Somerset Marine Incorporated & Ors. v. New Cap Reinsurance Corporation Ltd. (In Liquidation) & Anor. [2003] NSWCA 338

Court of Appeal (NSW)|2003-10-14|Before: Meagher JA, Hodgson JA, Gzell J

CITATION : Somerset Marine Incorporated & Ors. v. New Cap Reinsurance Corporation Ltd. (In Liquidation) & Anor. [2003] NSWCA 338 HEARING DATE(S) : 14 October 2003 JUDGMENT DATE : 21 November 2003

JUDGMENT OF : Meagher JA at 1; Hodgson JA at 2 DECISION : Application for leave to appeal dismissed with costs.

CATCHWORDS : CORPORATIONS - Winding up insolvency - Preference - Letters of credit issued by bank to creditors at request of company - Administrator appointed - Creditors draw on letters of credit, and bank reimburses itself from company - Whether company and creditors were parties to a transaction - Whether an unfair preference given by the company to the creditors - PRACTICE - Application for summary dismissal - Leave to appeal sought from refusal of application - Discretionary considerations. LEGISLATION CITED : Corporations Act 2001 (Cth) s.588FA Emanuel (No. 14) Pty. Ltd. (In Liquidation); Re (1997) 147 CLR 281 General Steel Industries Inc. v. Commissioner for Railways (NSW) (1964) 112 CLR 125 CASES CITED : House v. The King (1936) 55 CLR 499 Ramsay v. National Australia Bank Limited [1989] VR 59 Sheahan v. Carrier Air Conditioning Pty. Ltd. (1997) 189 CLR 407 Wily v. Bartercard Ltd. (2000) 34 ACSR 186 Somerset Marine Incorporated - First claimant Pennsylvania Lumbermens Mutual Insurance Company - Second claimant Insurance Corporation of New York - Third claimant Axa Corporate Solutions US Group - Fourth claimant Folksamerica Reinsurance Company - Fifth claimant Worcester Insurance Company - Sixth claimant PARTIES : Harleysville Insurance Company - Seventh claimant Employers Mutual Casualty Company - Eighth claimant National Liability & Fire Insurance Company - Ninth claimant Sorema North America Reinsurance Company - Tenth claimant Navigators Insurance Company - Eleventh claimant New Cap Reinsurance Corporation Limited - First opponent John Raymond Gibbons - Second opponent FILE NUMBER(S) : CA 40608/03 COUNSEL : Mr. N. Hutley SC with Mr. M. Leeming for the claimants Mr. P. Dowdy for the opponents SOLICITORS : Hunt & Hunt, Sydney for claimants Henry Davis York, Sydney for opponents

LOWER COURT Supreme Court - Equity Division JURISDICTION : LOWER COURT ED2372/02 FILE NUMBER(S) : LOWER COURT Gzell J JUDICIAL OFFICER :

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40608/03 ED 2372/02

MEAGHER JA HODGSON JA

Friday 21 November 2003 SOMERSET MARINE INCORPORATED & ORS. V. NEW CAP REINSURANCE CORPORATION LTD. (In Liquidation) & ANOR. Judgment 1 MEAGHER JA: I agree with Hodgson JA. 2 HODGSON JA: On 1 July 2003, Gzell J in the Equity Division dismissed with costs an application brought by the claimants, which was in substance for summary dismissal of proceedings brought by the opponents against the claimants. The claimants seek leave to appeal from that decision. 3 The circumstances giving rise to the proceedings can be shortly stated as follows. 4 The first opponent was a reinsurer for the claimants, which are companies incorporated in the United States of America, pursuant to reinsurance treaties entered into in September 1997 and February 1998. Article XXV of these treaties was as follows: If the Reinsurers are unauthorised in any State of the United States of America or the District of Columbia where authorisation is required by insurance regulatory authorities, the Reinsurers will fund (provided particulars are received thirty (30) days prior to the date funding is required by the Reinsured) known outstanding losses by either cash advances, escrow accounts for the benefit of the Reinsured, Letter of Credit, or a combination thereof, if a penalty would accrue to the Reinsured on its statement without such funding. The Reinsurer shall have the sole option of determining the method of funding referred to above provided it is acceptable to the insurance regulatory authorities involved.

It is common ground that the first opponent was "unauthorised" within this Article. 5 The first opponent and a related corporation had in January 1997 entered into a letter of credit agreement with Chase Manhattan Bank and another bank whereunder the banks had agreed to issue letters of credit for the account of the first opponent and the related corporation. The first opponent gave security to the banks securing its obligation to reimburse the banks in respect of letters of credit issued by the banks and subsequently called upon. 6 The first opponent later went into liquidation, with the relevant "relation back" day, for the purposes of the Corporations Act 2001 (Cth), being 21 April 1999; so that the six month period relevant to the preference provisions of s.588FA(1) of that Act commenced on 21 October 1998. 7 On 10 December 1998, the claimants required the first opponent to provide letters of credit in an amount of about $5 million pursuant to Article XXV. On 29 January 1999, the first opponent requested Chase Manhattan Bank to establish letters of credit in favour of the claimants, and this was done in February 1999. 8 On 21 April 1999, an administrator was appointed to the first opponent under s.436A(1) of the Corporations Act. 9 On 23 April 1999, the claimants drew on the letters of credit, receiving about $5 million; and the Chase Manhattan Bank reimbursed itself at the expense of the first opponent. On 16 September 1999, the second opponent was appointed liquidator of the first opponent. 10 The proceedings commenced by the opponents against the claimants sought recovery of the moneys paid to the claimants on the basis that they were unfair preferences in terms of s.588FA(1) of the Corporations Act, which is in the following terms: 588FA. Unfair preferences (1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if: (a) the company and the creditor are parties to the transaction (even if someone else is also a party); and (b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company; even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency. 11 The claimants sought to have the proceedings summarily dismissed, without having submitted to the jurisdiction of the Supreme Court of New South Wales. The claimants' argument was that there could not be preferences within s.588FA(1) because: (1) the claimants were not party to any transaction with the first opponent, within the meaning of s.588FA(1)(a) and (2) the claimants did not receive anything from the first opponent within the meaning of s.588FA(1)(b). 12 In support of that argument, the claimants referred to the following statement in Ramsay v. National Australia Bank Limited [1989] VR 59 at 63: We have seen no authority for the proposition that a payment out of his own moneys by B to C, pursuant to a contractual obligation to discharge A's debt to C, an obligation imposed upon B by a contract between A and B, can be said to be a payment made by A to C.

It was submitted that this statement had been approved by the High Court of Australia in Sheahan v. Carrier Air Conditioning Pty. Limited (1997) 189 CLR 407 at 438. 13 The primary judge expressed the view that the cases of Ramsay and Sheahan were distinguishable, or at least that there was a very good argument that they were distinguishable. He continued: 54 If the applicants' acceptance of payment on the letters of credit as discharging the first respondent's indebtedness to them required the authorisation of the first respondent, there was a transaction between the first respondent and the applicants, albeit it was but part of the entire transaction under which the Issuing Bank and Chase New York were the instruments for payment.

55 Article XXV of the reinsurance treaties, to which the applicants were parties, required the first respondent to fund outstanding losses by, amongst other ways, letters of credit. In accordance with that obligation, it entered into the letter of credit agreement and the collateral agreement and in further discharge of its obligation, it pre-funded payment by Chase New York on the letters of credit.

56 The first respondent thereby discharged its indebtedness to the applicants by payment by way of letters of credit. At the instance of the first respondent, the applicants received the benefit of the letters of credit that were created in their favour and pre-paid at the first respondent's instance.

57 On this analysis, there was a transaction to which the applicants were party and under which they received property from the first applicant by its instrument, the Issuing Bank and its instrument, Chase New York.

58 To concentrate, as the applicants have done, on the Issuing Bank's right to reimbursement and right of recourse under the security, ignores the fact that the first respondent's funds were depleted in advance of payment on the letters of credit.

59 At the very least this line of reasoning raises a serious issue and the respondents should not be denied the opportunity to have a Court finally determine the matter. 14 Before this Court, Mr. Hutley SC for the claimants accepted that the primary judge's decision was a discretionary decision to which the principles of both General Steel Industries Inc. v. Commissioner for Railways (NSW) (1964) 112 CLR 125 and House v. The King (1936) 55 CLR 499 applied; but he submitted that the primary judge had made a factual error which vitiated his exercise of discretion. This factual error Mr. Hutley submitted, was the statement in par.[55] of the judgment that entry into the letter of credit agreement and provision of security was in accordance with the first opponent's obligation under Article XXV, whereas these things were in fact done before the reinsurance treaties were entered into. 15 Accordingly, he submitted, the Court of Appeal would re-exercise the discretion, in circumstances where all relevant facts had been agreed, the only question was a pure question of law, and the proceedings were seeking to involve companies with no connection with New South Wales. In those circumstances, he submitted, the correct exercise of discretion, having regard to General Steel principles, would be to decide the question of law, rather than merely considering whether there was an arguable case. Accordingly, he submitted, there was a good prospect of success in the appeal. 16 Mr. Hutley submitted that similar discretionary considerations also supported the grant of leave to appeal. 17 In support of his submission that all relevant facts had been agreed, Mr. Hutley referred to par.[5] and the first sentence of par.[6] of the primary judge's judgment, which were as follows: 5 The allegations in the originating process and its accompanying statement of claim, together with the statements in an affidavit as to factual matters not set out in the pleading, were not in dispute. The application proceeded as on the old form of demurrer. It is for the applicant defendants to demonstrate that the originating process is beyond saving by legitimate amendment (Penthouse Publications Ltd v McWilliam (unreported, 14 March 1991, CA(NSW)) citing Mutual Life & Citizens' Assurance Co Ltd v Evatt (1970) 122 CLR 628 at 631).

6 For the purpose of this application, then, the following facts were not in issue. … 18 He also referred to par.[10] of the opponents' written submission before the primary judge, which was as follows: 10. The relevant facts for the proceedings are set out in the affidavit of Mr. Hutchison and the statement of claim (annexed to these submissions). The summary of the proceedings contained in the applicants' Written Submissions does not sufficiently identify all the relevant aspects of the transactions which are the subject matter of this dispute. Accordingly, set out in paragraphs 11 to 24 below is a summary of relevant facts. 19 Finally, he referred to p.3 l.10-23 of the transcript before the primary judge, which was as follows: HUTLEY: The proceedings were commenced by originating process filed or. 19 April. As part of that originating process was an affidavit of Kieran William Hutchinson. Rather than reading it it should be tendered before the court. There is no relevant dispute about the factual matters.

COLES: It would be our view that the affidavit with the originating process is really part of the originating process and the exhibits therein mentioned.

HIS HONOUR: If there is no dispute I will treat the affidavit of Mr Hutchinson as part of the originating process. 20 In my opinion, in so far as the second sentence of par.[55] of the primary judge's judgment suggests that the letter of credit arrangement and the giving of security to the banks was pursuant and subsequent to the incurring of obligations under Article XXV, this was an error. The question then is, could it be an error which vitiated the primary judge's exercise of discretion? 21 What the primary judge said to be arguably a transaction apparently included the "pre-funding" of the letters of credit, although it appears that this actually occurred prior to the entry into the reinsurance treaties and long before the commencement of the six months preference period in October 1998. 22 However, in my opinion it can equally be argued that a transaction was constituted by events after October 1998, namely the claimants' request of 10 December 1998, the first opponent's request to Chase Manhattan Bank to establish letters of credit, the establishment of those letters of credit, the claimants' call on those letters of credit and payments of them by the bank, and the bank reimbursing itself at the expense of the first opponent. The possibility that those matters could be regarded as a transaction is supported by cases relied on by the primary judge, namely Re Emanuel (No.14) Pty. Limited (In Liquidation) (1997) 147 ALR 281 at 289, and Wily v. Bartercard Limited (2000) 34 ACSR 186. 23 In those circumstances, in my opinion it is probable that the Court of Appeal would take the view that the error of the primary judge was not material to his essential reasoning, and would not be a ground for setting aside his exercise of discretion. 24 Furthermore, in my opinion, the High Court decision in Sheahan is clearly distinguishable. In that case a receiver, appointed by a bank having a security over the whole of the company's assets for a debt exceeding the company's assets, paid debts owing to subcontractors in order that they complete work which would assist in the realisation of the bank's security. The majority of the High Court held to the effect that, although for certain purposes the receiver was made the company's agent, these payments were as a matter of substance made by the receiver on behalf of the bank and not as agent for the company. I would add that it might conceivably be argued in this case that Article XXV in substance gave the claimants an equitable security, and that calling on that security did not give them an unfair preference; but that would be an issue for a full hearing of this case. 25 This is an application for leave to appeal, and the considerations referred to by Mr. Hutley, namely that all relevant facts were agreed, that there was a pure question of law, and that the proceedings were seeking to involve corporations with no connection to New South Wales, if made out, would be supportive of the granting of leave, if there was an arguable case. 26 However, in my opinion the references given by Mr. Hutley in support of his submission that all relevant facts were agreed, and that the matter was a pure question of law, fall short of establishing these propositions. In my opinion those references do not indicate an agreement that the facts before the primary judge were all the facts relevant to the questions of whether there was a transaction to which the first opponent and the claimants were a party, and whether the claimants received anything from the first opponent. Not only, in my opinion, was there no agreement to that effect, but also, in my opinion, questions of characterisation such as those I have specified often depend upon consideration of the whole matrix of circumstances. For those reasons, I do not think the essential question for decision was shown to be a pure question of law, as submitted by Mr. Hutley. 27 The question now is whether leave to appeal should be granted. 28 If leave is granted, the Court of Appeal will have to decide first whether the primary judge's decision is reviewable having regard to the principles in House v. The King; and if so, whether, on the principles of General Steel, the claimants' application for summary dismissal of the opponents' proceedings should be granted. In my opinion, for the reasons I have given, it is unlikely that the Court of Appeal would consider the primary judge's decision reviewable on the principles in House v. The King, and, even if it did, it is unlikely that it would decide in favour of summary dismissal, having regard to the principles of General Steel. 29 On the other hand, refusal of leave to appeal will not finally determine the rights of either party. On the contrary, those rights would be determined by a full hearing in which all issues of fact and law could be addressed. The probability is that this would be the outcome even if leave to appeal were granted, and the appeal would achieve no more than delay and expense. 30 For those reasons, in my opinion the appropriate course is to refuse leave to appeal. I propose that the application for leave to appeal be dismissed with costs. **********

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