AssetInsure Pty Ltd v New Cap Reinsurance Corporation Ltd (In Liq) & Ors

[2005] HCATrans 991

[2005] HCATrans 991

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S327 of 2005

B e t w e e n -

ASSETINSURE PTY LIMITED (FORMERLY GERLING GLOBAL REINSURANCE COMPANY OF AUSTRALIA PTY LIMITED)

Appellant

and

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

GLEESON CJ
KIRBY J
HAYNE J
HEYDON J
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON THURSDAY, 8 DECEMBER 2005, AT 10.24 AM

(Continued from 7/12/05)

Copyright in the High Court of Australia

__________________

GLEESON CJ:   Yes, Mr Hogan-Doran.

MR HOGAN-DORAN:   I take it that your Honours were provided with a copy of the written submissions that were prepared overnight?

GLEESON CJ:   Supplementary submissions?

MR HOGAN-DORAN:   Yes, those are the ones. 

GLEESON CJ:   Yes, thank you, three pages.

MR HOGAN-DORAN: Yes, that is right, your Honour. I should begin by saying this. The third respondent’s principal position is the same as that of the first and second respondents, which is that the correct interpretation of sections 116 and section 31 of the Insurance Act is that “liabilities in Australia”, for the purposes of section 116, includes all the liabilities which are situated in Australia under the rules of private international law as well as any liabilities that may be described in section 31(4) and I will not be repeating what is ‑ ‑ ‑

GLEESON CJ:   Mr Hogan-Doran, I might have misunderstood something in what I read in the reasons for judgment in the Court of Appeal, but is it not the case that Justice Hodgson concluded that section 31(4) was not a code?

MR HOGAN-DORAN:   Yes.

GLEESON CJ:   But then when he came to decide the case, and this I think is relevant to your supplementary submissions, in relation to the contract FC3A, he decided it not on the basis that the company, New Cap, was resident in Australia but on the basis of this broker’s custom. Was that because he thought the broker’s custom brought it within section 31(4)?

MR HOGAN-DORAN:   Yes.

GLEESON CJ:   Why did he bother about whether the broker’s custom brought it within section 31(4) if he was right to say that 31(4) is not a code?

MR HOGAN-DORAN:   I cannot say, your Honour, that it is clear why that is the case. I do understand your Honour’s reason but, having read it, I cannot see how those two statements necessarily sit together. His Honour merely identified that he thought that it was not a code, that it was not exhaustive, that there were circumstances that lay outside of section 31(4). It may be that his Honour thought that section 31(4) perhaps amended or changed what the general position would be in the absence of section 31(4).

GLEESON CJ:   I will have to look at his reasons again but was it a belt and braces process of reasoning, perhaps?

MR HOGAN-DORAN:   It may be, your Honour.  One of the ways in which we read it was that that is right, that his Honour dealt with the argument that had been put and perhaps his Honour thought that since the evidence was that there was this custom then even if what one of the parties was contesting was right, which is that it was a code, then nevertheless the contract FC3A was a liability in Australia and since his Honour could conclude that it was not necessary to go any further than that in respect of that individual contract.  But I must say that having read the judgment it is not clear to me precisely what his Honour would have done had his Honour not decided that. 

In that sense the two points that I will deal with this morning are essentially alternative arguments which are that if section 31(4) is a code alternatively that it amends the general law position, but nevertheless the contract FC3A falls within section 31(4). It is still a liability in Australia for one of two reasons.

GLEESON CJ:   Are we only concerned with contract FC3A in this litigation?

MR HOGAN-DORAN:   Yes, your Honour, for the purposes of this appeal.  The other contract TY165A has not come up before this Court.

GLEESON CJ:   Thank you.

MR HOGAN-DORAN:   The two alternate reasons are, first, what I described yesterday as the “local broker argument” but perhaps it would be better to call it the “placement broker argument” since what the evidence, we submit, showed was that there was a custom in the industry that where a placement broker was used that the reinsurer would discharge its liabilities by payments to the placement broker.  It just happens to be that in the context of contract FC3A the placement broker was local in the sense that it was also in Australia along with the reinsurer. 

The broader commercial circumstances could be described as this.  Faraday is the lead underwriter of a group of Lloyd’s underwriters.  It is located in England.  It has contacts with its local reinsurance brokers.  Those brokers would be familiar with reinsurers and have relationships with reinsurers in that market and other markets that they are familiar with but perhaps are not familiar with reinsurers in Australia so they have contacted - and Mr Hedley deals with this in his affidavit - Australian Independent Reinsurance Services, which is also a reinsurance broker here in Australia, who had a relationship with NCRA and that formed the connection between NCRA and Faraday.

The conclusion of Justice Hodgson was that since there was this custom within the industry and since AIRS was the placement broker and was local, was here in Australia, that therefore because of the custom the obligation was to pay the local broker and that that would be a satisfaction of the debt in Australia and made it a liability in Australia.

KIRBY J:   Now, could you give me the paragraph number?  You do not give the paragraph number in paragraph 4 of your additional submissions, where Justice Hodgson made this finding.

MR HOGAN-DORAN:   It is paragraph 34 of his Honour’s judgment.  Earlier on in his Honour’s judgment at paragraph 15 on page 343 of the appeal book his Honour had said that “undertaken to satisfy”, the word “satisfy” meant pay, and his Honour was looking for and did find that there was a practice, but in the light of what he had said essentially there was a contractual undertaking implied by the custom to pay the placement broker, who was a local broker here.

KIRBY J:   It is not all that clear.  Where does Justice Windeyer deal with this?  Which paragraph of his reasons?

MR HOGAN-DORAN:   Justice Windeyer did not need to decide this issue.

KIRBY J:   But did he deal with the evidence about a practice?  You pointed out that Justice Ipp applied standards of notoriousness, uniformity, reasonableness and certainty.

MR HOGAN-DORAN:   Yes.

KIRBY J:   Now, did Justice Windeyer refer to any of this?

MR HOGAN-DORAN:   Justice Windeyer did not need to decide this issue ‑ ‑ ‑

KIRBY J:   But did he deal with the evidence about a practice because you pointed out that Justice Ipp applied standards of notoriousness, uniformity, reasonableness and certainty?  Now, did Justice Windeyer refer to any of this?

MR HOGAN-DORAN: Justice Windeyer did not deal with it. Justice Windeyer did not need to deal with it because his Honour decided on the basis that section 31(4) was only additive to the general law position. The situs of the debt was in Australia because NCRA was only resident in Australia and did not need to go any further. But all of the evidence that was before Justice Windeyer was before the Court of Appeal and the argument was made again before the Court of Appeal.

KIRBY J:   If this was such an important aspect of Justice Hodgson’s reasoning one would have expected it to be exposed with a little bit more elaboration and in particular, by reason of Justice Ipp’s criticism of it as not meeting the standards that are required for a trade custom.

MR HOGAN-DORAN:   Yes, I understand that, your Honour, and I cannot say why it is that Justice Hodgson did not set out in greater detail ‑ ‑ ‑

KIRBY J:   Unless it is belt and braces and his Honour is just adding this in to make weight.

MR HOGAN-DORAN:   That may well be so.  I cannot answer that.  What was, in our submission, clear was that the evidence before the court did establish this custom and his Honour, Mr Justice Hodgson, appears to have concluded that there was that evidence.  His Honour, Mr Justice Ipp, came to a different conclusion but, as I set out in my written submissions, his Honour essentially relied on two pieces of evidence.  One was, with respect to his Honour, the wrong part of the evidence given by Mr Hedley in his affidavit.  His Honour referred to that part in Mr Hedley’s affidavit that dealt with not the payment of claims but the payment of premiums which is money going in the opposite direction.  The part of Mr Hedley’s affidavit that dealt with existence of the custom was quite unequivocal that there was such a custom.

Now, Mr Martin does in his evidence quibble with the existence of a custom but he does that in this way by saying that there were often circumstances – when I say often, in about 10 per cent of cases – where a request was made and acceded to that rather than payment being made to a local broker that the payment could be made either directly to the facultative broker – in the context of FC3A it would be the broker back in England who was originally engaged by Faraday – but that, in my respectful submission, is a misconception of what the custom was.

What matters, in my submission, is what would the position have been had there been no request and further agreement, if the parties had not separately agreed how the money was to be paid.  The evidence was, and Mr Martin did not quibble with this, that in those circumstances the practice was that the local or placement broker would be paid so on all of the evidence that was before the court, there was no evidence to quibble with the, if I can call it, default position which is the usual position when one is talking about implication of a customary term where there is silence by the parties as to what is to be done.

What is, if anything, is there a custom and the evidence was that there was a custom and that custom was for the placement broker to be paid.  Why that is so may be for commercial reasons.  It could be that the placement broker wants to be sure that their commission would be paid and they would take their cut from out of the claim that is being paid.  But, for whatever the reason, that was the custom.

Unfortunately, his Honour, Mr Justice Ipp, in one respect, dealt with the wrong part of Mr Hedley’s affidavit and in another respect, in my respectful submission, perhaps did not ask himself the right question and that question is, “What is the position where the parties are silent as to the specific obligations for the mechanism for payment?”

That evidence was, in my submission, quite clear that the custom was that the placement broker would be paid and the funds would then be remitted and that since AIRS, the placement broker in respect of contract FC3A was a local broker, that is located in Australia, the undertaking to pay the placement broker was an undertaking to pay an Australian broker. There was an undertaking to pay in Australia and that satisfied the requirements of section 31(4)(a)(i) since FC3A was a contract that relates only to a liability contingent upon an event that can happen only outside Australia, that is, it ensured property, mostly in the United States and around there, but it was a liability that the body corporate, that is NCRA, had undertaken to satisfy in Australia.

KIRBY J:   But if it came to it and we were required to consider this so‑called trade custom, we have a very flimsy foundation in the Court of Appeal’s decision for determining it and it really is not the province of this Court normally to try and work out factual questions for itself.

MR HOGAN‑DORAN:   I understand that, your Honour.

KIRBY J:   Not least because the primary judge did not think it necessary to do so and did not pass on it.

MR HOGAN‑DORAN:   I understand that, your Honour, and it is perhaps unfortunate from our perspective that his Honour Justice Hodgson did not go into greater detail as to the reasoning that led him to conclude what he did, but the conclusion is there and the evidence that was before him in this respect is the same as the evidence that is before this Court.

KIRBY J:   You do not have a notice of contention relevant to this point, do you?

MR HOGAN‑DORAN:   No, your Honour.  It is AssetInsure’s submission that there was no evidence of an undertaking.  That is the submission that they make.  It is in reply to that.  If your Honours are against us on that point, the alternate argument which is raised in our notice of contention is that “undertaken to satisfy” has a different meaning to the meaning ascribed by all of the judges in the Court of Appeal.  All three of their Honours – Justice Bryson by agreeing, but Justice Hodgson and Justice Ipp concluded that “undertaken to satisfy” meant essentially undertaken to pay and that the attention should be directed at what is the place to which a claim would be paid.

It is an alternate contention that “undertaken to satisfy” is not directed at the place to which payment is to be made of a claim but the place where the creditor in winding‑up would come to recover the debt. We say that for three reasons. The first is that if it means undertaken to pay the provisions of section 31(4) are easy to circumvent. Secondly, they are impossible to apply in many instances, and thirdly, if an alternate interpretation, the one urged on the Court by Faraday, is adopted, the anomalies identified by Justice Hodgson are eliminated.

I say, first, that they are easy to circumvent in this way. The liquidator has already identified that it would be possible simply by putting a stipulation in a contract that payment would be made outside of Australia to avoid the operation of section 31(4) where the business:

carries on insurance business both in and outside Australia –

because in section 31(4)(a)(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;

Indeed, even if we had a domestic insurer that operated throughout Australia and had no overseas operations, a canny lawyer might advise that company to set up one small branch in some small out of the way location, run a small insurance business there and start stipulating in contracts for payments to be satisfied by, say, paying into a trust account in that offshore branch.  That would be an easy way for a canny lawyer to advise the insurance company to avoid the prudential requirements as to where assets in Australia – as to where assets should be kept.  Of course, back in section 29, there is a requirement that they have assets, but it is only where the business – I am sorry, I withdraw that.

HAYNE J:   Well, can section 29 be understood as making these requirements?  An Australian incorporated body must have certain adequacy of requirements assessed by comparing all its assets with all its liabilities.  So much seems to follow from 29(1)(b), does it not?

MR HOGAN-DORAN:   Yes.

HAYNE J:   A non-Australian body and an Australian incorporated body must compare their Australian assets with the liabilities created from doing business in Australia.  That seems to be one view of the effect of 29(1)(c) plus 31(4), seeing 31(4) as hinged upon doing business in Australia. 

MR HOGAN-DORAN:   Yes.

HAYNE J:   Now, if that is the proper approach, why do you expand the list of liabilities to be taken into account, in particular by non-Australian bodies, to include those that do not arise from doing business in Australia in accordance with the authority that the Australian authorities grant?

MR HOGAN-DORAN:   Is your Honour asking me if an Australian body is doing business with foreigners or ‑ ‑ ‑

HAYNE J:   No, a non-Australian body.  Take the case of a non-Australian incorporated body doing insurance business in Australia in accordance with an authority granted by APRA.

MR HOGAN-DORAN:   Yes.

HAYNE J:   Why would you include in the liabilities that are to be taken into account in assessing capital adequacy liabilities that do not arise from doing business in Australia when that is the hinge about which 31(4) turns?

MR HOGAN-DORAN:   If it is doing business in Australia and it issues a policy but the policy is perhaps issued to a foreigner, as it would be in the case of NCRA issuing a policy FC3A in relation to Faraday, then that is a liability in Australia.  The contract would be made here or the policy was issued here and therefore that brings in what might at first glance appear to be a foreign liability and provision would have to be made for that as that is a liability in Australia.  But if “undertaken to satisfy” means undertaken to pay, then if the first statement is right, that that is a liability in Australia, then an insurer can circumvent that requirement by placing its contracts stipulations as to payment offshore.

It defeats the purpose of section 31(4), and if one looks at, in particular, subparagraph (b), one sees what is perhaps an attempt at an anti‑avoidance clause, trying to capture the sort of attempts that a body corporate could engage in to try to circumvent (4)(a) by, say, arranging for the contract to be made offshore or issuing the policy from some offshore location. It is in such broad terms that one might read (b) as saying that if an Australian company approaches this business to say, “We would like to have you reinsure our risk” and that business then says, “Okay, well, from now on we’re going to do everything offshore”, that because the negotiations began by an approach in Australia that would be enough and that anti-avoidance ‑ ‑ ‑

HAYNE J:   Yes, which reinforces the view, I would have thought, that 31(4) hinges about the notion of doing business in Australia.  You do business by writing contracts, negotiating contracts or the like, and on that there are grafted some exceptions, narrow exceptions, to take out those policies, those liabilities which are to be excluded from the notion of doing business in Australia.

MR HOGAN-DORAN: Yes, and one approach, your Honour, to interpreting section 31(4) is that it is a belts and braces provision designed, especially in (4)(a), to capture all the ways in which the Australian operations work, that is, they make contracts, they issue policies, they accept proposals, and the three different incidents are to be read together rather than separately. You do not look at the private international law rules to see if the contract is made there, but you read those three together and say (4)(a) is saying, “Have you written the business in Australia?” That is out of the Australian branch, let us say. In that sense, one simply asks, “Did the Australian branch of the foreign insurer write the business?” and that makes it a liability in Australia.

HAYNE J:   The notion of location of the debt, according to conflicts principles, is foreign to the terms of 31(4).

MR HOGAN-DORAN:   Except that if the business was being written out of the Australian branch, then, as with a foreign bank having a local branch with the accounts here, so would the situs of the debt be here in Australia.  If one says (4)(a) is saying, “If you have written the business out of the Australian branch, that business is a liability in Australia”, whether the person who you have reinsured is a local, an Australian, or a foreigner.  Then there the question is, “Do any of these narrow exceptions approach?”  That would be a very pragmatic way of dealing with it, and we do deal with that as what we call the third approach in paragraphs 18 to 24 of our written submissions.

It is very practical and pragmatic in this sense, that all one has to ask in respect of an insurance business is, “Where was the business written?”  One of the advantages of that is that the insurance company does not have to inquire, “What is the residence of the party that we have reinsured?”  The question of their residence is often a difficult question and it becomes all the more difficult when that person might move around.  There are persons who may appear to be Australian residents but will swear until they are blue in the face to the Tax Commissioner that they are not resident.

It cannot be a commercial interpretation, in our respectful submission, to say that to take an interpretation of section 31(4) that says to the reinsurer, or the insurance company, you have to know at any one point in time in order to meet the prudential requirements of the Act, where are your reinsureds located, what is their residence.

The only thing that in a commercial way the insurance business can do is look at their books and say, “Where did we issue that policy?  Was it issued out of our Paris branch?  Was it issued out of our Sydney branch?” just as a bank would look at their account holders in each of their branches around the world.  That would be a simple pragmatic approach.  The question then is, “Do any of these exceptions apply to contract FC3A?” and we say it is not because if one is looking at, in terms of the operations, the words “undertaken to satisfy” is directed at where would the customer be going to have their claimed satisfied?  Would they go to this branch or that branch?  In particular, if your Honours look at subparagraph (ii) there:

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 -

The words “undertaken to satisfy” immediately follow a point of distinction as to where the operations are.  In my respectful submission, that is a clue that “undertaken to satisfy” – the word “satisfy” has been chosen rather than “pay” which could have easily been chosen, because what the legislature is directing its attention to is which operations is the source of this liability.  Was the policy issued out of the Paris branch or the Sydney branch?

From a regulatory perspective it is very easy, both for the insurer and for APRA, to look at the insurer’s book and to say, “Well, where is the account held, where was the policy issued, which branch issued it?”  If you issued it in Paris to a Parisian resident, well, that is not a liability in Australia.  If you issued it in Sydney to a Parisian resident, that is a liability in Australia because that Parisian resident will come to Sydney to satisfy the claim.

GLEESON CJ:   The weight of your argument about the meaning of the expression “undertaken to satisfy” seems to be thrown on the word “satisfy”, but what about the word “undertaken”?

MR HOGAN-DORAN:   Yes.  Perhaps I could answer it in this way, your Honour.  If the company only had one location the contract would simply say, “We have to pay your claim”.  It is implicit that the place from which we would pay your claim is Sydney, because it only has one location.  If the company had more than one location one would have to either look for an explicit term and it could be, for example, that it would be a term that said, “Claims are to be made to the head office in Sydney”, or it is implicit from where the account is being held.  If the Parisian branch has issued it and it said, “Well, contact us if you have a claim.  We will process – we will recover the premiums and we will deal with any claims that you may have”, that is an indicator that the undertaking is that the Parisian branch will deal with your claim.  The word “undertaken” is given slightly broader meaning than expressed contractual stipulation as to the mechanism for the place of payment.

GLEESON CJ:   I am not suggesting there is anything wrong in this but the reasoning so far seems to have treated this legislative scheme on its own merits, as it were.  Is there any basis for any suggestion that it was intended to fit in with regulatory schemes in other countries?

MR HOGAN-DORAN:   I would suggest that it is in this sense, your Honour, and it is set out in our written submissions, that there is a potential for this legislation to have an extraterritorial effect, and there are in 31(4)(a)(i) and (ii) indications that the legislature was looking to put some limits on the extent to which it would have an extraterritorial application.  The premise of 31(4)(a)(i) where:

a liability is contingent upon an event that can happen only outside Australia –

so property is being insured that is entirely foreign and that is to be excluded from the concept of a liability in Australia unless it has been undertaken to satisfy in Australia.  Again, in subparagraph (ii), where the business in an international business and there is a concern that we might be regulating the activities of that business in another jurisdiction, then it is excluded unless it relates to a liability that, again, “the body corporate has undertaken to satisfy outside Australia”.

I would submit that there is a concern that it is possible that an insurance company might end up in the position where it has to make a capital provision in Australia for a liability that is overseas because of the Australian law and in its operations overseas, be required by local law to also make a capital provision for that loss, for if there was a similar piece of legislation in, say, France in respect of the Parisian branch’s claim in respect of operations in France, then it may be that in respect of the one liability two sets of capital, twice the value of that liability, have to be maintained somewhere.

That would be an economically inefficient outcome and the legislature in that respect is aware that there must be some limits. It was attempting to gather in all of these liabilities and prevent the insurance company avoiding the operation of section 31(4) by various devious means but is also aware that, in attempting to reach beyond the borders of Australia for conduct that occurs there, there is a danger that there might be some overreach.

GLEESON CJ:   But suppose an Australian company carrying on the business of household insurance wrote business insuring houses in New Orleans, do we know anything about what regulatory requirements there might be in Louisiana corresponding to section 29 of our Insurance Act?

MR HOGAN-DORAN:   We do not.  I can say from the Bar table that when we were before his Honour, Mr Justice Windeyer, there was some reference in submissions to the American model law – there is a model law in the United States that is picked up in many states as to adequacy provisions for insurance companies. 

It was referred to in submissions that we made before his Honour Mr Justice Windeyer but they are not before this Court and they were not made again before the Court of Appeal but ‑ ‑ ‑

GLEESON CJ:   Where could we get a look at that American model law?

MR HOGAN-DORAN:   We could obtain a copy of that and send that to your Honours. 

GLEESON CJ:   Thank you.

KIRBY J:   Can I say, prompted by what the Chief Justice has just been asking you and by something Justice Hayne told me from his researches this morning – I will let his Honour develop it, but I want to put this thought to you - it seems that there is an UNCITRAL treaty or agreement which deals with problems of international corporate insolvency that has been studied in Australia and apparently a discussion paper proposing that Australia should subscribe to it is to be published early in 2006. 

Now, we have not been told about these things from the Bar table but let all that be assumed and this is my thought, it is not Justice Hayne’s, if that be the case, why is it not a correct approach for this Court to take to a provision such as section 31(4) to say if there are to be exceptions which privilege a particular group of parties as nominated in the section and if the whole of this issue, fitting as it does into the international capital market is going to be considered by the federal authorities and perhaps by the Federal Parliament in the near future and if this is an international matter of concern, why would this Court invent other possibilities that the Parliament has not stated in section 31(4) and not take the view that what it has said in 31(4) is, if not a code, at least everything that the Parliament was concerned to deal with leaving it to the Parliament in 2006 or whenever it gets around to it, to fix this thing up for itself?

I mean why is that not a correct approach to the construction of the section given this new background?  When you get into this Court you have to think in terms of the way in which the law is developing and this is apparently a matter which is under development in UNCITRAL and in this country.

MR HOGAN-DORAN:   It may be – although I do not have the direct answer to your Honour - that it is a moot point because the provisions have been amended since the General Insurance Reform Act which substantially replaced what was section 31(4) with the new section 116A but I have to think about whether or not the new ‑ ‑ ‑

KIRBY J:   But that was in a very limited respect.

MR HOGAN-DORAN:   Yes. 

KIRBY J:   That was just confining it to general insurance and, in a sense, that was in the direction that one might expect this to happen, namely it is protecting consumer insurance which the Insurance Contracts Act was also originally designed substantially to deal with.  It is saying this is little insurance and we are going to deal with that and give them a privileged situation.

MR HOGAN‑DORAN:   Yes, and that does, your Honour, reflect what is going on at the international level in terms of throwing upon corporate bodies more responsibility to look after themselves.  It reflects recent attempts at The Hague conference on private national law, for example, to deal with choice of jurisdictional causes where corporations are involved and hold them to those agreements but not to attempt to deal with consumers.

KIRBY J:   But we have an ambiguity here, and the question is does this Court endeavour to solve the ambiguity or does it leave it to Parliament effectively to solve it and just deal with the matter on the basis that the privilege is going to be limited to those matters that the Parliament has taken the trouble to spell out.

MR HOGAN‑DORAN:   The two answers I have to that are, first, your Honour, that between the first, second and third respondents, the only addition that we see being required to be made is that the situs of the debt, being Australia, that is, fall back on the general law.  It is not a revolutionary change, but the second answer is that if your Honour takes a view that it ought to be treated as a code that comes to our alternate submissions about how do the words “undertaken to satisfy” be applied if it means pay, or be interpreted if it means the place of recovery.

GLEESON CJ:   What do you say is the relevant undertaking in this case?

MR HOGAN‑DORAN:   The undertaking is in the context of FC3A.  We would say if “satisfy” means pay, the undertaking is to pay the placement broker who is a local broker and that makes it liability in Australia.  If “undertaken to satisfy” - “satisfy” means recover, the word “undertaken” means that we have agreed that either expressly or by implication that this is the place that you should look to to recover your claim.

KIRBY J:   Yes, but the problem with that is that it is “undertaken to satisfy” in Australia.  It is “in Australia” that the satisfaction is to be effected, not the undertaking given.

MR HOGAN‑DORAN:   Yes, but if “satisfaction” has the same meaning as “recovery”, then if in the case of NCRA it is only located in Australia then the place of satisfaction, the place of recovery would only be in Australia.  If the business has multiple branches and its business has been written out of different branches in different countries the question would be similar to the question of what is the situs of a bank account.  Is it the place to recover your funds from the account?  Is it the branch over there or the branch back here in Australia?

HAYNE J:   If it is right to say that the addition you wish to make is to include within the class those liabilities where the situs of the debt is Australian, does it not follow that the references to undertakings to satisfy in Australia in (4)(b)(ii) are unnecessary references, because by hypothesis the company is a resident in Australia, it is doing business in Australia?  If it has undertaken to satisfy in Australia, the situs of the debt would be Australia, would it not?

MR HOGAN-DORAN:   The words are not otiose because if the body corporate does carry on insurance business inside and outside Australia the place of satisfaction may be a foreign branch.  I am here essentially extending the analogy from one type of financial industry institution, the bank, to another financial industry institution, an insurer ‑ ‑ ‑

HAYNE J:   But where there is an undertaking to satisfy in Australia, the situs of the debt is Australian, is it not?

MR HOGAN-DORAN:   Yes.

HAYNE J:   Does that not make (4)(b)(ii) unnecessary?

MR HOGAN-DORAN:   Yes.  If your Honours were to take that interpretation, the only remaining issue is should there be a change to the private international law rules as to the situs of the debt.  That is a position contended for by the appellant.  It has been dealt with at every level.  His Honour Mr Justice Windeyer rejected it.  His Honour Mr Justice Ipp dealt with it and rejected it.  It is certainly against orthodoxy, and given that the origins of the law are ecclesiastical perhaps, it is even heretical.  We deal with that issue in some detail at paragraphs 44 to 55 of our written

submissions.  Unless there is anything further, your Honours, that concludes my submissions.

GLEESON CJ:   Thank you, Mr Hogan-Doran.  Yes, Mr Epstein.

MR EPSTEIN:   Your Honours, we appear for NC RE, which is another company in the New Cap group of companies.  Like the first respondent, NCRA, NC RE is a company which is itself in insolvent liquidation.

NC RE has a claim against NCRA as an ordinary unsecured creditor for a very substantial amount and in that capacity NC RE was joined as a party to these proceedings which initially originated in an application for directions by the liquidator coupled with applications for declaratory relief which resulted in the proceedings which remained about the remaining questions which have come to this Court.

So, while NC RE was not a representative party in the strict sense, in a sense it was chosen to articulate the interests of ordinary unsecured creditors on the various questions which were brought before the Court, and to the extent those questions remain it is in that capacity which it appears, and insofar as Mr Macfarlan is successful in his application on the question of costs for some more favourable than usual treatment on the basis of the matters that he raised with respect to his client, similar, more beneficial treatment on the question of costs would be sought on behalf of my client. 

As an ordinary unsecured creditor it is our position on both questions which are still in dispute to contend for an application of the statutory provisions or interpretation of those provisions which confines them to what, we submit, to be their underlying purpose or object and both questions involve a form of priority in the distribution of funds in an insolvent winding-up.

Section 562A is squarely a form of priority within that part of the companies legislation. Section 116(3) of the Insurance Act, as it interacts with section 31(4) operates in effect as conferring a statutory priority in favour of the creditors who have the benefit of those sections. For the purpose of this appeal, with respect to both matters, we would respectfully ask the Court to bear in mind the legitimate interests of ordinary unsecured creditors in seeking at least some recovery of their claims in the winding-up without running the risk of those prospects of recovery being swallowed up by priority payments.

We would respectfully submit that your Honours should bear in mind that any enlargement of the statutory priorities beyond what their terms legitimately call for is not an enlargement which would come without cost, in the sense that every extra dollar which is directed in favour of priority creditors is a dollar out of the pockets of the non-priority or ordinary creditors.

So if one looks at the terms of the sections in the companies legislation, sections 562 and 562A, you will observe that those sections are expressed to override even the section 556 priorities that the traditional scheme of priority in insolvent windings-up so, for example, where section 556 confers priority in favour of employees’ claims, to the extent that section 562A for present purposes is interpreted in a broad fashion, that will necessarily operate to the detriment not only of ordinary unsecured creditors but even of the priority creditors in section 556, including the company in liquidation’s unpaid employees, et cetera. 

GLEESON CJ:   Although the issue of construction of section 31 presents itself to us via section 116 as a priority issue, in its ordinary practical effect it would present as an issue in relation to the operation of section 29, would it not?

MR EPSTEIN:   Yes, your Honour.

GLEESON CJ:   Absent insolvency, it would be the question of the capital requirements necessary to satisfy section 29 for the purpose of carrying on business that would usually arise or give rise to this question which has been described as a question whether section 31 is a code.

MR EPSTEIN:   Yes.  We entirely accept that and submit that the primary purpose of the definition of “liabilities in Australia” is for the purposes of that part of the Insurance Act relating to the prudential regulation of insurance companies and ‑ ‑ ‑

HAYNE J:   In that respect it is in part a circular question, is it not?  Go to 29(1)(c) – 29(1)(c) requires satisfaction of the greatest of three requirements, a fixed money sum, a sum calculated by reference to “premium income in Australia”, a concept not I think otherwise defined, is it?

MR EPSTEIN:   I do not believe so.

HAYNE J:   But then if the third criterion is engaged, only “15% of its outstanding claims provision’ becomes self referential because it is “outstanding claims provision in respect of liabilities in Australia” so regardless of whether you take a large or a narrow view of “liabilities in Australia”, the requirement in 29(1)(c)(iii) may be affected but the other two are unaffected.  What, if anything, does that say about what you do with 31(4)?

MR EPSTEIN:   It indicates, in our submission, that the interests of prudential regulation are not greatly assisted by a wide interpretation of the expression “liabilities in Australia” because ‑ ‑ ‑

GLEESON CJ:   That may be right, but the expression “liabilities in Australia” first occurs in the opening words of paragraph (c), that is:

a condition that the value of the assets in Australia of the body corporate shall at all times exceed the amount of its liabilities in Australia by not less than –

So paragraphs (i), (ii) and (iii) are in there for the purpose of comparison with the amount by which the value of the assets exceeds the amount of liabilities in Australia.

MR EPSTEIN:   Yes.  The most compelling consideration in interpreting these sections, we suggest, is the consideration of clarity and certainty from the point of view of the regulator and of the insurers who are required to report their compliance with these various requirements and as it is necessary for them to do so by reference not only to their liabilities in Australia but by reference to the totality of their liabilities.  A wide reading of the expression “liabilities in Australia” does not greatly advance the interest of the prudential regulation of the insurance industry. 

To the extent that one can reasonably infer what the underlying legislative purpose or object is, it apparently being primarily a concept which has its application with respect to Part III of the Act rather than with respect to section 116, we contend that the interests of certainty and clarity point strongly in the direction of a reading of section 31(4) as an exhaustive definition of “liabilities in Australia” insofar as those liabilities arise under policies of insurance.

CRENNAN J:   Are the returns which are necessary to be made in relation to capital adequacy the subject of regulation?

MR EPSTEIN:   You mean delegated legislation, your Honour?

CRENNAN J:   Yes.  Is it possible to see the format of the return because it is in fact covered by a regulation?

MR EPSTEIN:   I just cannot recall.  There obviously are prescribed forms but I do not recall from where those prescribed forms originate, whether there are ‑ ‑ ‑

KIRBY J:   It would be difficult to get them.  They are statutory instruments, one would think.  They are made under an Act.

MR EPSTEIN:   Yes.  If we may, we will give your Honours a note in answer to that question by Justice Crennan.  Returning to the proposition I was advancing about the overall statutory objectives of the interaction between insolvency and the various statutes we have under consideration, we would respectfully reiterate Mr Coles’ submission about the underlying importance in the administration of the insolvency laws of due recognition being given to the pari passu principle, that of equality amongst creditors in the division of the insolvent’s assets in his or her bankruptcy or its winding‑up, that fundamental principle of the law of insolvency not resting merely on the statutory basis, to which Mr Coles referred, but its foundation in the common law of insolvency going back to the days of Lord Mansfield and even before then.

GLEESON CJ:   Could I just ask you another question about section 29(1). I am not sure whether there is anything in the explanatory material that throws light on this, but what was the legislative purpose of dealing separately with paragraphs (b) and (c)? Another way of putting the question is to say why did they not just eliminate the introductory words of (b) and make the same condition apply to bodies corporate, whether incorporated in Australia or not, if they want to carry on business in Australia? Or, to put it another way, what is the point of (c) except by reference to 116(1), (3)? Paragraphs (b) and (c) are otherwise identical, are they not?

MR EPSTEIN:   Yes.  I am not sure I really quite grasp your Honour’s question.

GLEESON CJ:   Well, suppose you just had paragraph (b) that said “a condition that the value of its assets”, et cetera, and that that applied to a body corporate whether incorporated in Australia or not incorporated in Australia.

MR EPSTEIN:   I see.  In my submission, that is just a ‑ ‑ ‑

GLEESON CJ:   I can understand the point of (c) by reference to section 116(3) as a regulatory requirement, but just at the moment I am at a bit of a loss to understand why they have dealt separately with (b) and (c) in the way they have.

MR EPSTEIN:   I see, yes. 

HAYNE J:   Can I offer a suggestion?

MR EPSTEIN:   I would be obliged.

HAYNE J:   I thought you might.

KIRBY J:   Be careful.

HAYNE J:   Timeo danaos.  Is not the purpose of (c) twofold:  first, to deal with the foreign corporation and oblige it to segregate its Australian business and the Australian regulation is directed to the regulation of the Australian business of the foreign body.  That is part of it, is it not?

MR EPSTEIN:   I am sure that is right, yes.

HAYNE J:   And is it not also directed to the Australian business that has international affairs and requires such a body also to regulate its Australian business in a particular way, and when I speak of Australian business, again I return to this notion I put earlier, that the relevant hinge found in 31(4) is doing business in Australia and doing business in a practical, commercial sense, if we are going to inject notions of practicality and pragmatism, by writing contracts, negotiating for contracts and the like, and that the Australian regulation is directed to dealing with Australian companies in two ways.  All your assets compared with all your liabilities must be adequate.  You are an Australian company, you will satisfy that.  But for the foreign company that comes here and is authorised to operate here, you segregate your Australian business and we will look at that.

MR EPSTEIN:   Well, all of that is perfectly correct and I fully accept it, with respect, but the Chief Justice’s observation I interpreted to be directed to ‑ ‑ ‑

GLEESON CJ:   My question is, if were not for section 116(3), what would you be achieving by requiring a foreign corporation to separate its Australian business from its ex‑Australian business? What is the point of the separation, if not that provided by section 116(3)?

MR EPSTEIN:   The point is that a foreign insurer to be entitled to conduct insurance operations in this country has to satisfy the regulator by observing the provisions of Part III of its financial ability, both within Australia and with respect to its overall operations.  That consideration applies both to Australian insurers which operate internationally and to foreign insurers who operate internationally, including within Australia.

HAYNE J: Well, it marches in step with what you find, for example, in Part IV, section 40. Section 39 in Part IV brings back in, amongst other sections, section 31, but section 40, in the accounting records provision, obliges a body corporate authorised under the Act to:

(a)      keep such accounting records . . . with respect to:

(i)       its insurance business and other business carried on by it in Australia; and

(ii)      where the body corporate is incorporated in Australia, any business of insurance and all other business carried on by it outside Australia ‑ ‑ ‑

MR EPSTEIN:   Yes.

HAYNE J:   The Australian regulation is directed to dealing with Australian companies and with those others who transact business here in respect of their transactions here.

MR EPSTEIN:   Yes. Section 29 is not directed to improving the position of creditors who get the statutory priority under section 116(3). It is directed to laying down conditions for the operation of insurance operations in Australia under which the community can have confidence that insurers’ financial positions are such that they will continue to be able to meet claims made against them by insureds.

GLEESON CJ:   The liabilities referred to in section 116(3) are not limited to liabilities arising from insurance business, are they?

MR EPSTEIN:   They are not, no.

GLEESON CJ:   Are the liabilities referred to in section 29 limited to liabilities arising from insurance business?

MR EPSTEIN:   No.

GLEESON CJ: Section 31(4) is, however, confined to liabilities arising from insurance business, is it not?

MR EPSTEIN:   Yes.

GLEESON CJ:   Then why would you treat section 31(4) as a code in relation to sections 29 and 116 if section 31(4) is dealing with a narrower class of liability?

MR EPSTEIN:   It deals with the case of liabilities arising under contracts of insurance in a way indicative of a codification in the sense that (4)(a) deals with the cases of contracts of insurance made in Australia and (b) deals with the case of contracts of insurance made outside Australia.

GLEESON CJ:   But the point of ambiguity with which we are trying to grapple is whether the statement in 31(4) that a certain kind of liability is a liability in Australia means that that is the only kind of liability that is a liability in Australia. That is the point with which we are trying to grapple. The liabilities about which 31(4) is talking are insurance liabilities only. Is the argument a rather more narrow argument that section 31(4) is a code concerning insurance liabilities?

MR EPSTEIN:   Certainly.

HAYNE J:   You have accepted a number of premises for this chain of reasoning which, at least for my part, I do not.  You have accepted the premise that 116(3) deals with all liabilities.  Relevantly, it seems to me, it does not.  It:

shall not be applied in the discharge of its liabilities other than its liabilities in Australia unless it has no liabilities in Australia.

A possible view about 116(3) is that it is saying that your insurance liabilities, and only your insurance liabilities, are to be met out of assets in Australia and they are to be met first in priority, and that would be a sensible form of priority to afford in an insurance Act, which is not a general insolvency winding-up Act.

MR EPSTEIN:   The decision of Justice Windeyer, not the subject of appeal, rejected that view and as the matter has come up the chain the notice of appeal, if your Honours will observe at page 414 of the appeal book, put as the ground of appeal here that:

The Court erred in holding that for the purposes of sec 116 of the Insurance Act 1973 (Cth) “liabilities in Australia” are exhaustively and exclusively defined in sec 31(4) of the Insurance Act 1973 (Cth), insofar as such liabilities arise under contracts of insurance.

So it has been accepted in the courts below that claimants such as my client, not a claimant under a contract of insurance, are potentially within the advantageous position of section 116(3) if in this case, under the general law, its liability is to be treated as a liability in Australia.

HAYNE J:   Just so.  You contend that 116(3) is to be read as including among those who may resort to assets in Australia those whose liabilities are non-insurance liabilities.

MR EPSTEIN:   Yes, your Honour.

HAYNE J:   Yes, I understand that.

MR EPSTEIN:   I am sorry.  I must have been at cross‑purposes with you.

HAYNE J:   But the area for debate includes – I do not know whether it is confined to – whether the priority afforded by 116(3) is a priority in respect of certain kinds of insurance transaction.  Now, that would not be a surprising result in an insurance Act.  You say, I assume, nor is it surprising that the Insurance Act should make special provision for creditors of all classes where the company in question is an authorised insurer.

GLEESON CJ:   Take, for example, the most famous winding‑up of an insurance company in Australia in recent memory – Standard Insurance which went into insolvency in the 1960s, a New Zealand corporation carrying on business as an insurance company mainly in Australia which went into liquidation as a result of a series of bond transactions or underwriting transactions ‑ not insurance underwriting ‑ entered into by its Australian management.

MR EPSTEIN:   Yes.

GLEESON CJ:   Now, presumably the prudential requirements of section 29(3) would be meant to include that kind of liability.

MR EPSTEIN:   Certainly, because the prudential requirements directed the overall solvency of the company not – one cannot isolate the insurance operations of the company and disregard the balance of its non‑insurance operations when one is concerned with the financial viability of the company.

HAYNE J:   That is an argument for folding back (c) into (b) in 29(1) and it is not folded back.  You have two requirements.  If the only concern is financial viability, you compare assets of all kinds with liabilities of all kinds.  That is what determines financial solvency.

MR EPSTEIN: What the legislation is concerned with is both the question of the overall financial viability of the entity and the financial viability of its insurance operations. In that sense, the cumulative series of conditions prescribed by section 29 are a form of belt and braces protection to the community’s interest in the financial viability of countries carrying on insurance business in this country.

GLEESON CJ:   Was this Act enacted pursuant to some Law Reform Commission report or ‑ ‑ ‑

MR EPSTEIN:   Well, it seems not.  If one reads the second reading speech there is no indication there that its origin lay in anything of that nature.

GLEESON CJ:   It was actually enacted not a great length of time after the collapse of the Standard Insurance Company. 

MR EPSTEIN:   There is reference in the debate - I do not think in the second reading speech - to some notorious collapses in the insurance industry, so obviously that was a notorious matter.

GLEESON CJ:   I only mention it because that was an example of a collapse of an insurance company incorporated in New Zealand that was carrying on its main business in Australia.  It caused particular hardship because it had partly paid‑up shares.

MR EPSTEIN:   As we point out in our submissions the financial collapse of insurers is invariably going to give rise to public concern and concern on the part of lawmakers.  What may be present in our minds today is the HIH/FAI collapse but the cases which have some arguable bearing on section 562A include cases involving Dominion, Saltergate, Palmdale, which were all insurance collapses which preceded by just a few years the 1992 introduction of section 562A, and there are a few other names that one may remember from that period that are referred to at least in the case law cases, companies like Bishopsgate, Northumberland, Occidental Life and Regal so it has been a fairly common feature of the insurance industry in Australia that ordinary policyholders have suffered because they have held policies with insurance companies which have gone into insolvent liquidation.

As your Honour Justice Gleeson points out, that was a feature of the 60s, it was a feature of the late 70s and early 80s and it has recurred again in recent times with HIH and FAI.  What is something of a novelty is the financial collapse of reinsurance companies and it is really for that reason, we suggest, 562A should be read as directed to the mischief of the problem of the collapse of direct insurers rather than reinsurers.

That takes me a bit off my intended path. In our submissions, at paragraph 6 we submit that it is a very strange result reached by the majority of the Court of Appeal to hold as they did that the liability arising under the relevant policy of insurance FC3A fell within the specific exclusion laid down in section 31(4)(a)(i) and yet notwithstanding its express exclusion from the concept of liability in Australia within the terms of the section is nonetheless to be regarded as a liability in Australia by application of some different and inadequately articulated test of what may or may not constitute a liability in Australia with respect to liabilities arising under policies of insurance.

So if I may just take your Honours back to what Justice Hodgson ultimately held at appeal book 348.  To some extent the argument directed to the notice of contention, et cetera, this morning, is in point here.  What his Honour held here, and what Justice Bryson agreed with him in saying, was that the “liabilities under this policy did not fall within” – and it is obviously mistyped – “31(4)”.  He means here it fell within the exclusion 31(4)(a)(i) with respect to the words of that subsection not being a liability that the body corporate has “undertaken to satisfy” in Australia.

So his Honour’s holding is that the reason the liability under this policy is not a liability in Australia within the meaning of the section is because he considers that it is not a liability that NCRA had undertaken to satisfy in Australia.  To the extent that submissions were put at this level, that a contractual term required satisfaction in Australia by payment to the local broker, his Honour’s holding is contrary to that submission.

GLEESON CJ:   Yes.  In paragraphs 33 and 34 - I think this may be the answer to a question I raised earlier with Mr Hogan-Doran – Justice Hodgson seems to have said FC3A, or liabilities under FC3A, do not fall within 34(1).

MR EPSTEIN: Section 31(4). This is what he means.

GLEESON CJ:   I am sorry, do not fall within 31(4).  However – then he says what he says at paragraph 34.

MR EPSTEIN:   Yes. So if his Honour had regarded payment to the local broker as being a contractual term applicable to this policy, his finding would have been to the reverse and he would have said that the liabilities under the policy do fall within section 31(4).

GLEESON CJ:   Why would he say the policies are liabilities in Australia because of this practice of the brokers, instead of saying the policies are liabilities in Australia because this is an Australian company resident in Australia?

MR EPSTEIN:   Well, his Honour rejected the argument that principles of private international law and questions of the place of residence of the debtor were determinative.

GLEESON CJ:   I see, this is the practical approach.

MR EPSTEIN:   Yes.

GLEESON CJ:   So he said, “I reject the argument that 31(4) is a code, but I also reject the argument that you determine this according to” ‑ ‑ ‑

MR EPSTEIN:   Pragmatic considerations.

GLEESON CJ:   No.  “I reject the argument that you determine it according to principles of private international law and residence of the debtor, but” – but what?

MR EPSTEIN:   Paragraph 29 of his judgment includes this reference to pragmatic determinations so it includes his rejection of private international law rules.  It lays down the test which is not really a test as has been discussed of the pragmatic determination and his application of that supposed test in 33 and 34 is to reject the argument that FC3A liabilities fell within the section, thus rejecting any argument that the contract required payment to the local broker, rejecting, one must assume, the argument that there was an industry custom which had been established giving rise to an obligation and a correlative right for payment in Australia. 

No express provision of the policy required payment in Australia and it was not established and perhaps not argued that any term should be implied into the contract by past practice and his Honour’s approach to it in 34 was not to explicitly express any view with respect to industry custom but refer to the practice applicable to this policy so his Honour’s findings about practice are solely the practice applicable to this policy, not industry custom and from what I suggest to be rather flimsy foundation go from the practice generally applicable to this policy as it operated in practice and come to the pragmatic determination that the liabilities under policy could fairly be regarded as liabilities to be met in Australia which, in our submission, is an undesirably loose approach to the way in which this legislation should be interpreted. 

For the reasons Mr Macfarlan put forward, we suggest section 31(4) is exhaustive for insurance liabilities but for it not to be so, there has to be a test which is capable of adequate formulation for what are liabilities in Australia under contracts of insurance going beyond the terms of section 31(4). The only realistic possibility is the private international law situs test which Justice Windeyer accepted but was rejected by all members of the Court of Appeal and for the reasons set out we submit this Court should likewise reject it.

The submissions at paragraph 8 make the point that the majority of the Court of Appeal’s rejection of the exhaustive nature of section 31(4) are principally stated to be based upon what are said to be anomalies in the operation of section 31(4) as it may play out in different scenarios. We submit that an anomalous non-exhaustive definition is, as Justice Hodgson apparently regarded the section, not really to be treated as a great improvement on an anomalous exhaustive definition. At all events, we submit that what were characterised as anomalies by the majority of the Court of Appeal were not truly very anomalous matters but were really possible circumstances which could arise in very exceptional cases.

The first anomaly in paragraph 10 of the submissions is one which arises in the unusual circumstances that a company carries on its business only in Australia but, nonetheless, undertakes an occasional transaction outside Australia which is so occasional as not to constitute the carrying on of insurance business outside Australia.  In that exceptional case, the way the section works out is to exclude the liability under that rare transaction from the definition of “liability in Australia”.  We submit that that is not a highly anomalous circumstance.

The second suggested anomaly is also one which arises only in a very rare case where an insurer undertakes in Australia to satisfy its liability, the undertaking occurs in Australia but it is to be performed outside Australia, and that falls within the statutory exception of 31(4)(a)(ii) which we suggest is not particularly extraordinary, that that is not to be regarded as a liability in Australia nor, as we say in 12, is there any great anomaly in there not being a liability in Australia where the insurer undertakes its liability not in Australia, nor do any negotiations take place in Australia. 

GLEESON CJ:   How long do you expect to require to complete your argument?

MR EPSTEIN:   Twenty minutes or so, your Honour.  I am sorry, I am taking a bit longer than I thought.  So for that reason we ‑ ‑ ‑

GLEESON CJ:   Just before you go any further.  Mr Goodman, you might care to think about this over the next 20 minutes.  We are not intending to force this course of action on you, but we notice that Mr Macfarlan is somewhere else.  If you would prefer for your side to have the opportunity to put your reply in writing, we would be happy with that.

MR GOODMAN:   Thank you, your Honour.

GLEESON CJ:   You think about that.  Yes, Mr Epstein.

MR EPSTEIN:   As we say in 14, we contend for Justice Ipp’s approach.  I think the balance of what I have said in writing has been sufficiently covered in argument up to paragraph 18, which deals with the possibility that 31(4) is not an exhaustive definition.  In that respect, we refer to the judgment of the then Acting Chief Justice Sir Leo Cussen in a cross‑border insolvency situation arising in those days where a New South Wales incorporated company was the subject of a local winding-up in Victoria and the provisions relating to insurance companies in Victoria were under consideration by the Acting Chief Justice.

The appendix to the submissions sets out a legislative history referring to the legislation under consideration by Justice Cussen and its predecessors.  As has been pointed out, it is not a complete legislative history but is as complete as I was able to make it from the resources available at the Law Court’s library, so Justice Hayne’s observation about other legislation from South Australia and New Zealand and the like I was not aware of, but in all events ‑ ‑ ‑

HAYNE J:   Well, it does seem from the second reading speech of the 1873 Victorian Act to have been a Victorian invention.  It was a Victorian invention, so it seems, from the Hansard of 20 May 1873, page 79, column 2.  There is reference to the Act being largely founded on English legislation but this invention being put in because of what had been experienced in connection with amalgamations and failures in England of various insurance companies.

MR EPSTEIN:   Yes. I do not know that much light is shed upon the statutory purpose of section 116 by examining its origins, which are fairly mysterious, but they come from colonial legislation in the pre‑Federation days and were carried through in rather mysterious circumstances, it would seem, ultimately emerging in the section in the Insurance Act in 1973.

As Justice Crennan pointed out, paragraph 7 of the appendix – the Commonwealth in 1945 took over the regulation of life insurance companies and also in the same year took over regulatory responsibility for the banking industry and of course there was a bit of turmoil about it but ‑ ‑ ‑

GLEESON CJ:   They sure did.

MR EPSTEIN:   In all events, in 1945 the Commonwealth Bank was given the responsibility of acting as a central banker, a function later undertaken by the Reserve Bank and its successors.  The banking legislation, as Justice Crennan observes, also includes reference to these concepts of liabilities in Australia and assets in Australia and, as schedules to the Banking Act, both the 1945 Act and the later Act to which Justice Crennan referred, there were prescribed requirements for the submission of balance sheets and profit and loss statements, both of the overall position of banks and with respect to their liabilities in Australia and their assets in Australia.  Exactly why that distinction was thought to be necessary I do not think emerges very much further but ‑ ‑ ‑

HAYNE J:   Save this, it copes with the circumstance of the foreign liquidator who undoubtedly would be recognised as having control of the company which is in liquidation overseas.  It copes with the case of that foreign liquidator coming into Australia and saying please to repatriate to the place of incorporation all assets in this country.

MR EPSTEIN:   That is so, and both the insurance legislation and the banking legislation from time to time have contained other prudential safeguards requiring the placing of deposits to be a last resort in the case of insolvency – so I think Justice Hayne has referred in argument to section 69 of the Life Insurance Act which I have referred to there in paragraph 9 – but the Banking Act likewise had requirements for the maintaining of particular assets, but when the Commonwealth entered into the field of general insurance, as opposed simply to life insurance, in 1973 they did not, as I point out in paragraph 10, think it was desirable to require fidelity or guarantee funds and what had been deposit requirements under the earlier legislation were abandoned and the deposit Acts were repealed at that stage.

The reference to the second reading speech I give in 10 is at the joint bundle – the second reading speech starts at page 50 and the two references, the first is at page 59 and the second at page 62.

May I just return to how Sir Leo Cussen approached this question absent any section 31(4) equivalent. Sir Leo Cussen did not interpret the expression “liabilities in Australia” by reference to any principle of private international law as to where the situs of the debt was. He de facto applied the test of where the liability was required to be satisfied and, as is pointed out in the submissions in paragraphs 21 to 25, Justice Cussen’s process of reasoning was that the creditor’s claim was one for which payment was required to be made to the creditor in Victoria and thus it was a liability in Victoria getting the benefit of the effective priority and, consistently with what Justice Ipp says, we put in paragraph 26 references to the general proposition that the obligation of the debtor is to seek out its creditor and pay it. That would be the position which would apply in the case of contract FC3A and no contrary position has been demonstrated by industry practice or otherwise than that NCRA was required to seek out the creditor, Faraday, and pay it unless some different means was adopted, that the contractual obligation was a contractual obligation to pay in London.

I move then to section 562A.  Mr Macfarlan referred your Honours to Palgo Holdings.  Mr Coles referred to CIC Insurance.  The dilemma this Court is often placed in is literal interpretations of statutes as opposed to purposive mischief rule, further references to which are given in paragraph 30 of our submission.  We submit that it is fairly evident from the history of the statutory enactments that what was under consideration was protection of the consumer market with respect to insolvencies in the insurance context rather than the market for professional participants in insurance, that mischief being discernible from the statutory history.  We submit that the principle of rateable distribution or equality between creditors should not be disturbed beyond what was the intended operation of section 562A. 

It is fairly clear, we submit, that because of Harmer, as we say in 33, section 562 was changed to make it applicable only to the simple case of a company in liquidation not itself an insurer which held insurance and, notwithstanding Harmer, 562A was, we submit, directed to the situation, as I say in 38, as in Re Dominion Insurance where Dominion had become insolvent.  It had issued policies of insurance to ordinary insureds.  A real estate agent was an ordinary insured who held a Dominion policy.  It was sued.  It was able to successfully invoke section 292(5).  Because of Harmer, section 562 is no longer applicable to that class of case. 

We submit, section 562A is intended to be directed to that class of case, namely a case in which a direct insurer is placed into liquidation, not to the class of case in which a reinsurer is placed into liquidation, and retrocession or re-reinsurance proceeds become available to the insolvent reinsurer with the right, so it is claimed, of priority under 562A for insurance companies to get the benefit of a statutory priority.

KIRBY J:   Have you looked at any overseas legislation that has any equivalent provisions?

MR EPSTEIN:   Well, of course, there is reference to the English legislation in, for example, the Dominion Case itself and the ‑ ‑ ‑

KIRBY J:   But we were told that Justice Windeyer had before him some American statutory material.

MR EPSTEIN:   Frankly, I had forgotten that we even had that, but I cannot take the matter any further. 

KIRBY J:   When you get into this Court we are always looking at the way these things operate in other countries as well as our own country. 

MR EPSTEIN:   I do not frankly think it likely that any similar section to 562A is likely to be found in other jurisdictions.

KIRBY J:   Prompted by Justice Hayne, I am going to have a look at the UNCITRAL developments.

MR EPSTEIN:   Certainly the whole area of cross‑border insolvency is a matter under active consideration around the world. 

KIRBY J:   This is the reality in which this area of the law now operates.  It is operating on a vastly expanded and ever increasing international capital market and somehow we have to give meaning to an Australian statute that operates in that context. 

MR EPSTEIN:   That is the case with section 116(3) which does seem to be a rather peculiar relic of the colonial age and ought not to be extended in its operations beyond what is necessary to give effect to the statutory object of Part III dealing with prudential regulation, but beyond that I would not comment. What we submit, with respect, to 562A which does not involve international considerations is that while cases can be cited to support the view propounded by the appellant, it really is very unrealistic to treat the legislature as so omniscient that it was making a deliberate decision in the enactment of section 562A to make that section potentially applicable in circumstances of the winding‑up of a reinsurance company, a phenomenon not widely experienced or expected, I suggest, as opposed to the winding‑up of direct insurers and the needs of the insureds holding policies with direct insurers.

As we submit in paragraph 41, there was recognised a need with respect to what had been the old section 292(5) to amend it to expressly exclude reinsurance from its terms, but what was evidently not anticipated was that not only would circumstances arise in which direct insurers went into liquidation but also circumstances may arise when reinsurance companies went into liquidation and thus that section 562A would potentially be applicable to operate for the benefit of insurance companies advantageously with respect to retrocession or re-reinsurance proceeds in the winding‑up of a re-reinsurance company.

To the extent that policy considerations are in point, it was not a policy in the enactment of section 562A, I submit, that there would be some ultimate beneficial effect for ordinary consumers in the insurance market that there would be some form of trickle-down through the insolvency of the reinsurer a benefit to the direct insurer and that direct insurer may be better placed to meet the claims of the ultimate insureds to pay claims made when people contract mesothelioma or the like. 

The policy of section 562A, we submit, goes no further than being intended to deal with the case of the insolvency of a company writing direct insurance business.  Once one accepts that the word “insurance” does not in every case include the class of insurance known as reinsurance, there is a relevant ambiguity in section 562A when that section speaks of relevant contract of insurance to make it open at least to the interpretation that “relevant contract of insurance” is to be read as “relevant contract of direct insurance excluding reinsurance”. 

It is because of the two potential meanings of the word “insurance” or “contract of insurance” as either excluding or including reinsurance that, for example, as I say in paragraph 43, there is specific reference in the Insurance Act to where insurance is to include reinsurance and, as we have seen in section 31(4) of the Insurance Act, “contract of insurance (including reinsurance)”.

GLEESON CJ:   I think we have that point.

MR EPSTEIN:   Yes.  Your Honours have been taken to Agnew.  Different members of the House of Lords expressed themselves slightly differently.  Justice Heydon referred to the way Lord Millett expressed himself.  On the other hand, Lord Cooke, as I have set out in paragraph 46, was willing to go so far in point 1 as to say:

just as naturally [the word “insurance”] may be used in a more limited sense –

It may not rise, in your Honours’ view, quite as high as that but the word “insurance” is well capable of being applicable simply to contracts of direct insurance and, we submit, there are strong considerations, including section 15AB Acts Interpretation Act, et cetera, to adopt the same approach as the majority of the Court of Appeal did in this respect and treat section 562A as being protective of the rights of policyholders who themselves are not participants in the insurance industry.

HAYNE J:   Just before you sit down, Mr Epstein.  The only order of Justice Windeyer we have is one that reserves costs, reserving liberty to the parties to apply.  Did his Honour ever make an order for costs?

MR EPSTEIN:   It was dealt with by agreement among the parties.  I do not know whether that resulted in a formal order or not.

HAYNE J:   Because the common formal order on a liquidator summons would, I thought, have been an order that the costs of all of the parties would ultimately be borne by the insolvent estate, but perhaps that is not so.  Anyway, if there is no form of order, there is no form of order.

MR EPSTEIN:   Yes.  Well, as your Honours would appreciate, when a liquidator applies for directions, if there is some problem as to whether those decisions can be capable of appeal and hence it is sometimes thought desirable to translate the directions in a declaratory relief ‑ ‑ ‑

GLEESON CJ:   It is theoretically an exercise of administrative function, is it not, rather than judicial power?

MR EPSTEIN:   Yes.  So the granting of declaratory relief forms the foundation for appellate reconsideration.  I should just add, with reference to the notice of contention and the arguments advanced this morning by Mr Hogan‑Doran, a fair view of what Justice Ipp decided, at in particular his reference to the evidence – and it is to be inferred, I suggest, that Justice Hodgson did agree with Justice Ipp in this regard – was that there was no uniformity that Faraday was to be paid by payment to the local broker. 

There was a usual practice which is said to apply in 80 or 90 per cent of the times whereby the local Australian broker was paid.  There were departures from that practice, and departures from that practice were, it was said, usually notified by the local broker.  That evidence, which was commonly given by each of the witnesses – Corkery, Hedley and Martin – certainly did not elevate the position to one which an industry practice was established.  In the insurance context, if I could just give your Honours a reference to Con‑Stan Industries of Australia v Norwich Winterthur (1986) 160 CLR 226, in particular at 238 point 5, as to industry practice in the insurance industry with respect to the making of payments to brokers.

I should correct an earlier answer I gave.  The concept of premium income in Australia is apparently defined in section 32(2) of the Act.

GLEESON CJ:   Thank you, Mr Epstein.  Mr Goodman, have you made your election?

MR GOODMAN:   I have, your Honour.  I will take up your Honour’s invitation to reply in writing.

GLEESON CJ:   Very well.  We will reserve our decision in this matter and we will adjourn for a short time to reconstitute.

AT 12.13 PM THE MATTER WAS ADJOURNED