commencement of the winding up. On the date in question were in force the Old Insurance Act and the Corporations Law. To the extent to which s562A of the Corporations Law conflicts with s116(3) of the Insurance Act, the latter, being a provision in a Commonwealth Act, prevails. It is, I think, likely and almost certain that no one gave the slightest thought to the conflict between the provisions, so one should not think that the legislative intent can be found. However, it must be borne in mind that s562 had in the same general terms been included in corporations legislation for many years and as it had been held that under those provisions insurance included reinsurance, there was no particular reason for the problems springing to attention at the time the Corporations Law Reform Act was enacted. 67 If I am right in my conclusion as to the relevant law then the direction in 17(b) should be made but not so as to prevent s562A from having any operation. In other words liabilities in Australia are to satisfied out of assets in Australia in priority to all other claims. The only difficult question is whether or not insurance liabilities in Australia, being claims to which s562A of the Corporations Act or Corporations Law apply, should be paid in priority to other liabilities in Australia or whether they should be paid pro rata if there is a deficiency. While counsel, who was given leave to appear for APRA, submitted that the s562A creditors should have priority over other persons claiming under liabilities in Australia, I do not think that is correct. Once it is determined that "liabilities in Australia" extends to all liabilities and not only insurance liabilities as I have found to be the position under the construction of s31 of the Old Insurance Act, then it would seem to me to be acting in defiance of that finding to give the s562A creditors a special claim over the assets in Australia. I therefore consider that the order of priority is as follows.

New Cap Reinsurance v Faraday Underwriting

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