Transfield Philippines Inc v HIH Casualty & General Insurance Ltd

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST HUNTER J FRIDAY 4 MAY 2001

50160/00 TRANSFIELD PHILIPPINES INC -V- HIH CASUALTY & GENERAL INSURANCE LTD (IN PROVISIONAL LIQUIDATION) REASONS FOR JUDGMENT

1 This is an application by amended notice of motion by the plaintiff, pursuant to s 471B of the Corporations Law, for leave to proceed with the proceedings against the defendant to which provisional liquidators were appointed by order of the Court of 15 March 2001. 2 The proceedings were instituted by summons filed 27 November 2000. In the proceedings the plaintiff claims a declaration that it is entitled to be indemnified by the defendant under a policy of professional indemnity insurance (the policy), and that the defendant pay the amount of certain losses or expenses sustained by the plaintiff to the limit of the sum insured, namely $20,000,000. 3 The claim under the policy arose out of a "turnkey" contract entered into by the plaintiff on 26 March 1997 for the design, construction and commissioning of the Bakun hydro-electric power station, situated in the Philippines. The contract price was a "fixed price, guaranteed maximum lump sum of US$89,889,073". 4 It is alleged that the plaintiff seriously underestimated the length of steel lining required in the tunnel forming part of the project works and that the under estimation arose out of faulty design considerations. It is alleged that the direct costs incurred in relation to the extended steel lining was US$15,042,563 with indirect costs unascertained at the time of institution of the proceedings. 5 It is not in dispute that, at the time of the appointment of the provisional liquidators, pleadings in the proceedings have closed and categories of documents to be discovered have been exchanged. Informal discovery has been given by the plaintiff to the defendant to enable it to consider the issue of indemnity. 6 By its defence the defendant admitted the issuing of the policy and, in substance, put all other matters in issue. Par 20 of the defence is in the following terms: "20 In further answer to the Summons as a whole, HIH says that any loss or expense which the Plaintiff may be found to have suffered as a result of entering into the contract with Luzon arose from, inter alia, the Plaintiff: 20.1 Assuming the risk of unknown sub-surface conditions in circumstances when it knew that a risk existed that it may and/or was likely to suffer "loss and expense" (within the meaning of the expression ascribed to it by the Plaintiff); 20.2 Making an allowance for the steel lining required to comply with its contractual obligations in the contract price with Luzon which was and/or was likely to have been insufficient for the said risk; 20.3 Failing to take any or any adequate steps to ascertain the sub-surface conditions; 20.4 Failing to make any or any adequate geological investigations into the sub-surface conditions; 20.5 Assuming the risks associated with the length of the steel lining to be deployed in the tunnel; Particulars (a) HIH relies upon the matters pleaded in paragraph 6(e) of the Summons. 20.6 Courting the commercial risk of the amount of steel lining required; 20.7 Entering into a contract with Luzon with the knowledge of the possibility and/or likelihood that it would sustain "loss or expense" within the meaning of the expression ascribed to it by the Plaintiff (which meaning is denied in any event) if it entered into the contract with Luzon; 20.8 Relying on the matters pleaded in paragraphs 7,8,9 and 10 of the Summons; 20.9 Failing to mitigate its loss by making a demand against Halcrow for any alleged loss or expense." 7 By par 22 of the defence the defendant asserts a breach of the plaintiff's duty of disclosure in respect of each of the matters particularised in par 20. 8 Prior to the commencement of the proceedings the solicitors for the defendant (Sparke Helmore), in a seventy three page facsimile of 6 April 2000 to the plaintiff's parent corporation, denied liability on behalf of the defendant in respect of the claim in what was described as "HIH's preliminary view" reserving the defendant's "right to raise further points at a later stage". 9 It is clear that the plaintiff's claim is a major claim which is contested by the defendant and that the determination of it will require a very lengthy hearing, probably running into months. The issues are such that, in my view, they would be totally unsuitable for resolution by means of lodging proof of debt, if the provisional liquidators take the course of calling for proofs of debt, or in the event that the defendant is placed in liquidation. 10 I am satisfied that, while there remains any significant funds for the payment of creditors, it is unthinkable that a claim of this magnitude would be allowed to go by default. It is clearly in the interests of creditors that the proceedings be defended. 11 In my view, the only real question to be considered is whether leave to proceed should be given at this point. That, in turn, raises the question whether to do so would unduly interfere with the capacity of the provisional liquidators to undertake their responsibilities in an orderly fashion, or in the event that the defendant is placed in liquidation, whether it would interfere with the orderly winding up of the company. 12 The evidence relied upon by the provisional liquidators in the like application in Ibbco Trading Pty Ltd -v- HIH Casualty & General Insurance Ltd no. 50105/00, is repeated in this application, except in respect of one important area: namely, the existence and extent of any reinsurance affected by the defendant in relation to the class of risk covered by the policy. 13 It is not in dispute that reinsurance under quota share contracts of reinsurance was effected by the defendant at three levels. In respect of the first level, the cover was expressed in the following terms: " ARTICLE VI COVER: The Company agrees to cede to the Reinsurer and the Reinsurer agrees to accept the percentage described herein part of a 7.50% Quota Share of the net retained liability of the Company and then not exceeding the aforementioned percentage of AUD 1,000,000 any one Policy, any one risk (or equivalent at inception of declaration in any other currency)." 14 A 58% quota share was the subject of reinsurance in the following terms: " ARTICLE V COVER: The Company agrees to cede to the Reinsurer and the Reinsurer agrees to accept the percentage described herein part of a 58.00% Quota Share of the net retained liability of the Company and then not exceeding the aforementioned percentage of AUD 5,000,000 any one Policy, any one risk excess of AUD 5,000,000 any one Policy, any one risk (or equivalent at inception of declaration in any other currency)." 15 A further quota share of 61.28% was the subject of reinsurance in the following terms: " ARTICLE V

COVER: The Company agrees to cede to the Reinsurer and the Reinsurer agrees to accept the percentage described herein part of a 61.28% Quota Share of the net retained liability of the Company and then not exceeding the aforementioned percentage of AUD 15,000,000 any one Policy, any one risk excess of AUD 10,000,000 any one Policy, any one risk (or equivalent at inception of declaration in any other currency)."

16 The three quota share contracts did not provide for reinsurance for the level of risk between $1,000,000 and $5,000,000. 17 Anthony Gregory McGrath, one of the provisional liquidators, in his affidavit sworn 19 April 2001 deposed to the known position of reinsurance in relation to the subject class of risk as follows : "8. Certain reinsurance treaties which appear to relate to the Companies Collective Policy No. NK10598 written by the defendant in favour of, inter alia, the plaintiff have been identified. 9. In addition, other reinsurance may exist on a group basis which might apply. However, I expect that it will take at least a number of months before that can be satisfactorily determined, in particular before it is fully ascertained what reinsurance applies to the various classes of insurance business within the HIH Group. 10. The Provisional Liquidators have not had an opportunity to make inquiries of the reinsurers under the identified treaties as to their attitude to these proceedings. 11 I consider that the following further investigations must be conducted by the Provisional Liquidators to understand the effect of any relevant reinsurance treaties in respect of the claims under the Policy and any other claims where there is a contract for reinsurance: (a) the number of claimants that relate to the class of policy to which the relevant reinsurance treaty appears to relate should be ascertained to determine if any applicable aggregate on any layer is exceeded;

(b) the impact of reinsurance treaties (if any) on a group basis;

(c) the obligations of the defendant and the HIH Companies under the relevant reinsurance treaties or policies, and whether there is any basis for the reinsurers to deny liability under the reinsurance treaty; and

(d) eventually directions from the Court may be required in relation to the application of reinsurance proceeds; In order for the Provisional Liquidators to properly investigate the above matters, they will require much more time. 12. The Provisional Liquidators may inquire of particular reinsurers whether they will be prepared to fund the legal costs of defending proceedings, such as these. To date, no reinsurer has stated that it may be prepared to so (sic)." 18 On the same subject matter, Anthony Patrick Francis Ryan, an employed solicitor in the firm of solicitors acting for the provisional liquidators, in his affidavit of 26 April 2001 testified as follows: "3. Since these proceedings were before the Court on Friday 20 April 2001, I have made further inquiries on behalf of the provisional liquidators as to: (a) the volume of professional indemnity insurance policies written by the defendant which are (or may) be covered by the relevant reinsurance treaties produced by the provisional liquidators to this Court in these proceedings; and

(b) the volume and size of the actual and expected or notified claims on those professional indemnity insurance policies. 4. I made inquiries of the following persons to attempt to obtain that information: (a) Peter Thompson, from HIH;

(c) Jeff Trahair, from HIH. I was informed by each of the persons listed above that either they were unable to provide me with the information described above or were unable to provide it to me to be available this morning. Accordingly, I do not have the information from which it could be ascertained whether any applicable aggregate limits on any relevant reinsurance arrangement will or might be exceeded. 5. Exhibited to me at the time of swearing this affidavit and marked " APFR1" is a copy of a facsimile from Blake Dawson Waldron to the relevant broker in relation to the relevant reinsurers mentioned in paragraph 8 of Mr McGrath's affidavit of 19 April 2001. The name of the broker has been redacted from the copy of the facsimile exhibited. The facsimile was originally transmitted on 20 April 2001. At the date of swearing the affidavit no response has been received to the request contained in the facsimile."

19 The facsimile referred to in par 5 of that affidavit was one requesting urgent advice as to the following: "1. Provide confirmation from the reinsurers that the above treaties indemnify HIH against any liability to Transfield Philippines, Inc under the Policy within the limits of the treaties. 2. Advise whether the reinsurers are prepared to take over the conduct of HIH's defence in the proceedings with Transfield Philippines, Inc and bear the costs of the defence?"

20 While I think it is unusual for there to be a gap in the levels of reinsurance, I am not prepared to infer that a reinsurance cover in respect of the level between $1,000,000 and $5,000,000 will be revealed by further investigation. 21 The nature and terms of the quota share contracts are not without significance in this application. A quota share contract is described as follows: "An agreed proportion of all original risks within the portfolio or class of business covered is ceded on 'identical terms' and conditions to reinsurers. The principle behind the quota share interest is that a reinsurer participates in the reinsured's original business on almost the same terms as the reinsured, ie, with the exception of profit commissions and reinsurance overriders deducted by the reinsured before cession."

22 Of particular significance are the terms of Article 1X of the first level, which are repeated in Article VIII of the other levels of reinsurance. Those terms are as follows:

LOSSES AND LOSS ADJUSTMENT EXPENSES The Company will settle all losses incurred under its Policies and such settlements shall be binding on the Reinsurer in proportion to its participation in this Agreement. In addition, the Reinsurer will be liable for its pro-rata share of expenses incurred by the Company in connection with such losses. The Reinsurer is entitled to, and will be paid or credited with, any amounts the Company recovers as salvage. The Reinsurer agrees to reimburse the Company, promptly, when so requested by the Company for losses paid by the Company. Requests for such reimbursement must be accompanied by an executed reinsurance proof of loss. Alternatively losses shall be handled in the quarterly accounts and need not be individually reported. It is understood that, when so requested, the Company will afford the Reinsurer an opportunity to be associated with the Company, at the expenses (sic) of the Reinsurer, in the defense or control of any claim or suit or proceeding involving this reinsurance, and the Company and Reinsurer shall co-operate in every respect in the defense of such claim or suit or proceeding. Nothing in this Article shall be construed as meaning that losses are not recoverable hereunder until the loss to the Company has been ascertained. The date of loss as defined in the Company's original insurance policies shall apply as respects loss under this Agreement, and the Company shall be the sole judge of what shall constitute the date of loss."

The defendant is "the Company" within the meaning of Article IX. 23 I think it is significant that under those terms the defendant is able to bind the reinsurers in respect of any settlement by it "of losses incurred under its Policies". Further that the reinsurers are entitled to "be associated with the [defendant], at the expenses (sic) of the Reinsurer, in the defence or control of any claim … involving this reinsurance and the [defendant] and the Reinsurers [are to] co-operate in every respect in the defense of such claim". 24 In my view, no good purpose will be served by delaying the granting of leave. Sparke Helmore are willing to continue acting on behalf of the defendant in the proceedings as set out in their facsimile to the provisional liquidators of 20 April 2001: "We confirm that at this stage we are unable to give an estimate of costs to complete the matter with any precision and that we are willing to continue to act if leave to proceed is granted, on the basis of our normal terms of engagement." 25 I do not propose to repeat the evidence adduced by the provisional liquidators which duplicates the evidence adduced by them in the Ibbco matter, nor my views on that evidence so far as they are applicable to this application. Nor do I see any utility in revisiting the cases, referred to in Ibbco, in which the discretion under s 471B was considered.

26 On the question of reinsurance, whether there is a missing level of reinsurance I think is a matter of little significance. While it is true, as stated by the provisional liquidators, that the reinsurers have not indicated their attitude to the claim made in these proceedings, there is no reason to think that, if the policy responds to the claim, the reinsurance contracts will not respond: particularly having regard to the nature of a quota share contract. 27 In a press release by the provisional liquidators of 11 April 2001 they referred to the operation of 562A of the Corporations Law in the following terms: " Reinsurance priority Section 562A of the Corporations Law only applies once an insurance company is in liquidation. The effect of the section is that reinsurance recoveries collected by a liquidator are allocated in priority to the claims of creditors or groups of creditors whose claims lead to the particular reinsurance recovery. The HIH companies have extensive and varied reinsurance arrangements. Although the intention of the section is very clear, its application in practice is not straightforward, particularly for complex treaty reinsurances covering a number of companies. It is likely that allocation of reinsurance recoveries between different groups of creditors will need court direction. In some cases this will involve extensive delay, because the pool of sharing creditors will not be known until all claims of the particular type are known. We as provisional liquidators will preserve the position until the companies are in liquidation or are subject to schemes of arrangement approved by the courts and creditors." 28 There may be some force in those statements as to the time it may take to finally sort out the reinsurance position in different classes of cover. In my view, that is no reason to defer the granting of leave. 29 A successful outcome for the plaintiff in these proceedings will be an important first step towards gaining access to funds made available under s 562A : assuming the defendant is placed into liquidation. 30 It was submitted on behalf of the plaintiff, and it is not suggested otherwise by the defendant, that the burden of the discovery process in these proceedings will fall heavily on the plaintiff and that it will take several months for the plaintiff to comply with the usual directions of this Court in the Commercial List requiring statements of evidence to be filed and served by the respective parties. Accordingly, it will be a substantial time before the defendant will be called upon to provide much in the way of resources for the defence of these proceedings, if leave to proceed is granted. 31 The conduct of a defence should do little to distract provisional liquidators from addressing their responsibilities in the medium term. Further, I think that a defence of the proceedings is essential for the benefit of creditors having regard to the magnitude of the claim and the substantial nature of the defence foreshadowed in the extensive reasons for rejection of the claim in Sparke Helmore's facsimile to the plaintiff's parent corporation prior to proceedings being instituted. 32 It is not open to argument, in my view, that the dispute so raised is a serious dispute and that the proper forum for the resolution of those issues is in this Court in these proceedings. 33 In the event that a winding up order is made, for the same reasons, I think that the granting of leave will not interfere with the orderly winding up of the defendant. I do not accept that the granting of leave in these proceedings will result in a multiplicity of applications being brought against the defendant. Each case will have to be addressed with regard to its particular circumstances. 34 In this application I am satisfied that:

1. There is a serious question to be determined. 2. The machinery of lodgement of proof of debt and appeal from its rejection is entirely inappropriate to the resolution of the disputes raised in these proceedings and that the appropriate forum for the determination of those issues is in this Court and in this List in these proceedings.

The granting of leave should not act as a precedent and will not unduly distract the provisional liquidators in the performance of their responsibilities: particularly in the next several weeks.

In the event that the defendant is placed in liquidation, the granting of leave will not interfere in the orderly winding up of the company, for the reasons given.

Decisions will be required of the provisional liquidators as to the future conduct of these proceedings, if leave is granted. It is extremely unlikely that they would permit a disputed claim of this magnitude to go by default. If there was any suggestion of that nature, it would be even more unlikely that the reinsurers would stand idly by.

The granting of leave does not mean that any difficulties inherent in the fact that the defendant has provisional liquidators appointed or is placed in liquidation will be ignored in the close case management of the proceedings inherent in the conduct of all cases in this List. In that respect the burden of compliance with directions will fall most heavily, in coming months, on the plaintiff.

The plaintiff accepts that a condition of the granting of leave is that any judgment in its favour obtained in these proceedings be stayed until further order. 35 Accordingly, I grant leave to the plaintiff to proceed with these proceedings conditionally upon any judgment in favour of the plaintiff being stayed until further order. The costs of the application will be costs in the proceedings. ************

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