The quantification issue
103This conclusion means that there is no need to deal with the remaining ground of appeal which goes, in broad terms, to identification of the portion of moneys received from reinsurers that, on the "just and equitable" basis, it would have been appropriate to attribute to SWC's insurances with HIH. I nevertheless proceed to consider it.
104Submissions made to the primary judge were on the basis that that issue gave rise to a need to consider the operation of s 553C of the Corporations Act:
"(1) Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company:
(a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and
(b) the sum due from the one party is to be set off against any sum due from the other party; and
(c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.
(2) A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent."
105The judge approached what was presented to him as a s 553C issue by considering the way in which the sum that the liquidators received from the Syndicate was made up. The sum was $22,391,924 out of the total of approximately $29.3 million referred to at [37] above. The judge referred to evidence of Mr Honey, one of the liquidators, concerning the way in which the sum of $22,391,924 had been calculated. Mr Honey explained that various sums (totalling $31,640,826) were due by HIH to the Syndicate in respect of obligations referable to reinsurance contracts, that various sums (totalling $54,032,750) were due by the Syndicate to HIH generally in respect of obligations owed to HIH for reinsurance business written by HIH as a reinsurer and that the sum of $22,391,924 was a net amount arrived at by setting off the respective sums due. Mr Honey referred, in that connection, to the commutation agreement of April 2008.
106The primary judge found that dealings between HIH and the Syndicate had been of the kind referred to in the opening words of s 553C(1), that is, that there had been "mutual credits, mutual debts or other mutual dealings". Furthermore, the Syndicate was, in respect of moneys owed to it, a person who, in terms of s 553C(1), "wants to have a debt or claim admitted against the company", that is, HIH. In accordance with s 553C(1)(a), therefore, an account of moneys due by each to the other had to be taken; and argument apparently proceeded before the primary judge on the footing that it was the taking of the account, followed by the setting off directed by s 553C(1)(b), that produced the balance of $22,391,924. Pursuant to s 553C(1)(c), therefore, only that balance was "payable to the company".
107It is, of course, well established that s 553C(1) operates immediately and of its own force at the commencement of the winding up: Gye v McIntyre [1991] HCA 60; 171 CLR 609, Stein v Blake [1996] AC 243, Barton v Atlantic 3 Financial (Australia) Pty Ltd [2004] QSC 376; 212 ALR 348 at [40]ff, Pitt-Owen v Lenin [2006] NSWSC 748 at [11], Krishell Pty Ltd v Nilant and Ors [2006] WASCA 223.
108As a result, it was said, the sum of $54,032,750 owing by the Syndicate to HIH immediately before the commencement of the winding up was, as to $31,640,826 thereof, no longer owing once the winding commenced and, from the point of commencement, it was only the balance of $22,391,924 that was properly regarded as owing.
109The primary judge proceeded on the basis that the amount that, in accordance with s 553C(1), was "payable" by the Syndicate to HIH was the amount that, in terms of s 562A(1)(b), was "received" by HIH or the liquidators in respect of reinsured liabilities of HIH covered by all reinsurance contracts made between HIH and the Syndicate before commencement of the winding up.
110It must, in my opinion, be accepted that if, before the commencement of winding up, there were, in terms of s 553C(1), mutual credits, mutual debts or other mutual dealings between an insurer and a reinsurer and, upon the taking of an account in accordance with s 553C(1)(a) and set off pursuant to s 553C(1)(b), the balance of the account favours the insurer, payment of that balance by the reinsurer to the insurer (or its liquidator) causes the insurer (or liquidator) to "receive" that balance. It follows that, if the balance is "in respect of" one or more liabilities of the insurer referred to in s 562A(1)(a), receipt of the balance operates to satisfy the condition in s 562A(1)(b) and the "amount received" fails to be dealt with under s 562A(2), s 562A(3) or s 562A(4), depending on circumstances.
111Generally speaking, there will be no need to ascertain how much of an amount so received by an insurer or its liquidator is referable or attributable to a particular contract of insurance entered into by the insurer. If s 562A(2) or s 562A(3) applies, the whole will be dealt with as that provision dictates. If an order is made under s 562A(4), the whole will be dealt with as the order dictates. In the present case, identification of part of the receipt from the Syndicate as referable or attributable to SWC's insurance was seen to be an essential element of its contention that the court should order part of the total $22,391,924 to be applied exclusively for SWC's benefit.
112SWC's notice of appeal includes the following ground of appeal:
"The trial judge erred in law in holding that under s 562A(1)(b) the 'amount . . . received' by HIH in respect of HIH's liability to SWC was the amount arrived at after an allocation of amounts due by HIH to the reinsurers in relation to other contracts of reinsurance which had been set off."
113The contention seems to be that the judge should have regarded the gross $54,032,750 (see [105] above) as the amount "received" in the s 562A(1)(b) sense, with some appropriate proportion of that gross sum being attributed to SWC; and that, in determining a "just and equitable" application of the $22,391,924, the court should have seen SWC's "entitlement", as it were, as an entitlement to a proportion of the gross $54,032,750. The answer is simply that there is no compelling reason why this should be so and that there was no error of law in the respect alleged.
114There is another particularly compelling point apparently not argued below. The $22,391,924, although presented by the liquidators and accepted by the judge as a simple balance of account in s 553C(1)(c) terms (see [105] above), was in fact a sum provided for by and payable under the commutation agreement of April 2008. The parties to that agreement included HIH (and several of its related companies, together referred to as "the HIH Parties") and the Syndicate (referred to as "Limit"). The recitals included the following:
"A. The HIH Parties and Limit entered into various reinsurance arrangements including the HIH Reinsurance Agreements and the Limit Reinsurance Agreements. The HIH Reinsurance Agreements and the Limit Reinsurance Agreements are referred to collectively in this agreement as 'the Reinsurance Agreements'.
B. Each of the HIH Parties and Limit assert that amounts are due or will or may become due under the terms of the Reinsurance Agreements.
...
H. Disputes have arisen concerning each party's rights and obligations relating to the Reinsurance Agreements, including as to the validity of some HIH Reinsurance Agreements and as to the extent of Limit's set-off entitlements.
...
J. HIH C&G commenced the Pay as Paid Proceedings against Syndicate 683 for the 1993 to 2000 underwriting years of accounts by Summons and Commercial List Statement dated 1 June 2006, in relation to certain HIH Reinsurance Agreements.
K. On 29 August 2006 HIH C&G filed a notice of discontinuance in the Pay as Paid Proceedings whereby HIH C&G discontinued its claim against Sydney 683 for the 1998 to 2000 underwriting years of account (inclusive).
L. HIH C&G continued to pursue the remaining defendants in the Pay as Paid Proceedings in respect of claims arising on those HIH Reinsurance Agreements which are specified in Schedule 5 ('the Contracts Subject to the Proceedings').
M. The HIH Parties and Limit have agreed by way of settlement to commute fully and finally all liabilities and obligations owed to each other under each of the Reinsurance Agreements and to settle the Pay as Paid Proceedings on the terms and conditions of this agreement."
115The operative provisions included clause 2.1, as follows:
"Within 28 days of exchange of executed counterparts of this agreement, Limit agrees to pay the Commutation Amount to the HIH Parties in full, without any set-off or counterclaim and free of any deductions whatsoever. For the avoidance of doubt, the 28 days referred to in this clause includes Saturdays, Sundays and public holidays in New South Wales."
116The "Commutation Amount" was $22,391,924. Clause 2.3 divided the Commutation Amount between HIH and one of the other "HIH Parties". By clause 2.5, HIH agreed to make reasonable efforts to procure dismissal of the "Pay as Paid Proceedings" by consent. Clause 3 contained mutual release in respect of the "Reinsurance Agreements".
117On the face of the commutation agreement, there is no reference to set-off of respective sums of $54,032,750 and $31,640,826. Rather, $22,391,294 is an identified sum paid by one disputing party to the other disputing party in a context where different views were taken as to respective rights and obligations (and the validity of "some HIH Reinsurance Agreements", being agreements under which the Syndicate reinsured HIH) and the parties were already in litigation that was to be terminated in accordance with the agreement. Whatever result s 553C may have produced as at commencement of the winding up, the disputing parties chose to make a specific agreement as to what one was to pay to the other in the context of agreed extinguishment of the rights and obligations that would otherwise have prevailed.
118It is by no means clear that the negotiated sum of $22,391,924 was in truth capable of being the subject of any order under s 562A(4) as an amount "received ... under" a "contract of reinsurance" as referred to in s 562A(1)(b) or that, in the absence of such an order, it falls to be dealt with under s 562A(2) or s 562A(3): see McGrath & Anor re HIH Insurance Ltd [2008] NSWSC 9; 26 ACLC 111 (at [17] - [20]) and the reference there to Chan v Cresdon Pty Ltd [1989] HCA 63; 168 CLR 242 at 249 as to the meaning of "under" in contexts of this kind. Nor, in the circumstances of uncertainty and dispute recited in the commutation agreement, is it clear what result s 553C caused to emerge upon the commencement of the winding up. These matters do not require resolution on this appeal.