AssetInsure Pty Limited (formerly Gerling Global Reinsurance Company of Australia Pty Limited) v New Cap Reinsurance Corporation Limited (In Liq) & 3 Ors
[2004] NSWCA 225
•6 October 2004
Reported Decision:
61 NSWLR 451
(2004) 13 ANZ Insurance Cases 61-623
(2004) 22 ACLC 1637
Court of Appeal
CITATION: AssetInsure Pty Limited (formerly Gerling Global Reinsurance Company of Australia Pty Limited) v New Cap Reinsurance Corporation Limited (In Liq) & 3 Ors [2004] NSWCA 225 HEARING DATE(S): 23/06/04, 24/06/04, 25/06/04 JUDGMENT DATE:
6 October 2004JUDGMENT OF: Hodgson JA at 1; Ipp JA at 37; Bryson JA at 235 DECISION: (A) The first cross-appeal is dismissed with costs (B) The appeal is dismissed with costs (C)(i) The second cross-appeal is upheld (C)(ii) Declaration 1(e) made by Windeyer J is set aside and in lieu thereof the following direction is made: "1(e) [Contract TY165A] for the 1998 underwriting year and [Contract FC3A] for the 1997 and 1998 underwriting years are not 'relevant contracts of insurance' within the definition of that term in subsection (8) of section 562A of the Corporations Act 2001 (Cth)." (C)(iii) Direction 2(h) made by Windeyer J is set aside and in lieu thereof the following direction is made: "2(h) The liquidator would be justified in treating a contract of reinsurance entered into by [NCRA] as reinsurer as one to which the provisions of section 562A of the Corporations Act 2001 are not applicable." (C)(iv) AssetInsure and Faraday pay NCRA and NC Re their costs of the second cross-appeal and their costs of that part of the directions hearing before Windeyer J concerning directions 1(e) and 2(h) (C)(v) AssetInsure and Faraday to have a certificate under the Suitors' Fund Act 1951 (NSW) if otherwise entitled. (D) There be liberty to any party to make written submissions within 21 days in regard to the declarations and costs orders. CATCHWORDS: STATUTORY INTERPRETATION - Whether certain liabilities under insurance contracts are "liabilities in Australia" for the purposes of the Insurance Act 1973 (Cth) - Whether s 31(4) of the Insurance Act 1973 (Cth) was intended to be an exhaustive definition of "liabilities in Australia" - Discussion of general law regarding where a debt is satisfied - Whether s 116(3) of the Insurance Act 1973 (Cth) conferred accrued rights on creditors at the start of a winding up - Whether any such accrued rights were extinguished by s 562A of the Corporations Act 2001 (Cth) - Whether any such accrued rights were extinguished by the replacement of s 116 under the General Insurance Reform Act 2001 (Cth) - Whether contracts of reinsurance are "contracts of insurance" for the purposes of s 562A of the Corporations Act 2001 (Cth). - INSURANCE - Priority created by s 116 of the Insurance Act 1973 (Cth) - Requirement that liabilities of an insurance company in Australia be paid out of assets in preference to other liabilities - Discussion of "insurance", "reinsurance" and "re-reinsurance" - Meaning of "insurance" and "reinsurance" for the purposes of the Insurance Act 1973 (Cth) and the Corporations Act 2001 (Cth) - Discussion between a contract of insurance, a policy accepted in Australia and a policy issued in Australia - Whether an informal policy is a policy for the purposes of s 31 of the Insurance Act 1973 (Cth) - Whether the issue of a policy requires "something bilateral" - Whether the acceptance of a proposal for an insurance policy requires communication for the purposes of s 31 of the Insurance Act 1973 (Cth) - Whether a term regarding payment to a local broker was implied by custom or usage. - WINDING UP - Date at which creditors' rights are to be determined - Whether any accrued rights of priority arose - Effect of winding up on debts of creditors - Effect of change in legislation on creditors' rights. D LEGISLATION CITED: Acts Interpretation Act 1901 (Cth), ss 8(c), 15AB
Companies Act 1928 (Vic), ss 160(3), 447, 448
Companies Act 1961 (NSW), s 292(5)
Corporate Law Reform Act 1992 (Cth)
Corporations Law, ss 562, 562A
Corporations Act 2001 (Cth), ss 511, 562, 562A
Insurance Act 1973 (Cth), ss 22, 23, 27, 29(1), 30, 31, 32, 34, 35, 39(3), 40, 41, 43, 44, 116, Pts III & IV
General Insurance Reform Act 2001 (Cth), Schedule 2
Third Parties (Rights against Insurers) Act 1930 (UK), s 1(5)
Lugano Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters 1988, s 3CASES CITED: Agnew v Lansforsakringsbolagens AB [2001] 1 AC 223
Butterell v The Douglas Group Pty Ltd (2000) 35 ACSR 398
Drexel v Drexel [1916] 1 Ch 251
Durra v The Bank of New South Wales [1940] VLR 170
Earthworks and Quarries Ltd v F T Eastment & Sons Pty Limited [1966] VR 24
Ex Parte Coote (1949) 49 SR (NSW) 179
Fisher v Madden (2001) 54 NSWLR 179
Forsikringsaktieselskabet National (of Copenhagen) v Attorney General [1925] AC 639
Gosman v Ockerby [1908] VLR 298
Haque v Haque (No 2) 114 CLR 98
In Re Federal Building Assurance Co Ltd (In Liq) [1932] VLR 301
In Re Russo-Asiatic Bank [1934] 1 Ch 720
Jabbour v Custodian of Israeli Absentee Property [1954] 1 WLR 139
Maybury v Plowman (1913) 16 CLR 468
McCaughey v The Commissioner of Stamp Duties (1946) 46 SR (NSW) 192
Melville Island Limited v Richards (1933) 50 WN (NSW) 41
Motor Terms Co Pty Ltd v Liberty Insurance Ltd (1967) 116 CLR 177
Palmdale Insurance Limited (In Liq) (No 3) [1986] VR 439
Re Dominion Insurance Co of Australia Limited [1980] 1 NSWLR 271
Re Harrington Motor Company Limited; Ex Parte Chaplin [1928] 1 Ch 105
Re National Employers' Mutual General Insurance Association Ltd (In Liq) (1995) 15 ACSR 624
Roberts v Security Company [1897] 1 QB 111
Saltergate Insurance Co Limited and the Companies Act (No 2) [1984] 3 NSWLR 389
Shallay Holdings Pty Ltd v Griffith Co-operative Society Ltd [1983] VR 760
Steinberg v Herbert (1988) 14 ACLR 80
Thornley v Tilley (1925) 36 CLR 1
Universal General Insurance Co (UGIC) v Group Josi Reinsurance Co SA [2001] QB 68
Wight v Eckhardt Marine GmbH [2004] 1 AC 147
Xenos v Wickham (1867) LR 2 HL 296PARTIES :
AssetInsure Pty Limited (formerly Gerling Global Reinsurance Company of Australia Pty Ltd) (Appellant)
New Cap Reinsurance Corporation Limited (In Liquidation) (First Respondent)
John Raymond Gibbons (As liquidator to the First Respondent) (Second Respondent)
Faraday Underwriting Limited (Third Respondent)
NC Re Capital Limited (In Liquidation) (Fourth Respondent)FILE NUMBER(S): CA 40904/03 COUNSEL: R B S MacFarlan QC/S A Goodman (Appellant)
B Coles QC/D Robertson (First & Second Respondents)
F Douglas/J Hogan-Doran (Third Respondent)
S Epstein SC (Fourth Respondent)
M R Aldridge SC (Australian Prudential Regulation Authority) by leaveSOLICITORS: Clayton Utz (Appellant)
Henry Davis York (First & Second Respondents)
PricewaterhouseCoopers Legal (Third Respondent)
Deacons (Fourth Respondent)
LOWER COURTJURISDICTION: Supreme Court - Equity Division LOWER COURT FILE NUMBER(S): ED 6094/02 LOWER COURT
JUDICIAL OFFICER :Windeyer J
CA 40904/03
SC 6094/01Wednesday, 6 October 2004HODGSON JA
IPP JA
BRYSON JA
FACTS
New Cap Reinsurance Corporation Limited (NCRA) is a company incorporated in Australia. It is under winding up.
In the winding up of NCRA, some questions arose concerning various claims of NCRA’s creditors. These claims concerned three categories of insurance contracts. NCRA and its liquidator applied to Windeyer J for directions regarding the treatment of these claims, pursuant to s 511 of the Corporations Act 2001 (Cth).
Apart from NCRA and its liquidator, the parties before Windeyer J were:
· Faraday Underwriting Limited (“Faraday”) – a company carrying on business in London as an insurer. Faraday was reinsured under two contracts of reinsurance issued by NCRA. These contracts were referred to as TY165A and FC3A.
· Gerling Global Reinsurance Company of Australia Pty Limited, now AssetInsure Pty Limited (“AssetInsure”) – a company carrying on business in Australia as a reinsurer. AssetInsure was reinsured with NCRA under a contract of reinsurance.
· NC Re Capital Limited (in liquidation) (“NC Re”) – the principal shareholder of NCRA and a loan creditor of NCRA.
· The Australian Prudential Regulation Authority (“APRA”) – which was given leave to appear and make submissions.
The proceedings before Justice Windeyer were regarded as a test case to determine a number of issues regarding the application of ss 31 and 116(3) of the Insurance Act 1973 (Cth) to NCRA’s liabilities and s 562A of the Corporations Act 2001 (Cth) to contracts of reinsurance and re-reinsurance.
A voluntary administrator was appointed to NCRA on 21 April 1999. NCRA was placed in liquidation on 16 September 1999. On 15 July 2001 the Corporations Act 2001 (Cth) replaced the Corporations Law, re-enacting s 562A in somewhat different terms (although those differences are not presently relevant). On 1 July 2002 the General Insurance Reform Act 2001 (Cth) repealed the old s 116 of the Insurance Act 1973 (Cth) and replaced it with a new s 116. Both the old and the new s 116 concerned the treatment, in the winding up of a corporation authorised to carry on insurance business, of the corporation’s liabilities in Australia. The new s 116 does not apply to NCRA. The old s 116 did so apply.
Windeyer J made certain declarations and directions. There were three issues on appeal.
1. The appeal
AssetInsure (supported by NC Re and opposed by NCRA, the liquidator and Faraday) contends that Windeyer J erred in holding that NCRA’s liabilities under contracts TY165A and FC3A were “liabilities in Australia”.
2. The first cross-appeal
Faraday (supported by NCRA and the liquidator and opposed by AssetInsure, NC Re and APRA) contends that Windeyer J erred in holding that upon the winding up of NCRA, the old s 116(3) conferred accrued rights on creditors. Faraday further contends that Windeyer J erred in holding that any accrued rights were not extinguished by either s 562A of the Corporations Act 2001 (Cth) or the replacement of the old s 116 by the new s 116.
3. The second cross-appeal
NCRA and the liquidator (supported by NC Re and opposed by AssetInsure and Faraday) contend that Windeyer J erred in finding that contracts of reinsurance are “contracts of insurance” for the purposes of s 562A of the Corporations Act 2001 (Cth).
HELD per Hodgson JA (Bryson JA agreeing):
(a) Is s 31(4) of the Insurance Act 1973 (Cth) an exhaustive definition of “liabilities in Australia”?
Section 31(4) of the Insurance Act 1973 (Cth) was not intended to be exhaustive.
The question of what are liabilities in Australia is not answered by reference to a simple definition. Liabilities in Australia include liabilities to indemnify insured persons against losses occurring in Australia and liabilities which are to be satisfied in Australia. Otherwise, the question is to be determined pragmatically, having regard to the purpose of the Act that liabilities in Australia are the liabilities for which there should be assets in Australia available to meet them. Any liabilities that satisfy s 31(4) of the Insurance Act 1973 (Cth) will be included.
(b) Are NCRA’s liabilities under contract TY 165A “liabilities in Australia”?
The proposal for policy TY 165A was accepted in Australia, the policy was issued in Australia and it did not relate only to a liability contingent upon an event that could happen only outside Australia, or only a liability that the company had undertaken to satisfy in Australia.
Therefore, liabilities under policy TY 165A fall within s 31(4) of the Insurance Act 1973 (Cth), and are “liabilities in Australia”.
(c) Are NCRA’s liabilities under contract FC3A “liabilities in Australia”?
Policy FC3A relates only to liabilities contingent on events that can happen only outside Australia. Therefore, liabilities under the policy do not fall within s 31(4) of the Insurance Act 1973 (Cth).
However the practice applicable to the policy was that claims would be paid by NCRA to a local broker in Australia. Liabilities under policy FC3A can therefore fairly be regarded as liabilities to be met in Australia, and are therefore “liabilities in Australia”.
The appeal therefore fails, although not for the reasons given by the trial judge.
HELD per Ipp JA (dissenting):
(a) Is s 31(4) of the Insurance Act 1973 (Cth) an exhaustive definition of “liabilities in Australia”?
Despite the omission of any express statement, the strong indication from Part III of the Insurance Act 1973 (Cth) as a whole is that what is a “liability in Australia” in terms of s 31(4) was intended by the legislature to be an exhaustive definition.
(c) Are NCRA’s liabilities under contract FC3A “liabilities in Australia”?
The evidence does not establish an undertaking to satisfy the contract in Sydney, nor does it establish a general custom under contract FC3A of satisfaction of the contract by payment to a local placement broker. Because Faraday was resident in England, NCRA’s liability under contract FC3A was not a liability that NCRA undertook to satisfy in Australia. Contract FC3A therefore falls within s 31(4)(a)(i) of the Insurance Act 1973 (Cth). The liability of NCRA under contract FC3A is not a liability in Australia.
HELD per Ipp JA (Hodgson and Bryson JJA agreeing):
(a) Did the old s 116(3) of the Insurance Act 1973 (Cth) give rise to accrued rights of NCRA’s creditors?
It would be contrary to principle to hold that a change to the law (not expressed to be retrospective) between winding up and distribution alters priorities established according to the law at the date of the winding up. Wight v Eckhardt Marine GmbH [2004] 1 AC 147 is not of application in the present circumstances.
An administrator or liquidator, upon appointment, is obliged to pay (out of any surplus assets) the proved debts of the company according to the priorities fixed by law at the date of commencement of the winding up. This duty gives rise to an entitlement on the part of preferential creditors, although this may not be an entitlement to immediate payment.
Windeyer J correctly held that at the commencement of the winding up, rights accrued to NCRA’s creditors to have their rights to payments adjusted in accordance with the applicable regime for the distribution of the company’s assets.
(b) Were the rights accrued extinguished by s 562A of the Corporations Act 2001 (Cth)?
The scheme of s 562A works on the basis that it applies only to companies placed under winding up after the coming into force of the Corporations Act 2001 (Cth) and does not affect rights accrued against companies wound up before that date. Since rights of creditors accrued at the commencement of the winding up, there is no inconsistency between s 562A and s 116(3). The rights that accrued under the old s 116(3) were not extinguished by s 562A of the Corporations Act 2001 (Cth).
(c) Were the rights accrued extinguished by the enactment of the new s 116(3) of the Insurance Act 1973 (Cth)?
The transitional provisions of the General Insurance Reform Act 2001 (Cth), had no effect on rights that had accrued under the old s 116(3) prior to the commencement of the Reform Act. This is demonstrated by the anomalous result that would arise from the alternative conclusion and by the legislative intention demonstrated by the enactment of the new s 116(3) in the same terms as the old s 116(3). Windeyer J did not err in this respect. The first cross-appeal fails.
3. The second cross appeal
The legislature intended by s 562A to benefit only ordinary insureds, that is insureds other than reinsured insurance companies. This is readily understandable given the weaker position of ordinary insureds. The need to protect professional insurers is less compelling.
A textual construction supports this interpretation, as a “relevant contract of insurance” under s 562A means simply a contract of insurance and not a contract of reinsurance, and a “reinsurance payment” is a payment received pursuant to a contract of reinsurance and not a payment received pursuant to a contract of re-reinsurance.
Contracts of reinsurance are not “contracts of insurance” for the purposes of s 562A of the Corporations Act 2001 (Cth). The second cross-appeal is upheld.
A. The first cross-appeal is dismissed with costs.C. (1) The second cross-appeal is upheld.B. The appeal is dismissed with costs.
(2) Declaration 1(e) made by Windeyer J is set aside and in lieu thereof the following direction is made:
“1(e) [Contract TY165A] for the 1998 underwriting year and [Contract FC3A] for the 1997 and 1998 underwriting years are not ‘relevant contracts of insurance’ within the definition of that term in subsection (8) of section 562A of the Corporations Act 2001 (Cth).”
(3) Direction 2(h) made by Windeyer J is set aside and in lieu thereof the following direction is made:
“2(h) The liquidator would be justified in treating a contract of reinsurance entered into by [NCRA] as reinsurer as one to which the provisions of section 562A of the Corporations Act 2001 are not applicable.”
(4) AssetInsure and Faraday pay NCRA and NC Re their costs of the second cross-appeal and their costs of that part of the directions hearing before Windeyer J concerning directions 1(e) and 2(h).
(5) AssetInsure and Faraday to have certificate under the Suitors Fund Act 1951 (NSW) if otherwise entitled.
D. There be liberty to any party to make written submissions within 21 days in regard to the declarations and costs orders.**********
CA 40904/03
SC 6094/01Wednesday, 6 October 2004HODGSON JA
IPP JA
BRYSON JA
1 HODGSON JA: The circumstances of this appeal, and the issues raised by it, are set out in the judgment of Ipp JA.
2 I will deal in turn with Faraday’s cross-appeal, AssetInsure’s appeal, and the liquidator’s cross-appeal.
FARADAY’S CROSS-APPEAL
3 In this cross-appeal, Faraday challenged the conclusions of the primary judge that the old s.116(3) of the Insurance Act 1973 (Cth), as it existed prior to its amendment as from 1 July 2002, applied to the distribution to creditors in the NCRA liquidation; and that it prevailed over s.562A of the Corporations Act 2001 (Cth).
4 I agree with Ipp JA that this challenge fails, and subject to what I say below, I agree substantially with his reasons.
5 In my opinion, consistently with Motor Terms Co. Pty. Ltd. v. Liberty Insurance Ltd. (1967) 116 CLR 177, a creditor of a company acquires rights at the commencement of a winding up, in return for the restrictions then placed upon enforcement of its debt. Prima facie, those are accrued rights, which will not be affected by changes in applicable legislation, in the absence of a disclosed legislative intention to the contrary.
6 In my opinion, the legislative provisions by which s.116(3) was amended did not disclose any intention to change in any relevant respect the rights of creditors in relation to liquidations commenced but not concluded. It is true, as submitted by Mr. Douglas QC for Faraday, that there were extensive transitional provisions which did not advert to the matter; but on the other hand, the circumstance that the substituted s.116(3) made the same provision in respect of liquidations of companies carrying on insurance in accordance with the provisions of the new regime set up by the amending legislation, is a powerful indication that the legislature did not intend to do away with the regime set up by the old s.116(3) in respect of liquidations commenced but not concluded.
7 As regards s.562A, it is clear that so long as that provision was contained in State legislation (the Corporations Law), it could not displace s.116(3). The question is whether the enactment of that provision by the Commonwealth Corporations Act 2001 on 15 July 2001 gave effect to a partial repeal of s.116(3).
8 I agree with Ipp JA that this enactment did not disclose any intention to interfere with accrued rights; and also that, in any event, the mere re-enactment as Commonwealth law of an existing State provision concerning companies generally did not disclose an intention to displace an existing Commonwealth provision specifically relating to insurance companies.
ASSETINSURE’S APPEAL
9 In this appeal, AssetInsure contended that the primary judge was wrong in so far as he determined that certain liabilities were “liabilities in Australia” within the old s.116(3) of the Insurance Act, firstly because s.31(4) of that Act was exhaustive, and secondly because of exceptions existing at general law.
10 On this matter, I do not agree with Ipp JA; and these are my reasons.
11 In my opinion, it is necessary to have regard to certain general aspects of the Insurance Act, and in particular to ss.29(1), 31, 32(2), 35 and 116(4), as they existed prior to 1 July 2002. Those provisions were as follows:
- 29 Conditions to which authority is subject
(1) Subject to this Part, an authority granted to a body corporate under this Part is subject to the following conditions:
(a) where the body corporate has a share capital - a condition that its paid-up share capital shall not at any time be less than $2,000,000;
(b) where the body corporate is incorporated in Australia - a condition that the value of its assets shall at all times exceed the amount of its liabilities by not less than:
- (i) $2,000,000; or
(ii) 20% of its premium income during its last preceding financial year; or
(iii) 15% of its outstanding claims provision as at the end of its last preceding financial year;
whichever is the greatest;
- (i) $2,000,000; or
(ii) 20% of its premium income in Australia during its last preceding financial year; or
(iii) 15% of its outstanding claims provision in respect of liabilities in Australia as at the end of its last preceding financial year;
whichever is the greatest;
31 Liabilities(d) a condition that the body corporate shall, at all times other than a time at which an exemption from the requirements of section 34 is in force in respect of it, have arrangements for reinsurance, being arrangements approved by APRA under that section, or, if it has been granted an exemption under that section, shall comply with the terms and conditions of that exemption;
(e) where a change occurs in the particulars specified in the application for the authority and referred to in paragraph 22(2)(a), (b), (c), (d), (e), (ea) or (f) or in the matters contained in a document required to accompany that application - a condition that the body corporate shall, within a period of 21 days after the change occurs, or within such further period as APRA, within that period of 21 days, approves, give to APRA notice in writing signed by a director and specifying particulars of the change; and
(f) such other conditions (if any) as APRA or the Treasurer, as the case may be, specifies in the authority.
…
(1) In this Part, unless the contrary intention appears, a reference to liabilities of a body corporate includes a reference to provision for liabilities made in its accounts, or directed in accordance with this section to be made, but does not include:
(a) a liability in respect of share capital; or
(b) where the body corporate is registered under the Life Insurance Act 1995, a liability that is, in accordance with that Act:
- (i) referable to a class of life insurance business carried on by the body corporate in respect of which it has established a statutory fund under that Act; or
(ii) charged on any of the assets of such a statutory fund.
(3) For the purposes of this Act, APRA may, with the Treasurer's agreement, at any time, if APRA thinks fit, by notice in writing served on a body corporate carrying on insurance business, direct that the body corporate shall, within a specified period, not being less than 21 days, after the giving of the direction, or as at a specified date, make in its accounts provision, or further provision:
(a) of a specified amount; or
(b) of an amount determined in a specified manner; in respect of liabilities.
(3A) Part VI applies to a decision of APRA under this section.
(3AA) Subsection (3A) does not apply to a decision made within 5 years after the commencement of this subsection.
(3AB) It is not necessary to obtain the agreement of the Treasurer to the making of a decision by APRA under this section after 5 years after the commencement of subsection (3AA).
(3B) Where a direction has been given to a body corporate under subsection (3) and it appears at any time to APRA, and the Treasurer agrees, that the direction is no longer necessary or should be varied, APRA shall, by notice in writing served on the body corporate, revoke or vary the direction.
(3C) Where a body corporate to which a direction has been given under subsection (3) applies to APRA, by notice in writing, for the direction to be revoked or varied, APRA shall:
(a) if it appears to APRA, and the Treasurer agrees, that the direction is no longer necessary or should be varied - revoke or vary the direction; or
(b) in any other case - refuse to revoke or vary the direction; and shall serve on the body corporate notice in writing of the decision.
(3D) The powers of APRA under this section are in addition to, and do not derogate from, the powers of APRA or of the Treasurer under Part V.
(3E) Where a body corporate in respect of which a direction has been given under subsection (3) is commenced to be wound up, the direction ceases to have effect.
(3F) A body corporate that fails to comply with a direction given to it under subsection (3) is, in respect of each day during which it so fails to comply with the direction (including the day of a conviction under this subsection or any subsequent day), guilty of an offence punishable on conviction by a fine not exceeding 100 penalty units.
(4) For the purposes of this Part, where a liability is undertaken by a body corporate under:
(a) a contract of insurance (including reinsurance) made in Australia or in respect of which a proposal was accepted or a policy issued in Australia, not being a contract:
- (i) that relates only to a liability contingent upon an event that can happen only outside Australia, not being a liability that the body corporate has undertaken to satisfy in Australia; or
(ii) where the body corporate carries on insurance business both in and outside Australia, that relates only to a liability that the body corporate has undertaken to satisfy outside Australia; or
- (i) that relates to a liability contingent upon an event that can happen only in Australia; or
(ii) where the body corporate carries on insurance business both in and outside Australia, that relates to a liability that the body corporate has undertaken to satisfy in Australia;
that liability is a liability in Australia.
32 Premium income and premium income in Australia(5) In this section, unless the contrary intention appears, direction includes, where a direction is varied, the direction as varied.
…
(2) For the purposes of this Part, a reference to the premium income in Australia of a body corporate during a financial year is a reference to the amount that is the amount of premiums for insurance business received by or due to the body corporate during that year in respect of the undertaking by the body corporate of liabilities that are liabilities in Australia less the sum of:
(a) the amount of those premiums included in the premium income of the body corporate in respect of a preceding financial year;
(b) the amount of those first-mentioned premiums that the body corporate, during the first-mentioned financial year, refunded or was liable to refund not including an amount that the body corporate was, during a preceding financial year, liable to refund;
(c) the amount of premiums for reinsurance in respect of insurance business paid or payable by the body corporate during the first-mentioned financial year relating to liabilities undertaken by it that are liabilities in Australia less the sum of:
- (i) the amount of those premiums that, during a preceding financial year, were payable by the body corporate; and
(ii) the amount of premiums for reinsurance relating to those liabilities that, during the first-mentioned financial year, were refunded or liable to be refunded to the body corporate not including an amount that, during a preceding financial year, was liable to be refunded to the body corporate;
(d) the amount paid by the body corporate during the first-mentioned financial year under a law of a State or Territory relating to payments by insurers for or with respect to fire brigades;
(e) the amount of stamp duty paid by the body corporate, during the first-mentioned financial year, under a law, or a provision of a law, of a State or Territory imposing stamp duty in respect of the carrying on of insurance business; and
(f) the amount paid by the body corporate during the first-mentioned financial year under a prescribed law of the Commonwealth or of a State or Territory or under a prescribed provision of such a law.
116 Body corporate not to carry on insurance business after commencement of winding up35 Exemption from requirement relating to assets in Australia
(1) Where a body corporate authorized under this Act to carry on insurance business has, as the result of the happening of an exceptional event outside Australia, incurred substantial liabilities in respect of any business of insurance carried on by it, the Treasurer may, if he or she is satisfied that it is necessary for the body corporate to remove from Australia assets in Australia in order to assist in discharging those liabilities, by notice in writing given to the body corporate, determine that, during such period, not exceeding 6 months after the giving of the notice, as he or she specifies in the notice, the body corporate shall be deemed not to have failed to comply with the condition referred to in paragraph 29(1)(c) so long as the value of its assets in Australia is not less than:
(a) the amount of its liabilities in Australia; or
(b) if the Treasurer specifies in the notice an amount exceeding the amount of its liabilities in Australia - that amount.
(2) The Treasurer may, by notice in writing given to the body corporate, extend for such period, not exceeding 6 months, as he or she specifies in the notice, the period of 6 months referred to in subsection (1).
…
(4) Section 31 has effect for the purposes of this section.
…
12 Sections 29, 31, 32, and 35 were all within Part III of the Act.
13 Except in so far as s.31(4) did so, the Insurance Act 1973 (Cth) did not define what were “liabilities in Australia”. However, the expression was a very important one, particularly because of the requirement in s.29(1)(c), which indicated that great importance was placed on the availability of assets in Australia to satisfy liabilities in Australia.
14 This is reinforced by s.35, which suggests that, where assets in Australia are removed from Australia to satisfy liabilities incurred “as a result of the happening of an exceptional event outside Australia”, this may affect the balance between assets in Australia and liabilities in Australia; suggesting in turn that the Act contemplates that the liabilities for the satisfaction of which assets in Australia are removed from Australia are not liabilities in Australia.
15 I think it is reasonable to approach the question as to what are liabilities in Australia on the basis that prima facie these are liabilities in respect of which there should be assets in Australia available to satisfy them. And again, prima facie, in the case of liabilities under insurance policies, this would seem to be liabilities to indemnify against losses occurring in Australia and other liabilities which are to be satisfied by payments in Australia. What is to be “in Australia” is the insurance company’s liability, not the creditor’s asset corresponding to that liability; and I do not think that private international law rules concerning the location of such an asset are of direct application.
16 In my opinion, all this is confirmed by s.31(4), although for reasons I will give I do not think s.31(4) is exhaustive, even in respect of liabilities arising under insurance policies.
17 It is important to note that s.31 is a section which makes “liabilities” include “provision for liabilities” which are or should be made in the company’s accounts, and is directed primarily at such provision for liabilities. Section 31(4) concerns liabilities undertaken by insurance companies under contracts of insurance, and not (or not only) liabilities that have become actual liabilities because of the actual occurrence of the event on which liability is contingent. In my opinion, s.31(4) is primarily directed to determining the location of the liability at the time provision is to be made for it, rather than the location of a liability that has actually arisen. I think this is made clear by the importance given by s.31(4) to the terms of the contract relating to the possible location of the event that could give rise to actual liability: if s.31(4) were directed to the location in Australia of liability in respect of an event that had actually occurred, the actual location of that event would assume importance, which s.31(4) does not give it. (However, s.116(4) does indicate that s.31(4) is not limited to the determination of the location of liabilities at the time provision is made for them.)
18 The wording of s.31(4) is such as to make it very difficult to grasp the different categories dealt with, and their significance. It is I think helpful to set out the categories in a more systematic way. This incidentally discloses two strange anomalies, to which I will come.
19 Before setting out the categories, I note that I will adopt a shorthand of “liability undertaken in Australia” to cover the alternatives of contract made in Australia or proposal accepted in Australia or policy issued in Australia. I also note that a company that carries on business only in Australia could possibly make a contract of insurance where liability is not undertaken in Australia, because occasional transactions entered into outside Australia may not constitute carrying on business outside Australia.
20 The categories set up by s.31(4) are as follows:
- 1. Company carries on business in Australia but not outside Australia.
1.1 Liability undertaken in Australia
- (a) triggering event can happen in Australia
(b) liability required to be satisfied in Australia
(c) neither (a) nor (b).
1.2 Liability not undertaken in Australia, but some negotiations in Australia.
- (a) triggering event can only happen in Australia
(b) not (a).
2. Company carries on business in Australia and outside Australia.
1.3 Liability not undertaken in Australia and no negotiations in Australia.
2.1 Liability undertaken in Australia
- (a) triggering event can happen in Australia and liability not required to be satisfied outside Australia.
(b) liability required to be satisfied in Australia.
(c) neither (a) nor (b).
2.2 Liability not undertaken in Australia but some negotiations in Australia
- (a) triggering event can only happen in Australia
(b) liability required to be satisfied in Australia
(c) neither (a) nor (b).
2.3 Liability not undertaken in Australia and no negotiations in Australia.
21 According to s.31(4), categories 1.1(a) and (b), 1.2(a), 2.1(a) and (b) and 2.2(a) and (b) are liabilities in Australia. Categories 1.1(c), 1.2(b), 1.3, 2.1(c), 2.2(c) and 2.3 are not made liabilities in Australia.
22 There are two curious anomalies.
23 First, the absence from 1.2 of a category corresponding to 2.2(b). Where the company carries on business outside Australia as well as in Australia, it is sufficient to make it a liability in Australia that the liability is required to be satisfied in Australia. However, this is not sufficient where a company carries on business only in Australia. Why this should be so is a mystery.
24 Second, the absence from 2.1 of a category corresponding to 2.2(a). It is sufficient to make it a liability in Australia that the triggering event can only happen in Australia, where the liability is not undertaken in Australia. However, this is not sufficient where the liability is undertaken in Australia. Why this should be so is a further mystery.
25 It is perhaps also strange that, where the liability is not undertaken in Australia and there are no negotiations in Australia, so that category 2.3 is engaged, even liability under a contract under which the triggering event can only happen in Australia and liability is required to be satisfied in Australia is not made a liability in Australia.
26 Three points emerge from this analysis:
- 1. Great importance is placed on where the liability is to be satisfied. If it must be in Australia, this is sufficient, except in the case of the first anomaly, and categories 1.3 and 2.3.
2. Great importance is also placed on where the triggering event is to occur. If it must be in Australia, this is sufficient, except in the case of the second anomaly, and categories 1.3 and 2.3.
3. No independent significance is placed on where a triggering event actually occurs, or where a liability would in fact be paid, except where payment in Australia or outside Australia is specifically required by the contract.
27 In my opinion, these points confirm that s.31(4) was not intended to be exhaustive, at least in relation to liabilities that have actually been triggered. They also strongly suggest that such liabilities are liabilities in Australia if they indemnify an insured against a loss occurring in Australia (that is, where the triggering event has actually occurred in Australia), or if the liability is in fact to be paid in Australia (either because the contract requires this, or because the insured resides in Australia and there is no reason to pay elsewhere).
28 I also think that s.31(4) was not intended to be exhaustive even in relation to liabilities that are only provisions for liabilities. Suppose both insurer and insured reside in Australia, and an insurance contract is made in Australia to cover the insured’s travel in Europe, which permits but does not require compensation for lost luggage to be paid in Australia. Although that insurance would fall into category 1.1(c) or 2.1(c), it would be surprising if provision for liabilities in Australia did not include provision for compensation that might be paid in Australia for luggage lost in Europe under such a contract.
29 Thus, in my opinion, the question of what are liabilities in Australia is not answered by reference to a simple definition, whether it be the private international law rules as to the location of debts or the provisions of s.31(4) or some other definition. In my opinion, they include liabilities to indemnify insured persons against losses occurring in Australia, and liabilities which are to be satisfied in Australia. Otherwise, the question is to be determined pragmatically, having regard to the purpose of the Act that liabilities in Australia are the liabilities for which there should be assets in Australia available to meet them, and to the other considerations set out above. Of course, any liabilities that satisfy s.31(4) will also be included.
30 I turn now to the sample policies dealt with in this case.
31 The proposal for policy TY165A was accepted in Australia and the policy was issued in Australia; and it was common ground that it did not relate only to a liability contingent upon an event that could happen only outside Australia, or only to a liability that the company had undertaken to satisfy in Australia. Accordingly, liabilities under this policy fall within s.31(4).
32 Otherwise, I would not have been satisfied that liabilities incurred under this policy were liabilities in Australia, unless they were liabilities in respect of losses suffered in Australia or liabilities which were to be satisfied in Australia. I do not believe that either of these things was shown.
33 The proposal for policy FC3A was also accepted in Australia and the policy was also issued in Australia. Probably the contract was made in Australia. However, this policy relates only to liabilities contingent on events that can happen only outside Australia, not being liabilities that the company had undertaken to satisfy in Australia; and so liabilities under this policy do not fall within s.34(1).
34 However, the practice applicable to this policy was that claims would be paid by NCRA to a local broker in Australia (Australian Independent Re-insurances Pty. Ltd. or AIRS), and AIRS would then account to the re-insured’s broker. Thus, although the policy did not require payment in Australia, liabilities under the policy can fairly be regarded as liabilities to be met in Australia; and accordingly in my opinion liabilities under this policy are liabilities in Australia.
35 Thus, in my opinion this appeal substantially fails, though not for the reason given by the primary judge. I propose that it be ordered that the appeal be dismissed with costs, but that there be liberty to the parties to make submissions about costs.
LIQUIDATOR’S CROSS-APPEAL
36 I agree with Ipp JA that this cross-appeal succeeds, substantially for the reasons he gives.
37 IPP JA:
The parties and their respective interests
38 New Cap Reinsurance Corporation Limited (NCRA) is a company incorporated and resident in Australia. It is under winding up. Until it was placed under winding up, it was engaged in the business of writing international reinsurance. Many of NCRA’s liabilities to its creditors are in respect of contracts of reinsurance whereby it reinsured other insurers. NCRA also owes significant liabilities to Australian creditors that arose otherwise than pursuant to contracts of reinsurance or insurance. Amongst NCRA’s assets are the proceeds of contracts of reinsurance it entered into as reinsured.
39 Several questions of some complexity arose concerning the treatment of various claims of NCRA’s creditors in the winding up of the company. In order to resolve these questions, NCRA and its liquidator applied to Windeyer J sitting in the Equity Division for directions pursuant to s 511 of the Corporations Act 2001 (Cth).
40 The issues before his Honour concerned three categories of insurance contracts. The first category comprised ordinary contracts of insurance between insurers and insureds. The second category comprised contracts whereby insurers obtain reinsurance of risks they insure under contracts falling within the first category. The third category comprises contracts whereby reinsurers obtain “re-reinsurance” of the risks they reinsure under contracts falling within the second category.
41 At times during argument on appeal the parties referred to contracts falling within the third category as contracts of re-reinsurance and at times as contracts of retrocession. I shall adopt the terminology of “contracts of re-reinsurance”, “re-reinsurer” and “re-reinsured”. The language is inelegant, but I have adopted it in an attempt to avoid the confusion that tends to creep in when discussing the three categories of contracts to which I have referred.
42 The parties before Windeyer J, apart from NRCA and its liquidator, were Faraday Underwriting Limited (“Faraday”), a company carrying on business in London as an insurer, Gerling Global Reinsurance Company of Australia Pty Limited - now AssetInsure Pty Limited (“AssetInsure”) - a company carrying on business in Australia as a reinsurer, and NC Re Capital Limited (in liquidation) (“NC Re”), the principal shareholder of NCRA. NC Re is a loan creditor of NCRA in the amount of $30 million.
43 The interests of NCRA and the liquidator in the litigation are self-evident. The interests of the other parties are more complex; they need to be explained.
44 Faraday was a re-insured under two contracts of reinsurance issued by NCRA (referred to as contract TY165A and contract FC3A, respectively). These contracts were chosen as representative contracts to be the subject of the litigation (the proceedings being regarded as a test case). Faraday contended that it was entitled to a priority under s 116(3) of the Insurance Act 1973 (Cth) (the “old s 116(3)”) prior to its amendment by the General Insurance Reform Act 2001 (Cth) (the “Reform Act”) in respect of its claims under those contracts. The validity of that contention depended on whether Faraday’s claims under those contracts were in respect of NCRA’s “liabilities in Australia” within the meaning of that phrase in the old s 116(3). Faraday, accordingly, sought to put a broad construction upon the meaning of “liabilities in Australia” in s 116(3).
45 AssetInsure was insured with NCRA under a contract of reinsurance. As Windeyer J said:
- “As any payment to [AssetInsure] 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”.
46 NC Re, as a non-insurance creditor of NCRA, sought to limit, as far as possible, the priorities to be accorded to insurance companies in the winding up of NCRA.
47 In addition to the priorities of insurance creditors under the old s 116(3), a further issue on appeal involved the correct application in a winding up of moneys received by a liquidated reinsurer pursuant to contracts of re-reinsurance entered into by it. This issue concerned s 562A of the Corporations Act 2001 (Cth). The interests of AssetInsure and Faraday in regard to this issue are identical, but are opposed to the interests of NC Re – which makes common cause on this aspect with NCRA and the liquidator.
48 On appeal, the Australian Prudential Regulation Authority (“APRA”) was given leave to appear and to make submissions in regard to certain aspects of the issues in dispute.
49 As can be seen the matters in controversy concern matters of general insurance law and statutory construction. The legislative provisions principally involved are the old s 116(3), s 31 of the Insurance Act and s 562A of the Corporations Act. The meaning and effect of these legislative provisions are complicated by the temporal interaction between the relevant statutes, various amendments made to them, and the winding up of NCRA.
50 On 21 April 1999, a voluntary administrator was appointed to NCRA. On 16 September 1999, NCRA was placed in liquidation. Thereafter (on 15 July 2001), the Corporations Act replaced the Corporations Law and s 562A of the Corporations Act re-enacted, in somewhat different terms, the same numbered section of the Corporations Law. Those differences are not presently relevant. On 1 July 2002, the Reform Act repealed the old s 116 of the Insurance Act and replaced it with a new s 116.
51 The old s 116(3) contained provisions that concerned the treatment, in the winding up of a body corporate authorised under the Act to carry on insurance business, of the “liabilit[ies] in Australia” of the body corporate in question. In the winding up of such a body corporate, that section conferred a priority on creditors in respect of the body corporate’s liabilities in Australia. The section provided:
- “In the winding up of a body corporate authorised under this Act to carry on insurance business … the assets in Australia of the body corporate shall not be applied in the discharge of its liabilities other than its liabilities in Australia unless it has no liabilities in Australia.”
52 The new s 116(3) (as replaced by the Reform Act) provides:
- “In the winding up of a general insurer, the insurer’s assets in Australia must not be applied in the discharge of its liabilities other than its liabilities in Australia unless it has no liabilities in Australia.”
Thus, the new s 116 applies only to “a general insurer”. As, prior to the coming into force of the Reform Act, NCRA was wound up and ceased carrying on business, it does not, for the purposes of the new s 116, fall within the term “general insurer” as defined. Hence, the new s 116 does not apply to it.
53 The appeal concerns the true meaning of “liabilities in Australia” within the meaning of the old s 116(3). The first cross-appeal concerns the question whether any rights accrued under the old s 116(3) and the effect of s 562A of the Corporations Act and the Reform Act on any such rights. The second cross-appeal concerns the way in which, pursuant to s 562A, the proceeds of re-reinsurance policies received by NCRA are to be applied.
The directions made pursuant to s 511 of the Corporations Act
54 Windeyer J made the following declarations:
- “1(a) Any provable claim of [Faraday] against [NCRA] under [contract TY165A] for the 1998 underwriting year is a ‘ liability in Australia ’ of [NCRA] for the purposes of section 116(3) of the Insurance Act 1973 (Cth).
- (b) Any provable claim of [Faraday] against [NCRA] under [contract FC3A] for the 1997 and 1998 underwriting years is a ‘ liability in Australia ’ of [NCRA] for the purposes of section 116(3) of the Insurance Act 1973 (Cth).
- (c) Any provable claim of [NC Re] against [NCRA] under the Perpetual Unsecured Notes issued by [NCRA] to [NC Re] on or about 31 December 1998 is a ‘ liability in Australia ’ of [NCRA] for the purposes of section 116(3) of the Insurance Act 1973 (Cth)
- (d) In distributing the amounts that have been received by [NCRA] or [the liquidator] under contracts of reinsurance to creditors entitled thereto under s 562A of the Corporations Act 2001 (Cth), [the liquidator] is required to have regard to the application of section 116(3) of the Insurance Act 1973 (Cth) and pay any amounts required to be distributed pursuant to that section in priority to any amounts payable pursuant to section 562A.
- (e) [Contract TY 165A] for the 1998 Underwriting Year and [contract FC3A] for the 1997 and 1998 Underwriting Years are “ relevant contracts of insurance ” within the definition of that term in subsection 8 of section 562A of the Corporations Act 2001 (Cth).”
55 Windeyer J also made several directions, including the following:
- “2(a) The liquidator would be justified in distributing the proceeds of assets realised in the liquidation on the basis that section 116(3) of the Insurance Act 1973 as in force prior to 1 July 2002 applies to NCRA’s liquidation.
- (b) The liquidator would be justified in distributing the proceeds of assets realised in the liquidation on the basis that for the purposes of section 116(3) of the Insurance Act , ‘liabilities in Australia’ includes both liabilities of NCRA arising under contracts of insurance or reinsurance and other liabilities of NCRA not so arising.
- (c) The liquidator would be justified in distributing the proceeds of assets realised in the liquidation on the basis that ‘liabilities in Australia’ for the purposes of s 116(3) of the Insurance Act is not limited to those liabilities described in sub-section 31(4) of the Insurance Act 1973”.
- (d) The liquidator would be justified in distributing funds representing the proceeds of collection or realisation of assets situated outside of Australia on the basis that those proceeds are not to be regarded as assets in Australia for the purposes of section 116(3) of the Insurance Act 1973 by reason only of the fact that in the ordinary course of administration the proceeds have been transferred or remitted to Australia.
- (e) 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.
- (f) 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 that were not, prior to realisation, assets in Australia does not itself constitute an asset in Australia for the purposes of section 116(3) of the Insurance Act 1973.
- (g) 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.
…”(h) 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 applicable notwithstanding that the relevant contract or contracts of insurance insured under the contract of reinsurance are themselves contracts of reinsurance.
The appeal and cross-appeals; the parties and their respective positions
56 AssetInsure is the appellant in the appeal. NCRA, the liquidator, Faraday and NC Re are the respondents. AssetInsure is supported in its appeal by NC Re and opposed by NCRA, the liquidator and Faraday. APRA supports NCRA, the liquidator and Faraday.
57 In the appeal, AssetInsure accepts that Windeyer J correctly held that the old s 116(3) continues to apply to NCRA’s liabilities to Faraday under contracts TY165A and FC3A, but contends that his Honour erred in holding that those liabilities are liabilities in Australia. AssetInsure seeks that declarations 1(a) and (b) made by Windeyer J be set aside and in lieu thereof the following declarations be made:
- “1. (a) Any provable claim of [Faraday] against [NCRA] under [contract TY165A] for the 1998 underwriting year is not a ‘liability in Australia’ of [NCRA] for the purposes of section 116(3) of the Insurance Act 1973 (Cth);
- (b) Any provable claim of [Faraday] against [NCRA] under [contract FC3A] for the 1997 and 1998 underwriting years is not a ‘liability in Australia’ of [NCRA] for the purposes of section 116(3) of the Insurance Act 1973 (Cth).
58 In addition, AssetInsure seeks orders that direction 2(c) made by his Honour be set aside and in lieu thereof the following direction be made:
- 2. (c) The liquidator would be justified in distributing the proceeds of assets realised in the liquidation on the basis that ‘liabilities in Australia’ for the purposes of section 116(3) of the Insurance Act is, with the exception of liabilities undertaken under contracts of insurance, not limited to those liabilities described in sub-section 31(4) of the Insurance Act 1973”.
59 In the first cross-appeal, Faraday is the cross-appellant and the other parties (save for APRA) are the cross-respondents. Faraday is supported by NCRA and the liquidator, but is opposed by AssetInsure, NC Re and APRA.
60 In the first cross-appeal, Faraday argues that Windeyer J erred in holding that, upon the winding up of NCRA, the old s 116(3) conferred accrued rights on creditors; it asserts that rights to creditors accrued only upon the distribution of NCRA’s surplus assets.
61 Faraday contends, further, that his Honour erred in holding that rights that may have accrued under s 116(3) were not extinguished by s 562A of the Corporations Act or the replacement of the old s 116(3) by the new s 116(3).
62 Faraday challenges declarations 1(a) to (d) and the directions in paras 2(a) to 2(g) and 2(o). It seeks orders setting aside those declarations and directions and in lieu thereof seeks that the following direction be made:
- “The liquidator would be justified in distributing the proceeds of assets realised in the liquidation on the basis that section 116(3) of the Insurance Act 1973 as in force prior to 1 July 2002 does not apply to NCRA’s liquidation”.
63 In the alternative, Faraday seeks orders that declaration 1(d) and direction 2(o) be set aside and in lieu thereof the following declaration and direction, respectively, be made:
- “1(d) In distributing the amounts that have been received by the [NCRA] or [the liquidator] under contracts of reinsurance to creditors entitled thereto under section 562A of the Corporations Act 2001 (Cth), [the liquidator] is not required to have regard to the application of section 116(3) of the Insurance Act 1973 (Cth).”
- “2(o) 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 section 562A of the Corporations Act 2001 (Cth), the provisions of section 562A of the Corporations Act 2001 (Cth) prevail.”
64 In the second cross-appeal, NCRA and the liquidator are the cross-appellants and the other parties (save for APRA) are the cross-respondents. NCRA and the liquidator are supported by NC Re and opposed by AssetInsure and Faraday. NCRA and the liquidator challenge declaration 1(e) and direction 2(h) made by Windeyer J. They contend that his Honour erred in finding that contracts of reinsurance are “contracts of insurance” within the meaning of the latter phrase in s 562A(1)(a) of the Corporations Act.
65 In the second cross-appeal, NCRA and the liquidator seek orders that declaration 1(e) and direction 2(h) be set aside and in lieu thereof the following declaration and direction be made:
- “1(e) [Contract TY165A] for the 1998 underwriting year and [contract FC3A] for the 1997 and 1998 underwriting years are not ‘relevant contracts of insurance’ within the definition of that term in subsection (8) of section 562A of the Corporations Act 2001 (Cth).”
- “2(h) 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 notwithstanding that the relevant contract or contracts of insurance insured under the contract of reinsurance are themselves contracts of reinsurance.”
Alternatively to direction 2(h) in the terms so stated, NCRA and the liquidator seek that the following direction be made:
- “2(h) The liquidator would be justified in treating a contract of reinsurance entered into by [NCRA] as reinsurer as one to which the provisions of section 562A of the Corporations Act 2001 are not applicable.”
66 At the request of the Court, Faraday’s cross-appeal (the first cross-appeal) was argued first, followed by the appeal and then the cross-appeal of NCRA and the liquidator (the second cross-appeal). It is convenient in these reasons to proceed in the same order.
Did the old s 116(3) give rise to accrued rights?
Faraday’s (the first) cross-appeal
67 The old s 116(3) provided that the assets in Australia of a body corporate authorised to carry on insurance business should, upon the winding up of the body corporate, first be applied in the discharge of its “liabilities in Australia”. This, in effect, provided that the body corporate’s assets in Australia would be applied to payment of liabilities in Australia in priority to any other liabilities.
219 Lord Woolf MR (at 237) noted the submission that it was well established as a matter of English law that “by a contract of reinsurance the reinsuring party insures the original insuring party against the original loss” (Viscount Cave LC in Forsikringsaktieselskabet National (of Copenhagen) v Attorney General [1925] AC 639 at 642). Despite this general rule, Lord Woolf (at 239) regarded it as “contrary to the policy and structure of the Lugano Convention” to treat a particular section thereof, which dealt with “insurance,” as applying to reinsurance. As part of his reasoning, Lord Woolf observed that s 3 of Title II of the Convention (together with another section) had the primary objective of protecting the weaker party. He remarked (at 237)
- “Unlike the ordinary insured, the reinsured cannot conventionally be regarded as a weaker party than the reinsurer”.
Lord Cooke said (at 245):
- “As to section 3 of the Lugano Convention, the word ‘insurance’ may be used in a general sense covering all aspects of the subject, but just as naturally it may be used in a more limited sense to refer only to direct insurance as distinct from reinsurance. Which sense is appropriate in any given instrument will depend on the context and purpose of the provision in question. The more limited sense is likely to be more appropriate when the rights of policyholders other than reinsured in the insurance industry are the focus of attention.”
Lord Hope said (at 249):
- “In my opinion Title II, Section 3 of the Lugano Convention, by which matters relating to insurance are to be determined by special rules, does not apply to matters arising out of contracts of reinsurance. While it is no doubt true that reinsurance is a form of insurance, a clear line can be drawn between the generality of insurance business conducted between insurers and members of the public who wish to obtain insurance cover and the particular form or category of it which is commonly referred to by insurers, textbook writers and judges as reinsurance. The purpose of reinsurance is to lay off or pass on part of the liability of the insurer under an underlying insurance contract to another insurer. The contracting parties are engaged in the same industry. The reinsurer is an insurance company or underwriter who deals not with members of the public but only with other insurance companies or underwriters.”
His Lordship went on to say:
- “One has only to ask the question whether social protection needs to be extended to the insured under a reinsurance contract for it to be plain that the concept of social protection does not apply to this type of contract.”
Lord Millett (at 260) while noting that “reinsurance is merely a species of insurance” concluded:
- “I am satisfied that the social policy to which Section 3 of the Convention gives effect provides a compelling context which requires the word to be given a restrictive interpretation excluding reinsurance from its scope.”
Lord Millett said (at 262):
- “[W]hile both employ the same insurance mechanism, insurance and reinsurance are conceptually different and serve different purposes. All insurance is about managing risk. Direct insurance protects the insured against extraordinary risks outside the ordinary course of events, whether in his private life or in his business dealings. Reinsurance is concerned with the management of risks which it is the ordinary business of both parties to underwrite. It is essentially a professional hedging operation by which, by the only means known to the law, the insurer assigns all or part of his insurance liabilities to the reinsurer”.
220 In Universal General Insurance Co (UGIC) v Group JosiReinsurance Co SA [2001] QB 68 the Court of Justice of the European Communities came to a like decision. Underlying the reasoning of the Court of Justice is that the proposition that ordinary insurance contracts are designed to protect insured persons as presumptively weaker contracting parties, but that is not the case with reinsurance contracts. According to the judgment of the Court (at 86):
- “Both parties to the reinsurance contract are professionals in the insurance sector, neither of whom can be presumed to be in a weak position compared with the other party to the contract.”
The Court came to the same conclusion as the House of Lords in Agnew . It held that s 3 of Title II of the Lugano Convention “may not be regarded as applying to the relationship between a reinsured and his reinsurer in connection with a reinsurance contract”.
221 The Lugano Convention is very different legislation to the Corporations Act, but Agnew and Universal General Insurance Company (UGIC) v Group Josi Reinsurance Company SA support the proposition that, in a particular context, “insurance” may not mean “reinsurance”. As these cases demonstrate, the term “insurance” is inherently ambiguous and, in my view, by virtue of s 15AB of the Acts Interpretation Act, regard can be had to the Harmer Report and the Explanatory Memorandum.
222 In my opinion, there are aspects of the wording used in s 562A and the Corporations Act as a whole that tend to support the contentions of NCRA, the liquidator and NC Re.
223 The cogency of the argument that, while s 562 expressly excludes contracts of reinsurance, that exclusion does not expressly appear in s 562A, is, I think, materially diminished by the fact that in s 562A each of the expressions, “contract of insurance” and “contract of reinsurance” is used. In other words, s 562A uses the two expressions “contract of insurance” and “contract of reinsurance” to denote two different things; hence an express exclusion of “contract of reinsurance” from the term “contract of insurance” is unnecessary.
224 On this strict textual construction, s 562A refers to contracts of insurance when it means contracts of insurance alone, and refers to contracts of reinsurance when it means contracts of reinsurance alone. On this basis, a “relevant contract of insurance” under s 562A means simply a contract of insurance and not a contract of reinsurance, and a “reinsurance payment” under that subsection is not a payment received pursuant to a contract of re-reinsurance. A “reinsurance payment” on this construction means a payment received pursuant to a contract of reinsurance. Any potential ambiguity in s 562A is thus resolved by the fact that the section deals with the two concepts of insurance and reinsurance separately and in contra-distinction.
225 On the textual argument, advanced by NCRA, the liquidator and NC Re, the ultimate beneficiaries of s 562A are those persons who are insured directly under insurance policies issued by an insurer that has been wound up. No professional insurer would then be a beneficiary under s 562A in respect of the proceeds of re-reinsurance policies taken out by it with a reinsurer that has been placed under winding up.
226 The textual argument therefore supports the policy considerations identified in the Harmer Report and the Explanatory Memorandum.
227 Turning to those policy considerations, it may, I think, be accepted that, generally, the ordinary insured is a weaker party than the insurer. That, as Agnew and Universal General Insurance Co (UGIC) v Group JosiReinsurance Co SA point out, is not the case as between insurer and reinsurer where “both parties are professionals in the insurance sector, neither of whom can be presumed to be in a weak position compared with the other party to the contract”.
228 On the construction advanced by NCRA, the liquidator and NC Re, s 562A would be similar in effect to s 562 inasmuch as both sections would provide protection only to members of the public entitled to claim from an insured company that is under winding up. The same policy would underlie each section. On the other hand, on the construction upheld by Windeyer J (and contended for by AssetInsure and Faraday), s 562A also provides protection to professionals in the insurance sector. In my opinion, when due regard is had to text of the Corporations Act, the Harmer Report and the Explanatory Memorandum, that was not the intent of s 562A.
229 The policy issue in the second cross-appeal does not, as AssetInsure and Faraday submit, concern the distinction drawn in s 562 and s 562A between direct insurance on the one hand and reinsurance on the other. I accept their submission that, practically speaking, there is no difference in purpose between insurance and reinsurance. But that is no answer to the question whether, by s 562A, the legislature intended to confer benefits on reinsureds as well as ordinary insureds, or whether it intended only to benefit ordinary insureds. This, in my view, is the true or essential question of construction that arises.
230 In my opinion, the legislature intended by s 562A to benefit only ordinary insureds, that is insureds other than reinsured insurance companies. It is readily understandable that, by reason of the weaker position of such ordinary insureds, the legislature would wish to afford them protection by way of the priorities provided by s 562A. The need to protect professional insurers, in a similar way, against the general body of creditors, is far less compelling.
231 Accordingly, in my view, the second cross-appeal should be upheld and the relief sought by NCRA, the liquidator and NC Re should be granted.
Overall conclusion
232 The parties made no submissions as to the precise form of the declarations that should be made. I propose the declarations set out below but would give liberty to apply by written submissions within 21 days in that regard.
233 In regard to the costs orders I propose, I have treated NCRA and the liquidator as identical and I do not intend that any of the costs orders should apply to both. The costs orders I propose are intended to apply to NCRA alone and not the liquidator. As no submissions have been made in this respect, I would give liberty to the parties to make written submissions within 21 days in regard to the costs orders proposed.
234 Subject to what I have stated in the two preceding paragraphs, I propose the following orders:
B. As regards the appeal:
A. The first cross-appeal is dismissed with costs.
- (1) The appeal in regard to contract TY165A is dismissed with costs; the costs in regard to this aspect of the appeal to be paid by AssetInsure and NC Re.
(2) The appeal in regard to contract FC3A is upheld.
- (3) Declarations 1(a) and (b) and the direction in para 2(c) made by Windeyer J are set aside and in lieu of declarations 1(a) and (b) the following declarations are made:
- “1(a) Any provable claim of [Faraday] against [NCRA] under [reinsurance contract TY165A] for the 1998 underwriting year is not a ‘liability in Australia’ of [NCRA] for the purposes of section 116(3) of the Insurance Act 1973 (Cth);
- (b) Any provable claim of [Faraday] against [NCRA] under [contract FC 3A] for the 1997 and 1998 underwriting years is not a ‘liability in Australia’ of [NCRA] for the purposes of section 116(3) of the Insurance Act 1973 (Cth).”
- (4) NCRA and Faraday to pay AssetInsure and NC Re’s costs of the appeal in regard to contract FC3A and their costs of that part of the directions hearing before Windeyer J concerning contract FC3A which related to declarations 1(a) and (b) and the direction in para 2(c) made by his Honour.
- (5) NCRA and Faraday to have certificates under the Suitors Fund Act if otherwise entitled.
(1) The second cross-appeal is upheld.
C. As regards the second cross-appeal:
- (2) Declaration 1(e) made by Windeyer J is set aside and in lieu thereof the following direction is made:
- “1(e) [Contract TY165A] for the 1998 underwriting year and [Contract FC3A] for the 1997 and 1998 underwriting years are not ‘relevant contracts of insurance’ within the definition of that term in subsection (8) of section 562A of the Corporations Act 2001 (Cth).”
(3) Direction 2(h) made by Windeyer J is set aside and in lieu thereof the following direction is made:
- “2(h) The liquidator would be justified in treating a contract of reinsurance entered into by [NCRA] as reinsurer as one to which the provisions of section 562A of the Corporations Act 2001 are not applicable.”
- (4) AssetInsure and Faraday pay NCRA and NC Re their costs of the second cross-appeal and their costs of that part of the directions hearing before Windeyer J concerning directions 1(e) and 2(h).
- (5) AssetInsure and Faraday to have certificates under the Suitors Fund Act 1951 (NSW) if otherwise entitled.
D. There be liberty to any party to make written submissions within 21 days in regard to any of the declarations and costs orders.
235 BRYSON JA: In my opinion the first cross-appeal should be dismissed and the second cross-appeal should be allowed for the reasons which Ipp JA has given.
236 In my opinion subs.31(4) of the Insurance Act 1973 (Cth.) operated to widen the liabilities in Australia which, and provision for which, required to be considered in the scheme of authorization to carry on insurance business in Part III of that Act; with the purpose of maintaining, or tending to maintain financial capacity to meet obligations the protection of which the Commonwealth Parliament saw as its concern. It would not serve the purpose of subs.31(4) that it should be exhaustive, and it was not in its own text expressed to be exhaustive. The anomalies of expression which Hodgson JA has exposed present no real difficulty for interpretation of subs.31(4) overall: the subsection operated to declare that the cases with which it expressly deals are included (para (b)) or in some cases excluded (para (a)) without attempting to deal completely with what are liabilities in Australia. Discernible anomalies where a provision in one Part of this elaborate legislation is referentially given effect in a provision in another Part cannot be closely searched for implications. Attribution of entire integration and internal logic to the whole of a piece of legislation may not be a reliable indication of what the legislature truly intended.
237 The question whether liabilities are “liabilities in Australia” within the meaning of old s.116(3), if not determined by the application of subs.31(4), is to be determined by the pragmatic process described by Hodgson JA and applied by his Honour to policy FC 3A. The question is not a question in the Conflict of Laws, and old s.116(3) did not adopt the Conflict of Laws in its workings. The appeal should be dismissed for the reasons which Hodgson JA has given.
238 Questions of costs should be decided on written submissions, and detailed directions for times for submissions should be made.
Last Modified: 10/07/2004
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