[2005] HCATrans 990
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 WEDNESDAY, 7 DECEMBER 2005, AT 11.46 AM
Copyright in the High Court of Australia
__________________
MR R.B.S. MACFARLAN, QC: If the Court pleases, I appear with my learned friend, MR S.A. GOODMAN, for the appellant. (instructed by Clayton Utz)
MR B.A.J. COLES, QC: May it please the Court, I appear with MR D.A.C. ROBERTSON for the first and second respondents. (instructed by Henry Davis York)
MR J.A.N. HOGAN‑DORAN: Your Honours, I appear for the third respondent. (instructed by PricewaterhouseCoopers Legal)
MR S.D. EPSTEIN, SC: May it please the Court, I appear with MR N. MANOUSARIDIS for the fourth respondent. (instructed by Deacons)
GLEESON CJ: Mr Macfarlan, have counsel agreed on an order of address?
MR MACFARLAN: Yes, your Honour. It has been a dwindling cake but I think we have now dealt with the dwindling cake and it would involve the red light coming on for me at five minutes after lunch.
GLEESON CJ: You do not necessarily have to confine yourselves to finishing at 4.15 today. If we go into tomorrow, so be it.
MR MACFARLAN: I see.
GLEESON CJ: I was more concerned with the order of addresses because the issues and the alignments on the issues are a little complicated.
MR MACFARLAN: Yes. It is a matter for your Honours. We had been contemplating, I think, that each party would deal with both issues rather than deal with the two issues consecutively.
GLEESON CJ: We will leave you to your own devices and if you have contemplated also a certain economy we do not want to talk you out of that.
MR MACFARLAN: I would not have thought so, your Honour.
GLEESON CJ: No.
MR MACFARLAN: Your Honours, there are two issues that relate to the priorities concerning creditors in the winding‑up of New Cap Corporation Limited. There were a number of other issues that were dealt with at first instance, then some others in the Court of Appeal, but there are now only two issues, so if I may go straight to the first of those. It relates to section 31(4) of the Insurance Act 1973 (Cth) and the essential question is whether the terms of that section constitute an exhaustive definition of the phrase “liabilities in Australia” so far as liability ‑ ‑ ‑
KIRBY J: What is the background to this Act? This one did not come through the Law Reform Commission. It was a separate and standing Act that existed at the time the Commission embarked on its insurance contracts exercise, but did it grow out of an inquiry or a report?
MR MACFARLAN: Your Honour, the particular section that confers the priority seems to have had its origin in a Victorian section, but otherwise does not seem to have had substantial predecessors. Whether the Act generally arose out of an inquiry I could not tell your Honour.
KIRBY J: Is the Victorian section referred to?
MR MACFARLAN: It is referred to in the judgments below, your Honour. It is dealt with in a decision of Mr Justice Cussen. Your Honours, the starting point for consideration of ‑ ‑ ‑
KIRBY J: Were you are referring to section 116 there or ‑ ‑ ‑
MR MACFARLAN: A predecessor of that, your Honour. There is a case which is on the list of authorities.
KIRBY J: It seems to have been a rather nationalistic section.
MR MACFARLAN: The case I was referring to, your Honour, is In re Federal Building Assurance Co Ltd [1932] VR 301.
KIRBY J: It seems to be a sort of protective provision designed to make sure that you look after Australian creditors first, and if that is its overall purpose, insofar as that gives a guide, that should be the purpose that one endeavours to fulfil.
MR MACFARLAN: That is so, your Honour, yes.
KIRBY J: It does not solve the little gaps that are ‑ ‑ ‑
MR MACFARLAN: No. The purpose appears to be to ensure that there are in Australia sufficient assets to meet Australian liabilities.
KIRBY J: First.
MR MACFARLAN: First, yes. The starting point, your Honours, is to be found by looking at the schedule to our written submissions which sets out section 116 of the Insurance Act, page 16 of those submissions. Section 116(1) contains a prohibition against carrying on insurance business once a company has come to be wound up. The presently relevant provision is subsection (3):
In the winding up of a body corporate authorized under this Act to carry on insurance business, or in the winding up of a supervised body corporate, 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.
It is that phrase “liabilities in Australia” that is critical in this appeal. Subsection (4) says that:
Section 31 has effect for the purposes of this section.
If your Honours turn back one page in the written submissions, your Honours will see that subsection set out. It is perhaps worth going back a further page, to 14, where the commencement of section 31 appears. It is concerned with liabilities and one provision that stands out but which is not presently relevant is subsection (3) under which APRA may direct a body corporate carrying on insurance business to make provision, or further provision, in respect of various liabilities.
HAYNE J: That takes it place, really, against the background of section 29, does it not, and 29 is the general conditions to which authority to conduct insurance business is granted?
MR MACFARLAN: Yes, that is so, your Honour.
HAYNE J: Those include capital maintenance provisions?
MR MACFARLAN: Yes, that is so. So subsection (4), which is on page 15, is that which has been the subject of construction below. It says:
For the purposes of this Part –
but we have seen that section 116, which is not in the part, expressly adopts the operation of section 31(4) –
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 –
then there are exceptions –
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 –
and then (ii) has another exception to the general proposition that contracts of insurance made in Australia are going to be said to be liabilities in Australia, that is, where there has been an undertaking to satisfy outside Australia.
KIRBY J: The word “includes” is against your construction, is it not?
MR MACFARLAN: I am just looking for the word “includes”, your Honour. The critical word on the next page “is a liability in Australia”.
KIRBY J: You contend that supports your construction?
MR MACFARLAN: Yes, your Honour, and we draw the distinction between that and the use of a word such as “includes”. Then the other limb of subsection (4) is in (b) dealing with contracts made outside Australia but ones where there have been negotiations at least to some extent within the country. In that situation, if one of two conditions is satisfied then it is a liability in Australia, and the two conditions are in (i) and (ii). First, the contract:
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:
Those liabilities are said to be liabilities in Australia and the critical question, your Honours, is whether that statement is exhaustive, that is, is it or is it not the case that if a liability falls outside the section it can still be a liability in Australia. The Court of Appeal was divided about this. The majority said that this was not an exhaustive definition so that if a liability satisfied some other test, it could still be a liability in Australia even though it did not satisfy this test. Justice Ipp dissented.
The additional test that the majority adopted was one described by the word “pragmatic” in both Justice Hodgson’s judgment and Justice Bryson’s judgment, that is, their approach was if a liability, by reference to pragmatic considerations, could properly be classified as one in Australia, then it was that even though it fell outside the terms of 31(4). Now, it is notable, your Honours, that the respondents, who are against us on this issue, none of those seek to support the use of that test as their primary position. The liquidator of the company ‑ ‑ ‑
KIRBY J: But was it a test or was it simply a description of the consequence of the view that Justice Hodgson took? I do not think “pragmatic” can be a test. It is simply a description.
MR MACFARLAN: Yes, as we would put it, if one regards it in that way, one is left without any guidance, your Honour, and that is one of the points we seek to make, that for reasons I will come to it really is very important that liquidators and others know with some degree of precision what is or is not a liability in Australia, and the majority approach in the Court of Appeal would leave that question completely up in the air and the liquidator and the company, the first and second respondents, seem to implicitly acknowledge that by saying that the principles of private international law should be applicable, and that was an approach rejected in the majority judgments in the Court of Appeal. The third respondent on this appeal plumbs for another test again, one that substantially captures all business written in Australia by a company which is carrying on business here.
HAYNE J: Now, I understand the importance of focusing on 31(4) – it will be necessary to devote, I suspect, the bulk of the argument to it – but is not the relevant starting point 116(3)?
MR MACFARLAN: It is.
HAYNE J: First identification of to what windings-up it applies, identification of what, if any, significance is to be attached to the assets that are to be applied and questions of that kind?
MR MACFARLAN: Yes. The Act takes a somewhat different approach in respect of assets. It has a provision, section 30, which is not on any view an exhaustive definition. It says that certain things are not included but otherwise would seem to leave to the general law the identification of what are assets in Australia.
HAYNE J: Well, section 30 would have no operation in the understanding of 116(3), would it? Section 30 is introduced by “In this Part” and there is not the benefit of an equivalent of section 116(4) engaging section 30, is there?
MR MACFARLAN: Your Honour, I would need to check that. I am not sure about that. May I check that over lunch?
HAYNE J: Yes, of course.
MR MACFARLAN: But we certainly accept that 116(3) is the starting point, but there were issues about the application of that section to this winding‑up and they were dealt with below and are not the subject of the present appeal.
HAYNE J: I understand that, but what windings-up are the subject of the operation of 116(3)? Are they windings-up under Australian laws? Do they extend to windings-up ordered or undertaken by foreign law?
MR MACFARLAN: The section does not give any express guidance other than referring to windings‑up of companies which were authorised to carry on business by this Act.
KIRBY J: You would normally construe that to mean Australian windings‑up, would you not, by the Acts Interpretation Act, I would think?
MR MACFARLAN: Yes, your Honour.
HAYNE J: Because what otherwise appears, perhaps, to be a xenophobic approach. It may – it may not; I do not know – it may take on a different colour if the premise for 116(3) is that there is a winding‑up which is relevantly governed by Australian law saying that windings‑up under Australian law are to be ordered in this fashion, Australian assets are to be applied in discharge of Australian liabilities, leaving to whatever effect there may be windings‑up under foreign law of entities having affairs offshore. Perhaps these are matters of irrelevance – I do not know – but at least they are questions that occur to me as having some relevance to what you do with liabilities in Australia.
MR MACFARLAN: The assumption below has been, as your Honour hypothesised, that this is concerned with the winding‑up in Australia of bodies authorised to carry on insurance business in Australia and what may happen in respect of overseas windings‑up is a matter for other law.
KIRBY J: This is the drawbridge theory of the section which is not unknown in Australia. We have tended to do it in a number of respects. The problem in the modern capital market is that it is hard to do, especially in insurance and reinsurance, but that seems to be the theory behind the section.
MR MACFARLAN: The section fits in with the other prudential provisions which I will come to which require a body carrying on insurance business in Australia to have assets here to cover its Australian liabilities.
HAYNE J: The other point of view about the section is that, far from pulling up the drawbridge, it is not arrogating to Australia the regulation of foreign winding‑up of foreign entities having foreign assets and foreign liabilities. It is narrowly confining the reach of Australian law to winding‑up bodies which for many years have conducted affairs internationally to the local affairs of Australia rather than taking a rather larger reach into the insolvency regimes of other nations.
MR MACFARLAN: Yes, your Honour. If the provisions of the Act are adhered to, there will be assets in Australia to deal with these liabilities in Australia and this section prevents their repatriation somewhere else without having discharged the liabilities in Australia.
HAYNE J: It prevents it completely, though, does it not?
MR MACFARLAN: I am sorry, your Honour?
HEYDON J: Even if there were a surplus after setting off Australian assets against local liabilities, that surplus could not be sent to any other country, “shall not be applied” at all.
KIRBY J: I did not read it that way. I read it that there is a priority.
MR MACFARLAN: “[U]nless it has no liabilities in Australia”, your Honour.
HEYDON J: Yes, “unless it has no liabilities”, but if it has?
MR MACFARLAN: Yes. So once they have been discharged the surplus funds could go elsewhere.
HEYDON J: I see, from that moment on. So you say from that moment on it has no liabilities and then the ‑ ‑ ‑
MR MACFARLAN: Yes.
KIRBY J: I would like to think that Justice Hayne’s theory, the alternative theory, competing, would have appealed to our legislators back in 1973, but unless the Act has been amended since it was first enacted it sounds more likely to be a nationalistic approach. In our windings‑up we look after Aussies first. That seems to be the theory behind it and that would fit in with a sort of island mentality which is not unknown in our statute book.
MR MACFARLAN: Yes, Australian liabilities are looked after first but out of Australian assets ‑ ‑ ‑
GLEESON CJ: Australian liabilities does not equal Australian creditors, does it?
MR MACFARLAN: It may not, your Honour, no.
KIRBY J: The $2 million assets are not very much for a reinsurance business.
MR MACFARLAN: Well, that is the surplus or difference that is required to be an excess to that extent.
KIRBY J: That can change overnight if there is a tsunami.
MR MACFARLAN: Indeed. There was reference a moment ago to the amendment of the Act. It was amended and is not presently in the form in which the sections I have taken your Honours to appear. The present form appears in paragraph 17, 18 and 19 of our written submissions.
KIRBY J: You are talking about the amendment to 116(3)?
MR MACFARLAN: Yes.
KIRBY J: But was there any amendment before that amendment to section 116(3), because that merely cut it down to particular types of insurance, did it not?
MR MACFARLAN: Well, along with an amendment to 116(3), section 31(4) was effectively brought into a new section, 116A, of the Act, which is at the foot of page 17 of our submissions.
GLEESON CJ: What is the reprint of the Act from which we should be working?
MR MACFARLAN: I am told 31 October 1998, your Honours.
GLEESON CJ: That is Reprint No 5?
MR MACFARLAN: That is a consolidated Act as in force on that date.
GLEESON CJ: Thank you.
KIRBY J: So is it common ground now that we can disregard the amendment to 116(4)?
MR MACFARLAN: I believe it is. It was relevant of course on the special leave application as to the significance of a decision on this present question. The present provisions mirror very closely the ones with which this appeal is concerned, but they are not precisely the same.
KIRBY J: We better get that clear before the case is over.
MR MACFARLAN: Yes. Well, we certainly do not contend they are relevant and I am not aware of anyone else contending that, your Honour. Your Honours, in short our reasons for contending that section 31(4) is exhaustive in relation to insurance liabilities are, first, it has the appearance of a code, in our submission. One has the two limbs, one dealing with contracts made in Australia and the other dealing with contracts made outside Australia.
In the latter case it is thought necessary to add the qualification that some part of the negotiations has occurred in Australia, but the scheme of the subsection seems to be that if a contract is made within Australia then prima facie the liabilities to which it gives rise should be treated as liabilities in Australia but subject to the certain identified exclusions in (i) and (ii), whereas if a contract is made outside Australia then, subject to certain inclusory provisions, it should not be regarded as giving rise to a liability in Australia.
So there appear to be in the Act various connecting factors which hinge on, first, the place where the contract was made, but also by reason that the exceptions bring into play the question of where the liability was undertaken to be satisfied and where the events upon which the liability is contingent can happen may occur.
KIRBY J: How does that analysis fit in with Justice Hodgson’s analysis of the anomalous exceptions that his Honour discovers?
MR MACFARLAN: We have a number of points about the supposed anomalies, your Honour.
KIRBY J: Do not take yourself off your track, if you want to give us the arguments ‑ ‑ ‑
MR MACFARLAN: I will come to them if I may.
KIRBY J: ‑ ‑ ‑ but you will have to deal with that.
MR MACFARLAN: If I may deal with our points first. The second point we make is that section 31(4) in some cases operates in a broader fashion than the general law and in some cases in a narrower fashion. It operates more widely than the general law in this situation. If a contract is made overseas but there are some negotiations within Australia and the event in question may nevertheless only occur in Australia, then section 31(4) can apply, but that is not necessarily so with the general law.
It can operate more narrowly because the general law test, if one deals with the private international law rules as to location of debts, which are primarily directed to residence, it operates more narrowly because ‑ ‑ ‑
KIRBY J: You say primarily, because there was always the exception that if there was a special arrangement that the debt was to be paid in London or somewhere that that would fix – whether there were liabilities in that place.
MR MACFARLAN: Yes, that is so. That is the exception to which I was referring, your Honour, but primarily it is directed at residence. If the insurance company is resident in Australia, then its insurance liabilities will be liabilities in Australia under the general law test, whereas that may not be the case as a result of an application of 31(4) because the particular connecting factors might not be there. Section 31(4) does not look to residence as such but to other criteria.
We ask rhetorically the question, as did Justice Ipp below, why have the elaborate provisions of 31(4), if one could have recourse to a simple common law test of residence in the event that the provisions of 31(4) were not applicable. Your Honours, it would seem, we suggest, to be a contradiction of 31(4) to say that something was a liability in Australia when the words in 31(4) were applicable, “not being a contract” in Australia, or something of that sort – those words at the end of the opening words to (4)(a).
The third point, your Honours, is one which has already been adverted to, namely that the end of 31(4) uses the words “is a liability in Australia”. It is not expressed in terms of inclusion.
KIRBY J: That is what contrasts with 31(1), that where Parliament has meant in the section to use “inclusion” it says so.
MR MACFARLAN: Yes, that is so, your Honour.
KIRBY J: That is why the legislative history might be interesting. If they were both in the Act as originally enacted, the fact that there – one has to be a bit careful about this, but the fact that in the same section is “includes” and “is” may give some guidance.
MR MACFARLAN: Yes, your Honour.
KIRBY J: We are searching for straws here. That is what is revealed by the reasons in the Court of Appeal. Their Honours did not pretend that this is a clear matter or that there is only one answer. They took the view Justice McHugh always took, that these things are arguable.
MR MACFARLAN: We would not be here if that were not so, your Honour. The fourth point we would make is that in this area it is important that there be a high degree of certainty as to the proper characterisation of liabilities and it can be inferred, we submit, that the legislature had this in mind in setting out detailed rules as to classification.
KIRBY J: Certainty is one motivation that you look for, but more important is purpose. If the purpose is nationalistic, not so much xenophobic as nationalistic, looking after our own, then somehow you are going to have to help us to find which interpretation better furthers that purpose. I assume the Minister did not say anything about this in the second reading speech or that there is nothing in the documentation that helps?
MR MACFARLAN: I will see if that can be advanced, your Honour, over lunch.
HAYNE J: When you do, would you look also at the questions of nationalism that his Honour Justice Kirby is putting to you in this light. What are the possible competitions that are resolved between, for example, foreign windings‑up and local windings‑up? At the moment none occurs to me. Second, if it is a nationalistic approach, what other than the attribution of location in 31(4) would constitute the relevant preference or advantage to Australian creditors of the company over non‑Australian creditors? Again I should say to you at the moment it is not apparent to me how 31(4) operates in a way that gives any preference or advantage to local creditors over foreign creditors when the criteria adopted in 31(4) are cast in the fashion they are.
MR MACFARLAN: Well, 31(4) identifies various connecting factors. They are, we would suggest, sensible.
HAYNE J: Not one of which relevantly is the domicile residence or connection of the creditor of the insurance company concerned.
MR MACFARLAN: That is so.
HAYNE J: Thus the nationalism to which his Honour refers is for the moment not yet apparent to me.
MR MACFARLAN: Yes. There is a reference to the carrying on business both in and outside Australia in (4)(b), of course, and that, we would suggest, assumes that the company is at least carrying on business in Australia and that is perhaps explicit in the opening words to the subsection because it talks about companies authorised to carry on business here. But the question of residence can be an arbitrary one and, of course, assets do not necessarily follow residence. They are not necessarily located where residence is and the connecting factors to Australia that have been chosen by the legislature appear, we would submit with respect, to be sensible ones and obviously ones to which the legislature has given its attention.
KIRBY J: Can I just explain what I had in mind by referring to the nationalist theory and it is just that in section 116(3) it says:
shall not be applied in the discharge of its liabilities other than its liabilities in Australia –
Now, if you ask yourself what is the reason for such an unusual provision disturbing general rules for application on insolvency, the only one that pops into my mind is we look after Australian creditors first because we recognise that this is an international industry and market and we are not going to disturb the international arrangements except to the extent that where there is an Australian winding‑up to occur, we are going to make sure our citizens and residents, including corporations, get in first. Now, that seems to be the purpose of 116(4).
MR MACFARLAN: It does, your Honour. There is a recognition that it is an international type of business and perhaps also an implicit recognition that other countries may not regulate their insurers in as close a fashion as we would seek to do.
KIRBY J: On the contrary, they may do the same thing.
MR MACFARLAN: They may do the same thing or they may not.
KIRBY J: They may look after German creditors.
MR MACFARLAN: Yes, but they may not and in its overseas operations an insurer may incur huge liabilities that effectively swamp its assets. So, to the extent that the Australian legislature can regulate the position, it does so by dealing with Australian assets and liabilities and insuring that they have the right relationship which will result in protection of Australian creditors.
GLEESON CJ: In the days when companies used to be wound up in a number of jurisdictions in Australia, you could have a winding‑up in New South Wales and a winding‑up in Victoria and a winding‑up in South Australia, how did those administrations relate local assets and local liabilities?
MR MACFARLAN: I think that may have been one of the subjects of the decision of Justice Cussen, a Victorian decision, but I would need to see what the form of the statutory provision was there, but beyond that I could not assist your Honour. So I was dealing with the point of certainty. It is an area in which a high degree of certainty is, we have submitted, important. Not only so that section 116(3) can be given effect to but also because of the prudential requirements of the Act, some of which have been touched on already.
The principle of the requirements can be seen, your Honours, by reference to the joint bundle of materials, first at page 80 where section 23 is set out. That deals with authorities to commence carrying on insurance business and one of the matters of which APRA is required to be satisfied is subsection (c):
the value of the assets in Australia of the body corporate exceeds the amount of its liabilities in Australia by not less that $2,000,000;
and there is a counterpart, your Honours, in section 29 on the next page:
an authority granted . . . is subject to the following conditions –
including (c) which has a similar provision.
KIRBY J: What do you derive from that?
MR MACFARLAN: That to enable parties to comply with the provisions of the statute, what they need to do should be clearly spelt out and not left to very subjective considerations such as the majority of the Court of Appeal pointed to, the so-called pragmatic considerations. There should be rules and the legislature has sought to set them out to guide ‑ ‑ ‑
KIRBY J: But the prudential requirements are equally protective of overseas creditors as of Australian creditors.
MR MACFARLAN: Yes, indeed.
KIRBY J: So it is neutral, is it not?
MR MACFARLAN: It is not neutral in terms of there being a bright line or a set of bright lines because it emphasises the importance of certainty in this area. There are important requirements and if insurance companies do not know how to comply with them, then the purpose of the Act will not be achieved.
Section 31(4) does apply to those sections I last mentioned because, as has been pointed out, the opening words of 31(4) say it is applicable “For the purposes of the Part”, that is, Part III, which covers sections 21 to 38. There is also another section in the Act, namely, section 39(3), which renders section 31 applicable to the provisions concerning accounts which are contained in the Insurance Act in a later part.
If I could then say something about the anomalies that Justice Hodgson found. What he said, in effect, was that he would have expected certain liabilities to be liabilities in Australia, but when he looked at section 31(4) they were not so classified. The first point we would make about that is, your Honours, that it is a matter for the legislature rather than the Court. It is not a case of absurdity where his Honour was suggesting that he looked at the section and thought it had an absurd operation; rather, it was a subjective view that his Honour expressed about what reasonably should or should not be a liability in Australia.
The second point is that whether or not there are some anomalies in the operation of the section, they are there whether or not the section is exhaustive in its operation. Perhaps their importance is lessened where the section is not exhaustive but they are still there, and we submit the proper inference is that the legislature has chosen a particular course and set out detailed rules and we submit that course should be accepted.
The third point we would make, your Honours, is that the other majority judge, Justice Bryson, did not find the anomalies point of any significance, and it followed also from Justice Ipp’s dissent that he did not find it as of significance.
HAYNE J: Can I take you back to the winding‑up point? I am sorry to harp on it. If there were a winding‑up of a company carrying on insurance business which was not a company that was incorporated under Australian law, on its face it would be under current Corporations Law a winding‑up of a Part 5.7 body, and Part 5.7 of the Corporations Law would be engaged. The liquidator who is appointed to that body would be obliged to take custody of the assets. I think that is plain, is it not? But as a matter of fact, if the corporation concerned is not an Australian corporation – Australian incorporated body – could the liquidator take control of more than the local assets when I think the general conflicts rule is that you look primarily to the law of the place of incorporation for determining questions of status and for determining who has control of a company. So in Australia if you have a winding‑up offshore of an offshore incorporated company and a liquidator is appointed Australian courts will regard that liquidator as in control of the company and entitled to do things with its properties, but the case I am positing is one where a foreign corporation, foreign incorporated, liquidation in Australia as a Part 5.7 body, local liquidator, how far can that liquidator get his or her hands on the assets?
MR MACFARLAN: I take it, your Honour is also assuming that the company is authorised to carry on insurance business in Australia.
HAYNE J: Just so.
MR MACFARLAN: Well, according to my understanding, that liquidator could only take possession of the Australian assets, your Honour.
HAYNE J: Which takes me back to where I began, trying to understand what 163 is on about, what its purpose is. If it is regulating what is to happen in a winding-up, both of locally incorporated bodies and foreign incorporated bodies, in the case of the foreign incorporated body it may be that it is simply recognising the limits on what the liquidator can do, saying you can get hold of the Australian assets but here is what you do with them. The Australian assets are to be applied only to Australian liabilities until everything is satisfied, then the balance goes offshore.
MR MACFARLAN: But for that provision, your Honours, it may be that the overseas liquidator can call for the Australian assets ‑ ‑ ‑
HAYNE J: But, more importantly, the local liquidator would be bound to admit to proof everybody.
MR MACFARLAN: Yes.
HAYNE J: Proof against only the assets that he/she can get hold of, namely the Australian assets.
MR MACFARLAN: Yes.
CRENNAN J: And 116(3), I think, echoes, mirrors or is based upon the Banking Act 1959, is it not, whether there are cognate priorities provided for, and the whole idea was, as I recollect it, that the Australian assets would be used to meet the deposit liabilities in Australia.
MR MACFARLAN: Yes, I think that is so, your Honour.
GLEESON CJ: In relation to windings-up, the word “foreign”, in times not very long past, meant in Victoria, New South Wales in this context.
HAYNE J: It still does.
MR MACFARLAN: Certainly in football terms, your Honour.
GLEESON CJ: If you look at the first edition of Mr Justice McPherson’s book on the law of company liquidation, in Chapter 16 he deals with this question of windings-up in a number of jurisdictions. As he points out, that is very important in a country with a federal Constitution like Australia because it applied as between the various States. So the concept of local and foreign assets, or local and foreign creditors, in connection with the law of winding-up has for a long time been familiar and of fairly commonplace practical significance.
MR MACFARLAN: Yes.
KIRBY J: Of course section 116 is in a federal statute and is addressed to assets in Australia and liabilities in Australia, so even before the Corporations Act it took an Australia-wide approach.
MR MACFARLAN: Yes, that is so.
HAYNE J: But was founded on section 526 of the Companies Act 1938 (Vic) which in turn finds its roots in, so it seems, the Victorian 1928 Act, section 448, the South Australian 1936 Act, sections 25 and 26, the Tasmanian 1874 Act, section 11, and the New Zealand Act of 1908, section 79. So this is not a lately invented concept it seems. True it is O’Dowd and Menzies has only the note to Re Federal Building Assurance Company Limited, counsel will be pleased to hear, but there is a deal of statutory origin in behind 116, I believe.
MR MACFARLAN: Yes. Well, your Honours, the way we put it is there really cannot be much doubt about what its purpose is. It is to protect Australian creditors, to put it broadly, and it does so by identifying liabilities in Australia and choosing particular connecting factors, and it is a context, as I have submitted, where some certainty is important and the legislature has set out to give that certainty.
Your Honours, there is an alternative position we have which your Honours will have seen from the written submissions. That is this, that if the majority in the Court of Appeal are correct and 31(4) is not exhaustive then the question is what other tests may result in characterisation of liabilities as liabilities in Australia. At first instance Justice Windeyer had regard to the rules of private international law and as our alternative position we say that that is an appropriate course to adopt. We have dealt with these in our written submissions at paragraphs 27 to 29 and in reply at paragraphs 6 to 10.
KIRBY J: Would you just explain how that leads to the same outcome?
MR MACFARLAN: Yes, your Honour. We need to have your Honours find that the general law position is of a particular character. That is, let me put it in this way, residence, if that is the appropriate test under the general law, is insufficient for us. In the case of the particular contract in question here, there was, we say, an agreement to pay overseas. Now, there was reference earlier to the exception to the ‑ ‑ ‑
KIRBY J: There was no payment to be made within Australia; it was solely overseas.
MR MACFARLAN: That is as Justice Ipp found it and that is as we put it, yes. That is not necessarily a matter of common ground.
KIRBY J: But we can approach the matter on that footing, can we not? I thought that was an agreed matter in your written submissions.
MR MACFARLAN: Yes. Well, your Honour, I think so, but the respondents may say otherwise. Now, under one view of the general law, a liability of that character would still not be a liability in Australia because the debtor, New Cap, was not resident in Australia and also the payment is to be made outside Australia but not at a place where New Cap had any place of business. One view of the authorities concerning the general law is that the exception to the residence requirement requires not only payment at a particular place outside Australia, but also that the debtor carry on business in that place, and it is our contention that the second of those requirements is not an apt requirement and should not be held to be applicable.
KIRBY J: This only works if your theory is right that section 31(4) is an exclusive statement?
MR MACFARLAN: No, this is our alternative position, your Honour. It is a fallback if we ‑ ‑ ‑
KIRBY J: I thought it was based on an analysis of the subsection. I must have got it wrong.
MR MACFARLAN: It is relevant to examine the position as to payment for the purpose of 31(4) and his Honour Justice Ipp did and found in our favour and it fell within 31(4). But, your Honours, this deals with the alternative position which we would advert to if it be found that 31(4) is not exhaustive. Your Honours, the authority on this point as to whether it is a requirement that the debtor have a place of residence in the place agreed for payment is not settled. There have been statements in various of the cases principally at first instance, but the only case which we have been able to find which actually had to deal with the point in a situation where there was an agreement for payment elsewhere and there was no residence or no carrying on of the business of the debtor in that place is an old Victorian case of In the will of Currie (1899) 25 VLR 225.
HAYNE J: The late Mr Justice Smith said to counsel who cited the numbered volumes of the Victorian Law Reports that you may find authority for any proposition in the numbered volumes of the Victorian Law Reports.
MR MACFARLAN: Yes. I would happily embrace that, your Honour, because that is a case that is against us.
KIRBY J: Notice we never say things like that in New South Wales.
HAYNE J: It is much more apt to obfuscate.
MR MACFARLAN: Your Honours, our position in that respect is set out in the written submissions and I do not want to say anything further about it and I want to move to the second issue.
GLEESON CJ: Before you do that, do the provisions with which we are concerned have anything to do with life insurance business?
MR MACFARLAN: I do not think so, your Honour. We will need to check that, your Honour.
HAYNE J: Could you look at the first Life Insurance Act because the Victorian progenitor of this was concerned with life insurance provisions, the New Zealand Act was concerned with life insurance and so on and it may well have come across into the Life Insurance Act (Cth) in what was it, 1948 or thereabouts, I think?
MR MACFARLAN: It may be necessary to seek your Honours permission to put in a note about the historical position, if your Honours wish it to be pursued.
GLEESON CJ: Yes, I think it would be helpful if you could do that. I asked the question because life insurance businesses are a very obvious example of a business that at least in the past would have been carried on by companies in many countries, including Australia, who typically have life insurance policies being written in Australia by an English company, for example.
MR MACFARLAN: Yes, your Honour. We will have a look at that. Your Honours, the other issue arising on the appeal concerns section 562A of the Corporations Act which is concerned with the application of insurance proceeds and as to priorities in that context. If I could introduce that issue, your Honours, by going to page 19 of our submissions in‑chief which set out the terms of section 56. This was a section that was enacted in previous legislation designed to overcome the effect of the English decision in Harrington Motor Company and it in effect gives access to third parties to insurance proceeds in respect of policies taken out by the debtor. It says:
Where a company is, under a contract of insurance (not being a contract of reinsurance) entered into before the relevant date, insured against liability to third parties, then, if such a liability is incurred by the company . . . and an amount . . . is received . . . the amount shall . . . be paid by the liquidator to the third party –
So there is a direct matching of the third party’s claim against the defendant and the insurance proceeds that are available to the defendant. Now, that section in the form that it previously existed was changed as a result of the 1988 Harmer Report recommendations and the words in the first line “not being a contract of reinsurance” were then inserted, so the direct matching provided for by section 562 was rendered inapplicable to a contract of reinsurance but ‑ ‑ ‑
KIRBY J: What was the reason behind Mr Harmer’s submission? What was the reason?
MR MACFARLAN: I will have to come to that, your Honours. I will come to the Harmer Report in a moment if I may. At the same time as that limitation on section 562 was enacted by the insertion of those words, section 562A was enacted. That is on the next page of the submission and that deals with reinsurance and it says in 1(a):
This section applies where:
(a) a company is insured, under a contract of reinsurance . . . against liability to pay amounts in respect of a relevant contract of insurance –
Pausing there, there is a definition of a sort of “relevant contract of insurance” in subsection (8) on the next page. It means:
a contract of insurance entered into by the company, as insurer, before the relevant date.
Going back to (1)(a), where there is such a contract and:
an amount . . . is received . . . under the contract of reinsurance.
(2) Subject to subsection (4) –
which provides for a court order –
if the amount received, after deducted expenses . . . equals or exceeds the total of all the amounts that are payable by the company under relevant contracts of insurance, the liquidator must, out of the amount received and in priority to all payments in respect of the debts . . . pay the amounts that are so payable under those contracts of insurance.
I will come to subsection (4) in a moment, but what that provides, your Honours, is not for a direct matching such that if there is a contract of insurance the creditor under that contract can get the benefit of any reinsurance; rather, it provides for what has been described as a broad pooling. That is one looks to see what were all of the contracts of insurance entered into by the subject company and one takes all of the reinsurance receipts and distributes them amongst those insurance creditors, whether or not those contracts of insurance had any particular responsibility for or connection with the taking out of that reinsurance.
GLEESON CJ: Is that a convenient time, Mr Macfarlan?
MR MACFARLAN: Yes it is, your Honour.
GLEESON CJ: We will adjourn until 2.15.
AT 12.47 PM LUNCHEON ADJOURNMENT
UPON RESUMING AT 2.18 PM:
GLEESON CJ: Yes, Mr Macfarlan.
MR MACFARLAN: Your Honours, one or two matters arising out of the argument in relation to section 31. As to the concept behind it, your Honours, we would put this, that it is apparent that the concept is that those who are permitted to carry on insurance business in Australia, and those will often include foreign insurers who have large overseas businesses, should take care of the liabilities they take here and do so out of the assets that are in Australia. In a general sense there will often be a connection between the two in the sense that the assets will often have been produced by the incurring of the liabilities in question, so there will be a nexus, and it would be contrary to policy to permit Australian assets to be repatriated to meet what may be huge liabilities created overseas in a circumstance where the Australian liabilities may be swamped by the liabilities in general.
GLEESON CJ: And created overseas by activities outside the purview of the Australian regulatory authorities.
MR MACFARLAN: Indeed, your Honour.
KIRBY J: Just explain how that helps your interpretation.
MR MACFARLAN: It is probably neutral, your Honour. It emphasises the importance of knowing what is to be done to comply with the legislation. There is a very strong purpose behind it and it is no good having provisions that are vague or are interpreted in a vague fashion such that people do not know how to comply with them. The legislature has identified the criteria which it says lead to characterisation of liabilities as Australian ones. They appear on their face to be sensible criteria, not absurd ones, and the legislative policy should be adhered to.
HAYNE J: Why would you amplify the class of liabilities that are to be given the favoured treatment of resort to the Australian assets beyond those which Parliament has specified if the notion is that the regulator looks to the assets in Australia and to the liabilities in Australia identified in a particular way in determining whether you meet capital adequacy requirements and the like, why do you add to the list of liabilities that is to be allowed resort to the Australian assets?
MR MACFARLAN: That is consistent with our argument and we would adopt that comment, your Honour.
KIRBY J: That is what I was trying to get you to say, what Justice Hayne just said. You see, the Court is searching for the purpose. Given that this is an ambiguous statutory provision, given that Parliament could have put it beyond doubt by saying that liability and only that liability is a liability in Australia and given that Parliament did not do that, then we have a choice to make and we have to weigh the indicia one way or the other and that is why you look to the purpose as the main driving force for the choice and what Justice Hayne said seems to me is the best purpose I have heard so far for saying this is the choice that Parliament has made and if it had wanted to make any other choice it would have spelt it out in equally detailed and plain terms.
MR MACFARLAN: That is what we say, your Honour, no doubt in less felicitous terms than what Justice Hayne said, but we would certainly adopt what his Honour said.
KIRBY J: It would be hard to beat Justice Hayne in felicity.
MR MACFARLAN: It is and I would not attempt to do so.
HAYNE J: As far as I can trace the legislation back, at least so far, it goes back to the Life Assurance Companies Act 1873 (Vic), section 11, which obliged a company whose head office or principal place of business was not in Victoria to keep a separate account of all the business transacted in Victoria and of the entire assets of the company in Victoria whether registered as secured assets or not and in the event winding‑up only the local assets and local liabilities were to be dealt with in fashion similar to that with which we are now concerned.
MR MACFARLAN: Yes. Your Honour, there is reference to that 1873 statute in the appendix to the fourth respondent’s submissions on this appeal. There is in that appendix a legislative history of the provision. It may not be complete and we would wish to avail ourselves of an opportunity to put in a note to supplement that concern of the legislative history.
Two other brief matters arising out of this morning’s argument, section 3 of the Insurance Act 1973 excludes life insurance from the definition of “insurance” under that Act and, secondly, we have not been able to find any provision which applies section 30 which concerns the characterisation of asset. I have not been able to find any provision applying that to section 116.
KIRBY J: Are there any provisions in the Life Insurance Act that are mirror provisions or analogous provisions to these provisions?
MR MACFARLAN: We would need to deal with that separately, also, your Honour.
HAYNE J: In that respect you might look at section 69 of the Life Insurance Act 1945 which is, I think, the first comprehensive Commonwealth legislation on life insurance and which seems to be derived from an English Bill but it hinged around the concept of the statutory fund rather than upon any question of territorial location of assets or liabilities. Justice Crennan has looked and will tell you about the Banking Act 1959.
CRENNAN J: I did mention a very, very similar section. If you look at 13A(3) it is in very similar terms to the section under discussion.
MR MACFARLAN: There was mention of that in the court below in the argument and I do not think it is mentioned in the judgment. Your Honours, in picking up where I left off in relation to section 562A, the effect, as I said, of 562A is not to provide a direct matching but for the pooling of reinsurance proceeds amongst insurance creditors to the exclusion of non-insurance creditors, subject to the possibility of a court order providing for a different division taking place and that is provided for in subsection (4). The factors that the court may take into account are referred to in subsection (5). The factors “include, but are not limited to” the matters there set out. The question of:
(a) whether it is possible to identify particular relevant contracts of insurance as being the contracts in respect of which the contract of reinsurance was entered into; and
(b) whether it is possible to identify persons who can be said to have paid extra in order to have particular relevant contract of insurance protected by reinsurance; and
(c) whether particular relevant contracts of insurance include statements to the effect that the contracts are to be protected by reinsurance; and
(d) whether a person to whom an amount is payable under a relevant contract of insurance would be severely prejudiced if subsections (2) and (3) applied –
that is if there was a pooling there provided for.
KIRBY J: These provisions have been re-enacted in the Corporations Act, I gather, is that correct?
MR MACFARLAN: Yes, your Honour. We have referred to it as the Act in our submissions because section 1401 of the Corporations Act in broad terms provides for liabilities and other matters dealt with under the Corporations Law to be treated in the corresponding fashion under the Act in substitution for the way in which they were so treated under the law and the courts below and we in our submissions have therefore spoken of the Corporations Act although the statute in force at the relevant time was the Corporations Law, the State Act.
KIRBY J: Anything turn on that, given the interaction of a federal and a State law?
MR MACFARLAN: It does not now, your Honour. There were arguments that were run below which were disposed of and are not the subject of an appeal. Your Honours, with 562A the issue that arose is whether contracts of insurance there referred to include contracts of reinsurance. Clearly 562A can apply where an insurance company goes into liquidation and there are reinsurance proceeds. The issue is whether it also applies where a reinsurance company such as the subject one goes into liquidation and there are re‑reinsurance proceeds. In other words, “retrocession” which was the other word used below or re‑reinsurance proceeds.
Your Honours, putting it broadly, the normal meaning, we say, of contract of insurance embraces different types of contracts of insurance including contracts on reinsurance. The Court of Appeal found ‑ ‑ ‑
KIRBY J: That seems to be confirmed by the fact that where Parliament does not intend it to operate they have spelt that out in terms, although I think it goes both ways, does it not? Sometimes they have said “which shall include a contract of reinsurance as well”. Is that correct?
MR MACFARLAN: It only goes one way with 562 which was the amendment made at the same time. Could I perhaps just say one thing before I come to that, that the Court of Appeal found reasons to say that the expression “contract of insurance” did not include contracts of reinsurance. There was a textual matter but primarily the reasons seem to be a policy one which the members of the court found emanating from the Harmer Report and the explanatory memorandum, so I will deal with those two aspects in turn, if I may.
As to the text of the statute, our primary point is the one just adverted to by Justice Kirby and that is this, that the term “contract of insurance” was in section 562 and by the same statute, that is the Corporate Law Reform Act 1992, the legislature did two things. It limited the meaning of “contract of insurance” in 562 by an express provision to the effect that it did not include a contract of reinsurance and then it enacted 562A to deal with contracts of reinsurance. Our primary point is that where the legislature intended “contract of insurance” not to embrace contract of reinsurance, it clearly said so in its amendment at 562, but at the same time it used that expression in 562A without containing that limitation.
KIRBY J: That is not really your primary point. That is a secondary indicium, but the primary point is that a contract of reinsurance is a special kind of a contract of insurance and there are risks that are run and that names an insurer generally as the party insured, so it is just of its character. What was the Court of Appeal’s answer to that? Did they find indicia in the Act that said that this is not to be taken as a contract of insurance, although otherwise it would be?
MR MACFARLAN: Well, they pointed to one thing in the Act. I will come to it in a moment and then to policy reasons, which I will also come to. But may I say first that both the Harmer Report and the explanatory memorandum to which I am going to take your Honours in a few moments, expressly refer to the pre‑existing case law concerning the meaning of “contract of insurance”. That case law says that in its ordinary meaning that term includes reinsurance. Now, where the legislature used the expression “without limitation” in 562A with obvious knowledge of the pre‑existing case law, we submit an inference should be drawn that the legislature intended to adopt the same meanings in the case law. We refer your Honours to Re Alcan 181 CLR 96 at 106 where the principle appears, and in many other places, but it certainly appears there:
that where the Parliament repeats words which have been judicially construed, it is taken to have intended the words to bear the meaning already “judicially attributed to [them]” ‑ ‑ ‑
KIRBY J: I think there are many authorities saying - this is like the Victorian Reports in the late 19th century that say the other thing, that Parliament is just too busy to be knowing everything the courts do.
MR MACFARLAN: Yes.
KIRBY J: I think Sir Owen Dixon once said that that is a bit of a mythology.
MR MACFARLAN: Yes. Well, Parliament was not too busy here, your Honour, or at least its helpers were not too busy, because they expressly referred to this case law in the ‑ ‑ ‑
KIRBY J: They could have done a better job and we would not be spending our day doing this problem.
MR MACFARLAN: They made it very clear, in our submission, because they put an express limitation in 562 and chose not to do it for 562A. Your Honour Justice Kirby referred to the normal meaning. We have quoted in our submissions at paragraph 39 the Prudential Insurance v Commissioner of Inland Revenue definition of insurance. We say the effect of that is that the normal meaning of the expression is such as to include reinsurance.
Your Honours, the textual point argued against us and referred to in the judgment below is this. It said 562A uses both the expression “contract of insurance”, for example, in (1)(a), and also the expression “contract of reinsurance”, therefore Parliament must have intended some distinction between them. Now, our response to that, your Honours, is that it was necessary to use some such terms to denote the different layers, that is, that to identify the source of the funds coming in, that is from a contract of reinsurance, and the class of creditors who were to be preferred in relation to those funds, that is, the other parties to the contracts of insurance. So there is a particular purpose for doing that.
There is no reason, we say, your Honours, why “contract of insurance” there cannot be understood to include, as it normally does “contract of reinsurance”. Where reinsurance is referred to, there is no reason why it cannot be understood to include re‑reinsurance, or retrocession. That was the textual point against us.
The policy point against us, as found by the Court of Appeal, was in effect this – I will come in a few moments to where it appears in the Court of Appeal judgment. The Court of Appeal found that the policy of the section was to protect the weaker parties to insurance contracts where there was an imbalance in bargaining power. There was no imbalance, so the Court of Appeal said, between parties of a contract of reinsurance, unlike the position concerning direct insurance.
KIRBY J: I do not understand that point. Would you just explain that?
MR MACFARLAN: Yes. They were saying, your Honours, at the level of direct insurance one has insureds and an insurance company, and in the usual case the insured would be in a weaker bargaining position so far as the determination of the terms of the contract of insurance than the insurance company, whereas as between reinsured and reinsurer there is, the Court of Appeal inferred, no such imbalance because both parties can be inferred to be professionals in the industry and to be able to look after themselves.
Your Honours, we join issue with the proposition that that is the policy behind the section. The Court of Appeal referred to the Harmer Report and the explanatory memorandum, to which I am about to go, and then to an English decision in Agnew, but neither in the Harmer Report nor in the explanatory memorandum is there any such policy, we say.
If your Honours would go to the joint bundle of materials, at page 32 your Honours will see the relevant part of the Harmer Report. At paragraph 759 on page 32 section 447 is referred to. That is the predecessor of section 562:
Section 447 . . . enables a person who is a creditor of a company in relation to a claim in respect of which the company is insured, to be paid from the insurance claim in priority to the other unsecured creditors.
KIRBY J: You have called this the Harmer Report in your index to materials and the cover sheet is not there, but it is just an ordinary report of the Law Reform Commission, is it not, the LRC?
MR MACFARLAN: It is, your Honour, yes.
KIRBY J: We need a proper reference to it.
MR MACFARLAN: It is a colloquial description, the Harmer Report.
KIRBY J: I know. We have used it ourselves in an earlier case but what is the LRC reference?
MR MACFARLAN: It is Report No 45 of 1988, your Honour. If I go to the end of that paragraph 759 on page 32, the last sentence reads:
The rationale for this priority would appear to be that an individual who would have been entitled to the proceeds of an insurance claim could be very adversely affected if insurance money which has been generated because of their claim is pooled on behalf of all creditors.
Then 760:
The contract of insurance referred to in s 447 has been held to include a contract of reinsurance –
and the footnote is to the decisions in Re Dominion Insurance, Re Saltergate and Re Palmdale. That is one of the references I mentioned earlier where there is explicit reference to the pre‑existing case law. The report goes on:
Reinsurance is the process whereby an insurer transfers or ‘lays off’ all or part of its risk to another insurer. It has been submitted to the Commission that the inclusion of contracts of reinsurance in s 447 may lead to problems if the company being wound up is an insurance company. These include
·the difficulty of identifying third party claimants who are entitled to the benefit of ‘reinsurance’
·where third parties are both creditors and debtors, the applicability of the law of set‑off . . .
·the possibility that surplus money will result from the failure of third parties to lodge claims . . .
·the inequity of those persons whose contracts of insurance are backed by reinsurance only being able to benefit.
. . .
761. Pooling of funds. The key issue in relation to funds paid under reinsurance policies is whether, given the problems of identification, it is better to pool all funds derived from policies of reinsurance so that all insureds in respect of the particular class of insurance or, indeed, all creditors of the insurer may share in the distribution. The argument in favour is that it is more equitable to all insureds because it does not lead to arbitrary distinctions between insureds whose policies were supported by reinsurance and those with policies not so supported.
Then if I could go to line 30 on the page:
The principal argument put forward in the submission for excluding reinsurance from the operation of s 447 is that reinsurance arrangements are fundamentally different from insurance policies. While individual policies of insurance may be specifically reinsured where there is a large or unsecured risk, it is much more common for reinsurance to cover classes of policies with the reinsurer agreeing, for example, to pay a proportion of the risk or all claims exceeding a specified amount.
The Commission’s view is on the next page, paragraph 763:
The Commission agrees that contracts of reinsurance are for the most part fundamentally different from contracts of insurance and that the application of s 447 to reinsurance contracts may lead to inequities. It appears unfair to allow an insured a special priority if the particular insurance policy is backed in some way by reinsurance whereas an insured with a policy not backed by reinsurance ranks with other unsecured creditors.
Then the recommendation in 764:
The Commission recommends that, unless the court orders otherwise, s 447 should not apply to a contract of reinsurance.
Now, that was a recommendation that was not precisely followed in the legislation that followed; rather, the scheme was to exclude reinsurance altogether from the successor to 447 and to create a special provision dealing with reinsurance incorporating a provision for the court to make an order if it felt fit to vary the operation of the section.
Your Honours, the explanatory paper to the public exposure draft of the Corporate Law Reform Bill can be seen commencing at page 38 of that bundle of materials. I will not need to go to the explanatory memorandum in respect of the Bill itself because that is in relevantly the same terms as this explanatory paper in respect of the public exposure draft. The relevant part of the material, your Honours, is ‑ ‑ ‑
KIRBY J: We do need the coversheets of these documents so that we can cite them if we need to. Just supply those later.
MR MACFARLAN: Yes, we will add those to the note we are putting in, your Honour. Page 40 of the bundle, paragraph 1093:
Clause H562 amends subsection 562(1) of the Corporations Law by inserting after the word ‘insurance’ the expression ‘(not being a contract of reinsurance)’. The amendment clarifies the existing law so that 562 does not apply to contracts of –
that should be “reinsurance”, your Honours, and is so corrected in the explanatory memorandum itself.
Instead, specific provision is made for contracts of reinsurance under proposed section 562A.
Paragraph 1095:
The Harmer Report identified a number of difficulties which arise in relation to the application of section 562 to contracts of reinsurance.
In fact the Harmer Report had referred to them as being problems referred to in submissions, but nevertheless they are referred to here as difficulties. Those are the ones I have read to your Honours. Then at line 31 on the page:
The Report noted that a contract of insurance under section 562 has been held to include a contract of reinsurance.
Again Re Dominion and Re Palmdale are referred to. Then 1096 on the opposite page:
The Report also noted that reinsurance should be viewed as no more than the means adopted by –
and that repeats the passage from the Harmer Report. Then 1098:
Clause H562A inserts a new section 562A into the Corporations Law to make specific provision for contracts of reinsurance.
There is nothing further which illuminates the position. Your Honours, we submit that there is nothing in the views there expressed to indicate that what this section is all about is an inequality of bargaining power; rather, behind it is the concept that to a greater or lesser extent where there is insurance or reinsurance backing access should be given to it to the relevant claimant.
Now, in the case of direct insurance, 562 provides for that direct matching. For reasons that are explained in the two documents I have just been to, a different view was taken in respect of reinsurance because it was said that was different from direct insurance. There were problems there and that led to the pooling recommendation, but one looks in vain, we submit, from the turning on bargaining power and the position is very different from that which appeared in the legislation dealt with by the House of Lords in the Agnew [2001] 1 AC 233 decision upon which the Court of Appeal relied heavily.
It was a case in which the plaintiff, London reinsurers, sued the Swedish insurance company in relation to a contract of reinsurance and the plaintiff reinsurers commenced their proceedings in London and a question of jurisdiction arose. If your Honours look at page 234G of the report, your Honours will see a provision from the Lugano Convention. That Convention is referred to between E and F and article 5 referred to between F and G says:
“A person domiciled in a contracting state may, in another contracting state, be sued: (1) in matters relating to a contract, in the courts for the place of performance of the obligation in question –
and so forth. Then there is an exception at H:
Section 3 of the Lugano Convention contains additional special rules which in turn override, inter alia, the provisions of article 5. Section 3 commences with article 7 which provides: “In matters relating to insurance, jurisdiction shall be determined by this Section . . . ” Article 11 in Section 3 provides:
“Without prejudice to the provisions of the third paragraph of article 10, an insurer may bring proceedings only in the courts of the contracting state in which the defendant is domiciled –
and if that section applied then the plaintiffs would have had to have sued the Swedish insurance company in Sweden rather than in London, so there was an issue in the proceedings as to whether matters relating to insurance included or excluded reinsurance. The way in which the House proceeded can be seen at the foot of 237 just below G:
The decision of the Court of Appeal is correct for the reasons submitted . . . Section 3B(2) . . . provides that the Jenard and Möller Report on the Lugano Convention can be referred to in order to ascertain the meaning or effect of any provision of the Convention. That Report points out that Section 3 and Section 4 of the Convention, which deals with consumer contracts, have the primary objective of protecting the weaker party: paragraph 13. Unlike the ordinary insured the reinsured cannot conventionally be regarded as a weaker party than the reinsurer.
Now, the Court of Appeal fastened on that, your Honours, and said that is applicable here to 562A and therefore we should read “contract of insurance” as excluding contracts of reinsurance. Can I show your Honours how the Court of Appeal did that by referring to Justice Ipp at appeal book 395. At line 20, his Honour quoted from the Harmer Report, a passage I had read, and then at line 40 he commenced to quote from the explanatory memorandum. Various passages I have referred to are referred to on pages 396, 397 and then on 398 he refers to the submissions of the liquidator and other parties at line 18, the submissions of AssetInsure and Faraday at line 35. Then at the foot of page 399, line 35 he commences to refer to Agnew and on 400 quotes a number of passages from what is said in Agnew, including what is at line 20, “Unlike the ordinary insured, the reinsured cannot conventionally be regarded as a weaker party than the reinsurer”, and the various passages to like effect in the speeches of others of the Lords.
Then on page 401 at line 30 his Honour refers to Universal General Insurance, a decision of the Court of Justice of the European Communities. Again, the extrinsic material there indicated the basis for the Court’s reference to the weaker contracting parties. Then on page 402, your Honours, Justice Ipp at line 20 referred to the wording of section 562A. At paragraph 223 he referred to:
The cogency of the argument that, while s 562 expressly excludes contracts of reinsurance . . . materially diminished by the fact that in s 562A each of the expressions, “contract of insurance” and “contract of reinsurance” is used.
That is the matter I have already dealt with. Then on the next page, 403, paragraph 226 he goes on to deal with the policy considerations. He says in paragraph 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 Josi Reinsurance 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”.
In the next paragraph he again refers to the same policy and in the last sentence of paragraph 228 says:
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.
Then on the next page at the end of paragraph 229 he refers to it intending:
only to benefit ordinary insureds.
HAYNE J: What does his Honour mean by that?
MR MACFARLAN: “Ordinary insureds”, your Honour?
HAYNE J: Yes. In the context of 562A(1) commencing:
This section applies where:
(a) a company is insured –
What is it? An ordinary insured company?
MR MACFARLAN: Well, his Honour must have been talking about companies, but where the presumption his Honour comes from one does not know and the validity of it is not clear because there will be all manner of insureds, weak and strong and whatever. Paragraph 230 his Honour said:
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.
Your Honours, we submit, with respect, that one just does not get that out of the Harmer Report or the explanatory memorandum. One perhaps gets it out of Agnew, but Agnew was based upon extrinsic materials concerning the policy of the legislation entirely different from those present here.
Your Honours, a further insight into the policy behind 562A, we submit, can be derived from looking at the factors which the legislature set out in section 562A(5) which we submit do not have anything to do with weaker bargaining power, but rather, with a more general notion that to a greater or a lesser extent and in particular circumstances it is appropriate and fair that people who have contracts of insurance should somehow get some benefit in respect of reinsurance that may exist in relation to it.
Your Honours, we would call in aid the recent decision of this Court in Palgo Holdings v Gowans 79 ALJR 1171 at paragraph [28], where the Court cautioned against attributing a purpose to the legislature which was not fairly discernible from the Act and the relevant extrinsic materials.
KIRBY J: The Act was amended within a month, I think, of that decision.
MR MACFARLAN: Yes, that may be ‑ ‑ ‑
KIRBY J: To bear out the minority view.
MR MACFARLAN: That does not affect the correctness of the decision, your Honour, with respect.
KIRBY J: I will not say anything.
MR MACFARLAN: The point is just one of approach, that if one is going to use purpose to construe an Act, one has to be very careful to identify the purpose and make sure that one has the right purpose when one is departing from what we say is the normal meaning.
KIRBY J: I do not know where it leads, but so far as what Justice Ipp says so far as it goes it would be right, little insureds are not as well able to protect themselves as big insureds. But I do not know where that leads in this circumstance.
MR MACFARLAN: That is not the focus of the policy as we put it. The focus of the policy is to what extent should someone who has a policy of insurance get the benefit of reinsurance. It is not a matter of bargaining power; it is a matter of what is fair in all of the circumstances. The circumstances include the various problems identified in the Harmer Report, but they apply equally in a context of the winding-up of an insurance company as they do in the context of the winding-up of a reinsurance company.
Your Honours, subject to one matter that is what we wish to put. There is one matter in the written submissions that I would like to mention in passing, namely we submit there in paragraph 52 that if your Honours were against us on the appeal, nevertheless your Honours would make a special costs order, for one reason, that the case was commenced as a test case, and for another reason, that clarity and certainty is important in this area, particularly in section 31(4). As I pointed out, the relevant
respondents to the appeal do not seek to support as their primary position the reasoning of Justice Hodgson. If the Court pleases.
GLEESON CJ: Thank you, Mr Macfarlan.
MR COLES: If it is convenient, your Honours, it may be appropriate to deal with the section 562A point first, since Mr Macfarlan has most recently dealt with it and it would be sensible to come straight in on that.
KIRBY J: You accept that it is the Corporations Act that is the relevant law?
MR COLES: Yes.
KIRBY J: It is not the State law that preceded it?
MR COLES: The Corporations Act, yes. There is not any controversy about that, I think, if your Honours please.
KIRBY J: So we have two federal Acts. We do not have any problems of the interrelationship with the State law that troubled the Court of Appeal?
MR COLES: No, we do not. Your Honours, as our written submissions indicate we respectfully submit that the decision of the Court of Appeal holding that section 562A does not extend to the proceeds received by reinsurers from other insurers, we contend that is correct for a collection of reasons, which are textual, contextual and policy related.
Can I deal, however, in connection with the last-mentioned aspect, that is to say the policy, by perhaps suggesting how we would see the relevant policy being identified and worked through. We do not accept it will become apparent - wholly embrace the somewhat elastic notion of weaker and stronger bargaining parties and so forth, but we do say that that is not irrelevant but it takes its place perhaps subordinate to the more insistent policy – two insistent policies indeed – which can be discerned as relevant to the construction and application of the legislation. Can I mention ‑ ‑ ‑
KIRBY J: Would you just explain now the different bargaining power. Is it all relevant to the determination of this issue?
MR COLES: I will have to deal with that shortly, your Honour. As I say, as your Honours will hear when I develop very shortly the submission, we do not embrace the notion of inequality of bargaining power or superiority of bargaining power at the forefront of our policy submissions although we do not disclaim it, and we do not repudiate it, but we do not, with respect, attach the same significance to it as the Court of Appeal did, but we contend that notwithstanding that the decision should be affirmed for reasons including those that the Court of Appeal identified.
HAYNE J: At the risk of pinning you to it, Mr Coles, how can there be any question of inequality of bargaining power intruded in the face of 562A(1)(a) where by hypothesis:
a company is insured, under a contract of reinsurance . . . in respect of a relevant contract of insurance –
that the company has written? There can be no question of inequality, can there?
MR COLES: It does not leap out at one, your Honour. It does not leap out at one, I must say, your Honour, and I think we would acknowledge that the concept of respective bargaining power seems to have been borrowed – I will not say uncritically, but perhaps borrowed with less depth of analysis than might otherwise have been invoked via the observations that came from their Lordships in Agnew which in turn, of course, borrowed heavily on the admissible background interpretative material upon which they were instructed to rely in interpreting the Lugano Convention.
Can I firstly invite your Honours’ attention back, not for the purposes of rereading what Mr Macfarlan has already taken you to, but to point out the first of two important policy considerations that we say have a strong bearing in this area. If your Honours have the supplementary bundle, the first pages are as the index indicates from what is popularly called “The Harmer Report, (Chapter 2: General issues” and if your Honours go to page 1 your Honour will see that “Chapter 2: General issues” commences, and on page 5 ‑ that is to say, page 5 of the supplementary appeal papers – there is a subheading at line 14 “Aims of insolvency law” and then a further subheading, “Principles”. Thereon the Commission goes on to say in the third sentence of that paragraph 33:
The principles are identified below with brief details of the way in which they guided specific recommendations of the Commission.
·The fundamental purpose of an insolvency law is to provide a fair and orderly process for dealing with the financial affairs of insolvent individuals and companies.
They elaborate on that point, and if your Honours would indulge me so far as to go over to the next page, the first full bullet point, still under the same paragraph but on the next page, the particular fundamental principle or the particular principle, I should say, which has guided the recommendations of the Committee is identified in this way:
The principle of equal sharing between creditors should be retained and in some areas reinforced.
Equal sharing has long been regarded as a fundamental principle of insolvency law. The Commission’s review of the priority provisions of the legislation was guided by this principle –
and I emphasise “priority provisions” because that is what we are concerned with here:
and was the basis of the Commission’s recommendation that the priority –
and so forth, and they recite that. That, your Honour, is of course in the chapter relating to general principles. Then the passages to which Mr Macfarlan has taken you commence on page 13 of the supplementary materials and are contained in Chapter 15 of the Commission’s report which is headed, and deals specifically with the topic of priority among creditors.
What I have taken you to before, of course, was in the general principles, but if your Honour would look then at the way the Commission regards or amplifies its view on what it describes at line 30 of the page:
The fundamental principle of equality
713. This principle is well expressed in the Cork Report.
It is a fundamental objective of the law of insolvency to achieve a rateable, that is to say pari passu, distribution of the uncharged assets of the insolvent amongst the unsecured creditors.
Despite this principle, the objective of equal distribution is rarely, if ever, achieved because of the extensive range of creditors upon whom statutory priority is conferred. It is the view of the Commission that, to the maximum extent possible, the principle of equality should be maintained by insolvency law subject to these qualifications:
. it should not intrude unnecessarily upon the law as it otherwise affects property rights and securities
. it should encourage the effective administration of insolvent estates.
Then a passage to which we would draw particular attention:
Any departure from this approach should only be countenanced by reference to clearly defined principles or policies which enjoy general community support.
Now, it was against that background, in our respectful submission, that what fell from the Commission in the balance of that Chapter 15 on priorities, including, of course, the reference to the specific role or function, purpose and commercial effect of reinsurance came to be said. Now, it is unnecessary to repeat the portions to which Mr Macfarlan has taken you, but I would invite your Honours to bear in mind in reviewing those provisions that they fall for consideration in the context of the emphasis by the Commission on the fundamental principle of equality.
Now, having said that by way of background, may I now come to what we would respectfully suggest is an important policy consideration applicable in the resolution of the constructional issue which 562A presents. May I try and put it this way. Apart from exceptions specifically provided for, all creditors, generally speaking, should participate rateably in the distribution of the insolvent estate. There is no legislative reason, in our respectful submission, to benefit what I will call the insurance industry or the insurance industry participants as a class at the expense of the general body of creditors. That seems, with respect, to be an uncontroversial proposition in itself.
To the contrary, we would say, those incursions into the principle of rateable distribution of which 562 itself and 562A are proper illustrations, they are incursions into the principle of rateable distribution and they exist in the – they are incursions in the insurance context into the principle of rateable distribution. They are justified, in our respectful submission, by the importance of giving effect to another high policy consideration, that is to say the high social purpose of, in effect, making insurance proceeds available to members of the public, members of the community, who have a need for indemnity against the particular risks and then expectation by the purchase of that right of indemnity the protection thereby afforded would be meaningful.
That high community objective, in our respectful submission, explains the incursions into rateable distribution which 562 and 562A respectively supply. The protection, for example - let me illustrate it firstly by reference to section 562. The protection afforded by 562 is crucial, of course, against the background of the well‑known decision of the Court of Appeal in 1928 in Harrington’s Case. Harrington’s Case is of course a case of an insolvent insured. The taxi company, which injured Mr Harrington, had a policy of insurance against that risk. I am sorry. The victim of the tort was a Mr Chaplin.
He, ordinarily, would have been entitled to receive the benefit of the contract of indemnity which the insolvent insured had taken out with the perfectly solvent insurer. The proceeds of the policy were received. There was no basis. There could hardly, for example, be a trust whereby one could find a mechanism for, in effect, giving Mr Chaplin, the injured person, a priority over the ordinary unsecured creditors of the company. So the result was – and it was a result that offended community expectations – that the general unsecured creditors of the Harrington Motor Company, in effect, participated greatly in the proceeds of the insurance policy which the company had taken out to benefit people specifically in the class of Mr Chaplin, the injured plaintiff.
KIRBY J: What is the name of this case?
MR COLES: This is Harrington Motor Company; Ex parte Chaplin [1928] 1 Ch 105. It is on our list, if your Honours please, and I am very happy to take your Honours through it, but suffice it to say there could be found in the law, there being no relevant statute law authorising other than distribution amongst creditors rateably - the ordinary unsecured – there could be found no principle of law to displace that. For example, one could not identify a trust. The moneys were simply paid to the company beneficially.
So there was no technique available to the law to enable the injured Mr Chaplin to obtain the proceeds of the insurance which it was every participant’s – and as I say, the expectation of every participant in the process that he should obtain. So, 562 of course came in very quickly, I think, in 1930 in England and not long after that in the various States of Australia.
KIRBY J: It is not the only thing. There were amendments to the – I think it is one of - the Law Reform (Miscellaneous Provisions) Act, was it not, that allows you to go straight to the insurer.
MR COLES: Yes, section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW). It has counterparts.
KIRBY J: I think there may have been provisions in workers compensation law, too. I am not sure.
MR COLES: So there the enactment of section 562 of the Corporations Act or its predecessors, was a justifiable incursion into the process or the concept of rateable distribution amongst the ordinary unsecured creditors. Indeed, the insistent demands of justice and the proper expectations of acquirers of policies of indemnity would have dictated that result. Likewise, in our respectful submission, when it is the insurer, not the insured – where the insurer and not the insured is the insolvent the expectations of the insureds who made claims upon the insolvent insurer and the insured’s own victims, the Mr Chaplins of the world, will be better satisfied and the expectations of those who contract for insurance will be better met and satisfied if all of the reinsurance proceeds go in priority to the insurance contract claimants.
In that situation, the Chaplins of the world are still interested in that outcome, albeit at one remove, but when one moves along still further, where the reinsurer is insolvent and itself enjoys reinsurance then the contest is really between a limited class or group of solvent insurers, on the one hand, against the general body of creditors on the other. So, one asks in point of attempt to identify policy objective, why would one prefer over and above the general body of creditors in terms of the division of the proceeds in the hands of a reinsurer of reinsurance, why would one prefer ‑ ‑ ‑
HAYNE J: An alternative way of putting it is that the proceeds of insurance, on your submission, go into the pool to satisfy all creditors regardless or rather than to the particular creditor whose claim generated the payment.
MR COLES: Certainly. I have identified the contest as being the contest between the general body of creditors, not distinguishing it ‑ ‑ ‑
HAYNE J: Exactly, and we have the weaker and stronger parties marching across the stage in the guise of the general body of creditors, the Mr Chaplins of this world was I think the way you put it, versus this body of strong and healthy insurance companies who stand foursquare in times of uncertainty, is that right?
MR COLES: Your Honour should not misunderstand my submission as a re-badging of the weaker party concept.
HAYNE J: Forgive me, I did.
MR COLES: I think, your Honour, with respect to you, that I am seeking to resist that attribution but I am not sure my endeavours are necessarily self‑evidently successful but we would say, your Honour, there is a legitimate policy purpose in recognising an incursion or a cut out from the pro rata pari passu distribution process. The fulfilment of expectations that the insurance industry generally generates to the consumers of its product, on the one hand, and panning across to the other scenario, a situation where there is a competition between thoroughly solvent participants in the insurance industry fighting in contest with the other unsecured creditors in the ashes of the insolvent reinsurer.
So we respectfully say the major concern should be with the objects of insurance protection, not simply with some less tangible concept of protection of weaker parties and the like and frankly many insured persons will be parties of considerable commercial strength. Many of them may be themselves insurance companies insured in other respects but bargaining position, we would say, is not quite – equality or inequality of bargaining position is not quite the nub of the point.
We do not - as I say, I before disclaimed it as wholly irrelevant but we are, with respect, in some difficulties ascribing content to the expression and when one looks, as your Honours point out or as your Honour Justice Hayne points out at the opening words of section 562A(1), one is in some difficulty, I suppose, ascribing a textual basis in the – so, in our respectful submission, it may be fair to say that the Law Reform Commission did not exactly have this problem in mind, that their evaluation did not, I do not think I could claim, directly contemplate the situation of competition between a group of thriving insurance industry participants in competition with the ordinary unsecureds, but ‑ ‑ ‑
HAYNE J: Now, textually, how do you do it? 562A(1) makes plain, does it not, that the section is dealing and dealing only with creditors of insolvent insurers, is that right?
MR COLES: Yes, that is right.
HAYNE J: Now, what is the textual ‑ ‑ ‑
MR COLES: I should say, 562A(1)(a), the company, that is to say, the company that is insolvent, the insolvent “company is insured, under a contract of reinsurance”.
HAYNE J:
against liability to pay amounts in respect of a relevant contract of insurance ‑ ‑ ‑
MR COLES: That is right. So we are looking at an insolvent insurance company who was reinsured.
HAYNE J: Just so. Now, what is the textual solution that you proffer to achieve the policy objective you identified?
MR COLES: It is no more and no less than this, but we do lay some claims for its cogency which I will seek to develop. It is, in the first instance, simply to point to the juxtaposition that the close propinquity between the two expressions, “insured, under a contract of reinsurance” and then a few lines further down, “a relevant contract of insurance” - now you will see that juxtaposition occurring at 562A(1)(a) and you will see a definition, as has been pointed out of “relevant contract of insurance”, though not of anything else – you will see, for example, in the definition of “Reinsurance payment”, that is the “amount received under the contract of reinsurance”. So there is, working one’s way through the section – “Particular amount owed” is defined under subsection (3) as:
payable to the person under the relevant contract of insurance.
Total amount owed . . . under relevant contracts of insurance.
Reinsurance payment means the amount received under the contract of reinsurance -
So there is a close textual juxtaposition of the two respective phrases and we say, your Honour, that that does not self-evidently produce the concept that they would mean the same thing. What it does do is give rise to an ambiguity which authorises consideration of wider circumstances, including those to which I have referred and here I perhaps would seek to ‑ ‑ ‑
KIRBY J: Once you get to that though it means that you, for the purpose of the creditors and this principle of equality of dealing, get your hands on a fund which has a big stamp on it. That is the stamp that this is somebody else’s insurance benefit.
MR COLES: In a sense, the answer to that question may assume the matter in issue. I am not sure, your Honour. But could I seek to try and develop the position a little further by inviting your Honours’ attention to the observation of Lord Millett in Agnew v Länsförsäkringsbolagens, to which you have already been taken. My Swedish pronunciation, your Honour, is under criticism from my learned friend. At the foot of page 260, if your Honours please, in the speech of Lord Millett, just to put his later observations in the context – he is:
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.
It is not to the point, in our respectful submission, that in many cases insurance as a general topic includes reinsurance, because reinsurance is obviously a species of insurance. What is important is whether in a particular context and in advancement of the particular statutory purposes of a given enactment it has that effect. Lord Millett went on to say ‑ ‑ ‑
HEYDON J: Lord Millett said at G:
If the question arose under a domestic statute . . . there would be no reason to confine insurance to direct insurance -
and 562A is a domestic statute, in English – no foreign language problems, foreign country problems.
MR COLES: Well, that is an observation, your Honour.
KIRBY J: Lord Millett was dissenting. I do not know if that affects ‑ ‑ ‑
MR COLES: It does not, but the point we want to make really appears on the next page, 262. He says:
This is not because contracts of reinsurance are commercial rather than “consumer” contracts; or because insured risks tend to be very large. It is because, while 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 ‑ ‑ ‑
KIRBY J: Where is that passage?
MR COLES: That passage appears between A and C on page 262 in the speech of Lord Millett. The other passages are, as Mr Macfarlan pointed out, noted elsewhere in the judgment, but could we just remind your Honour for completeness that on page 249, in the speech of Lord Hope, commencing at A, he says:
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.
KIRBY J: I am beginning to see what Justice Ipp was getting at when he talked about the different quality of insurance and reinsurance.
MR COLES: With respect, the only justifiable criticism of Mr Justice Ipp’s reasoning is he perhaps laid greater concentration on the weaker party concept, which is not the whole content of the identified policy, in our respectful submission. There are two main contents ‑ ‑ ‑
KIRBY J: If you take Lord Millett’s view ‑ ‑ ‑
MR COLES: One is the point that Lord Hope is making about the conceptually distinct purposes served respectively by contracts of insurance on the one hand and contracts of reinsurance on the other, and the other is the point I hope I was seeking to explain, namely the importance of insurance as a community indemnity activity, or safeguard, as between insurers and insureds. The third point of course is the total absence of any policy reason if the contest be properly classified as one between a group of insurers on the one hand – the solvent insurers who are proving in the winding-up of the insolvent reinsurer are competing with the general body of creditors for the reinsurer’s reinsurance proceeds, and we see no policy reason to interpret section 562A to give those persons a preference over the ordinary body of unsecureds.
KIRBY J: But unless the insurer gets the benefit of the reinsurance, the insured further down the food chain is not going to get the insured’s benefits.
MR COLES: There is room, I acknowledge, for a kind of trickle down argument.
KIRBY J: There certainly is. That is the practicality of the matter.
MR COLES: But our answers to that are twofold. One, we say the evaluative level is the risk – and I hope this does not depreciate the submission, but the evaluative level is at the consumer level that I have been describing, the people whose expectations are that they will secure indemnity by contract against risks which they need to insure against. There are not a series of greater levels. That is the one level and one works out to see how advancing that base level is legislatively catered for at the various stages of the statutory operation. That is the first point.
The second point is, of course, the trickle down effect is rather less important in the scenario we are discussing because ordinarily and necessarily the beneficiary of the proceeds of the insolvent reinsurer’s reinsurance will be prudently managed Part III regulated solvent insurers themselves who may be expected to be able, even with the odd dint here and there, of – and, after all, they are only being asked to accept a rateable proportion of the reinsurance as opposed to pocketing between themselves the lot. One asks whether the trickle down effect, bearing in mind that the supposed victims of my suggested construction are themselves solvent and prudently regulated insurers, is the supposed trickle down effect going to have a – wreak havoc, in other words, at the tier in the marketplace that we say the policy is directed to.
KIRBY J: Yes, but it means you ‑ ‑ ‑
MR COLES: In other words, we say there is no significant effect on the Mr Chaplins of the world or the Harrington motor companies of the world.
KIRBY J: I wonder about that. I mean, if you have mesothelioma or if you are a quadriplegic, you know, every penny counts and if you are not going to be getting it because the reinsurance is going to be – or part of it rateably is going to be shared with general creditors, then that ‑ ‑ ‑
MR COLES: That is the point. We do not identify any interception in the eventual rights of the real objects of the insurance, the victims. Their rights are not impaired, as we would see it, or not self‑evidently impaired by the fact that – in other words, the policies they enjoy will respond by this – or the solvent insurers who have issued the policies will answer their claims.
KIRBY J: Well, we could sit here for days talking about this as a law reform body, but ultimately we have to go back to the text and solve it in terms of what the statute requires.
MR COLES: If one accepts the proposition that if for no other reason than the juxtaposition of the several phrases to which I have referred invites recognition of an ambiguity, one then looks at the policy considerations I have referred. One sees no particular magic in – or one sees no compelling necessity to treat the two expressions as, in effect, not as otherwise than their linguistic content suggests. In other words, there is a linguistic distinction and why is ‑ ‑ ‑
HAYNE J: There is, but how do you give effect to it? I understand the point you make about insurance/reinsurance being distinguishable and distinguished, but are you reading it as:
This section applies where:
(a) a company is insured, under a contract of reinsurance . . . against liability –
What are you doing to the words to take out the reinsurer from its operation? At the moment I cannot grasp it.
MR COLES: I think one way we can approach it, if you start at the bottom, in subsection (8) you have the definition of “relevant contract of insurance”, which simply means a contract of insurance entered into before the onset of liquidation, in effect. The question really is, does “relevant contract of insurance” include contract of reinsurance when “relevant contract of insurance” means contract of insurance? So, in other words, there is a virtually exclusive definition of “relevant contract of insurance”. It means a contract of insurance entered into before the relevant date and it does not go on to say “and includes a contract of reinsurance”. So that is really the issue: does, on its proper construction, “relevant contract of insurance” as defined in subsection (8) include a contract of reinsurance? That is the issue, in our respectful submission, and we see no compelling reason for an affirmative answer to that question.
KIRBY J: The question is whether the policy of the section, the compelling reason to give it a construction contrary to that which you urge from those words is the notion that certain funds are labelled, they are stamped, they are marked and they are going to be put aside to the ultimate benefit of those who have in the faith of the insurance industry taken out insurance down the food chain, and that is at least arguably a high public policy which is reflected not just in this statute but in the Law Reform (Miscellaneous Provisions) Act, the Banking Act and other provisions which the Court of Appeal should have held applied here.
MR COLES: I suppose a partial answer – and, indeed, where I think we gain some support from the dicta, now no more, in Agnew’s Case is that really draws attention to a significant matter. There are really two insurance industries. There is the insurance industry in which the participants are insurance companies who are insuring their book, in effect. Now, that is typically excessive loss treaty reinsurance, and there is the insurance industry, more familiarly known to people who have houses, cars and so forth, the consumer insurance industry and the business insurance industry, and we say that if you look at the policy considerations described in the portions that Mr Macfarlan read to you from Harmer’s Report and from the explanatory memorandum and so forth, it is plain, in our respectful submission, that the emphasis was on the consumer market rather than the insurance industry participant market.
Now, your Honours, our written submissions put the matter in various other ways, and unless there is any other aspect about that in which I can assist your Honours, I should move on in view of the time to the other topic. Can I commence perhaps by some short observations in the light of some matters your Honours raised this morning about section 116. It refers, of course, to the winding‑up of a body corporate. It is not essential, of course, that the body corporate should be a body corporate incorporated in this country. It may be a body corporate incorporated overseas which has come into this country to do business and has become recognised or registered and thereby authorised for that purpose to do so.
Secondly, it is not of the essence of the section that that body corporate has commenced to be wound up in or solely in Australia. In fact the winding‑up may have originated in the country of origin in the case of internationally operative bodies corporate. Thirdly, for matters, it is of course not essential or it is not a condition of the operation of the section that the winding‑up is a winding‑up in insolvency. Indeed, many insurance companies are wound up voluntarily.
HAYNE J: Just a moment, go back to the proposition you made immediately before that. You say that in the winding‑up of a body corporate extends to the winding‑up overseas of a foreign body?
MR COLES: Yes. For example, if you had a Bavarian liquidator or an insurance company in Munich, for example, who had a subsidiary or who was registered here as a foreign company to carry on business ‑ ‑ ‑
HAYNE J: Yes, and without a Part III winding‑up?
MR COLES: There are two ways, as we would see it, you can do it. The primary winding‑up or the domiciliary winding‑up would happen necessarily in the place of the company’s incorporation. The liquidator in the place of incorporation could come into this country. His title as such would no doubt, unless there was some reason to the contrary, be recognised, and he might sue in our courts as liquidator of the foreign company and recover assets and take them with him back to the foreign country.
GLEESON CJ: It used to mean, did it not, winding‑up by a court?
MR COLES: Yes.
GLEESON CJ: I mean winding‑up by a local court, winding‑up by the Supreme Court of New South Wales or winding‑up by the Supreme Court of Victoria?
MR COLES: That is one of the features of the section. It simply says neutrally or colourlessly, if the body corporate commences to be wound up. Now, that could be a voluntary winding‑up, in our respectful submission, of a perfectly solvent insurer, and they are a very common form of winding‑up, on our understanding. As I say, as we see it, there will be two ways in which a ‑ ‑ ‑
GLEESON CJ: But what, if any, territorial connection is there in the opening words of section 116?
MR COLES: In our respectful submission, because the prohibition will be irrelevant otherwise, the supposition is that it carries on business in this country but the only territorial connection is that the event which enlivens the section has happened, namely, it is carrying on business, no doubt lawfully under the section, but there is no territorial connection with incorporation with making of winding‑up resolution or winding‑up order or with residence – in other words, the local jurisdiction need not be the domiciliary winding‑up.
There are, as we would imagine, two ways one could have it. One could have the foreign liquidator coming to this country and simply collect the assets himself, and unless there were provisions like section 116 he could pack them up and take them back to the primary port of administration. The other way of doing it would be to have a local liquidator appointed under a Part 5.7 body winding‑up. His function, interestingly, would normally be to collect the assets in this country and send them to or repatriate them to the foreign port.
HAYNE J: Under Part 5.7? The liquidator would be bound under a Part 5.7 winding‑up to ‑ ‑ ‑
MR COLES: If it was not for 116. We suggest that, your Honour, because – and I think, assuming this was the operative statutory provision relating to companies in 1973, section 352(3) of the Companies Act 1961 provided that:
A liquidator of a foreign company appointed for the State by the Court or a person exercising powers and functions of such a liquidator –
had certain duties, one of which was:
unless otherwise ordered by the Court, only recover and realize the assets of the foreign company in the State and pay the net amount so recovered and realized to the liquidator of that foreign company for the place where it was formed or incorporated.
There were some other prohibitions, for example ‑ ‑ ‑
HAYNE J: The local liquidator was bound to abide the local winding‑up law. That I understand.
MR COLES: Yes, quite.
HAYNE J: But you have to point me to a statutory provision to make good the proposition, I think, rather than simply assert it as a matter of general law, do you not?
MR COLES: The general law would encompass – it is presently section 601CL(15), if it matters – the local law would countenance the possibility that the liquidator might, subject to the publication of advertisements and so forth, simply remit the proceeds of collection to the liquidator and the country where the primary winding‑up was happening. Section 116 of course intercepts that either because if the foreign liquidator enters Australia to collect the assets himself he thereby, of course, becomes subject to Australian law, or, if the local liquidator carries out the functions conferred and imposed upon him by Australian law then he also, of course, is obviously bound by section 116. So, in other words, there is an interception of what might otherwise be the process of repatriation of assets to another country.
HAYNE J: Repatriation of net amount.
MR COLES: Yes, net amount. We prefer to look at the section, if it matters, not in terms of some parochial or nationalistic view of things, but prefer to regard the section perhaps as more about symmetry or consistency than about any particular view about giving priority to persons who might be called Australian creditors, notably because the section is not concerned with the claims of Australian creditors. As such, it is concerned by terms with the discharge of liabilities in Australia, which may of course not be liabilities to Australian creditors at all. They might be liabilities in Australia to creditors all around the world and, indeed ‑ ‑ ‑
KIRBY J: I understand the submission, but overwhelmingly they would be Australian creditors.
MR COLES: As a matter of practice that is very likely to be.
KIRBY J: I thought this morning that this had a nationalistic type view that went back to the old debates, maybe at the time of Federation, about protectionism and so on, but it does seem that this goes back well into the 19th century, provisions of this kind, and whether one can ascribe that to them or if there is some other theory, I do not know. I am less sure now than I was this morning.
MR COLES: Well, it is our submission that one can look at the provisions, in effect, fairly colourlessly as part of a consistent process, starting with Part III, which, of course, is the part that your Honours have been considering and includes, importantly, sections such as 23(c) and 29.
GLEESON CJ: It is related to the regulatory scheme, is it not?
MR COLES: Yes, that is right. In other words, the regulatory scheme prescribed by Part III which insists upon a surplus of assets over liabilities and a buffer or cushion above them is intended to operate in relation to all those insurance companies who do business – in other words, intended to regulate the Australian operations.
GLEESON CJ: Do they make returns of their liabilities and assets?
MR COLES: Yes.
GLEESON CJ: Are there returns identified Australian liability?
MR COLES: Yes, there is a statutory form they have to fill in which carefully divides up ‑ ‑ ‑
GLEESON CJ: That is what the regulator is supposed to be keeping an eye on.
MR COLES: Yes, that is right. There is a form of accounts that have to be provided to APRA which divide these things up more or less as you would suppose it would in light of the statutory provisions, but the importance is we are regulating under Part III in the prudential regulatory provisions the conduct of the insurance operations of companies doing insurance business in this company while ‑ ‑ ‑
GLEESON CJ: The regulator would not know what happens to them as a result of a hurricane in Florida.
MR COLES: They would not, and that is happening while they are of course doing business here and while they are no doubt trading in solvent and meeting their claims and so forth. Section 116 is simply to be seen as the terminal point when that has stopped, but it carries through, in our respectful submission, the same concept and the same policy, namely, that if all has gone well in the prudential regulation imposed by Part III you should find when you get to the in point, 116, if the provision – well you would expect the provisions to operate symmetrically and consistently and you should find, although you would not because perhaps atypical or catastrophic events have intercepted it, but you should in theory find that when the winding‑up comes the same levels of assets in excess of liabilities and the same buffer or cushion of another $2 million or thereabouts on top should be accounted, and it is because the regulatory provisions are insistent that the company must be in the financial position which those provisions prescribe, that when you get to the terminal point then you should suppose that the same process ought to operate consistently in the same way. That is to say the liabilities in Australia should be able to be paid out of the assets in Australia because the insurance company has been regulated all along to make sure that happens.
The bearing of this of course on the interpretative issue in the appeal is important because there should be the same and no less access to the Australian assets in a winding-up than was intended to be available to meet the company’s claims whilst the company was trading. Attention has been drawn already to section 23(c), and I think the other section is 29(c), where the conditions of carrying on business provide for that consistent level of surplus of assets over liabilities and a cushion on top as well.
Now, they of course suggest, in our respectful submission, that all of the liabilities, not just insurance liabilities – there is no point in a regulatory regime not including liabilities to which the company while trading may be subject, for example, liabilities to pay compensation to employees or liabilities to meet any sort of claim that might arise. Liabilities in Australia in the regulatory provisions must mean all the liabilities of any kind to which the company is subject, not simply insurance liabilities. So it would be asymmetrical when you get to the terminal point of the process to regard the liabilities in Australia as restricted to insurance liabilities, and plainly they are not. What our learned friends say is that section 31(4) prescribes what are the only insurance liabilities in Australia.
Now, to bring that about, in our respectful submission, requires a particular process of construction of the Act which we respectfully suggest is not available. The initial operative provision of course must be section 116(4). We are of course here considering whether that provision, which is undermining section 31, has effect for the purposes of this section. That is a limited formulation to use if one means section 31 has exclusive effect and a fortiori, as the appellant submission goes further, it says section 31(4) has exhaustive and exclusive effects for the purposes of insurance liabilities which, in our respectful submission, is a gloss on section 116(4) which is not warranted by the text.
One bears in mind that section 116(4) is not, in form at least, a section purporting to be definitional. One bears in mind in that context that section 3 of the Act contains elaborate definitions and it would have been an easy matter to insert in section 3 a definition that simply said liabilities in Australia means those referred to in section 31, and that would cement the matter throughout the whole of the Act. But, in our respectful submission, it is less easy to see, when one looks at section 116(4), that a statement that section 31 has effect means has effect to the exclusion of things that plainly are liabilities in Australia.
The next thing one notices of course is that section 31 is concerned at the most with liabilities for under insurance arrangements, and it is not claimed by our learned friends in fairness that section 116, when it refers to liabilities in Australia, is only referring to insurance liabilities in Australia – plainly that would not be for the reasons we mentioned correct. So one has a dual notion that liabilities in Australia in section 116(3) means all of the liabilities in Australia, except any insurance liabilities which are those confined to the narrow walls of section 31, and our friends would say section 31(4), but section 31(4) itself does not apply of course to all liabilities of an insurance kind and, in our respectful submission, one would not, conformably with the regulatory pattern insisted upon by Part III, carve out of that when one gets to 116 a subset of insurance liabilities, being only those insurance liabilities of the company which corresponded with the gateways described in subsection (4).
HAYNE J: That is a set of submissions that seems to depend upon a view of the operation of section 29(1) that I do not presently understand. Section 29(1) prescribes the conditions, is that right?
MR COLES: Yes.
HAYNE J: Are the conditions in (a), (b) and (c), if applicable, cumulative?
MR COLES: If your Honour will pardon me while I turn up the section. Yes, they are, your Honour.
HAYNE J: In particular, therefore, 29(1)(b) which speaks of liabilities, not liabilities in Australia, and (c) which fastens on liabilities in Australia.
MR COLES: Yes. It is not easy to identify the reason for the additional words, in our respectful submission, but no doubt there is a purpose.
HAYNE J: If you have an international company, compliance with 29(1)(b) may be different from the manner of compliance with 29(1)(c), may it not?
MR COLES: I agree with that, your Honour, and (b) of course, is applicable to a body corporate which is incorporated in Australia.
HAYNE J: Yes, but it may be trading offshore.
MR COLES: That is true, your Honour, that is true. We focus on subsection (c) and we would suggest there is no warrant in 29(1)(c) for limiting liabilities in Australia so far as they are insurance liabilities to only those insurance liabilities described in section 31(4). It is of course plain, your Honour, that section 31 itself which has effect to…..116 describes liabilities including, we would think, insurance liabilities which are not confined to the insurance liabilities ascribed in subsection (4).
Subsection (1) simply refers to “liabilities of a body corporate” without discriminating, although it says what they do not include and does not subject itself to subsection (4) and, equally importantly, subsection (2) says – staying with subsection (1), if a body corporate provides in its accounts for liability then that is a liability. Likewise if APRA under subsection (3) directs the body corporate to include the liability in its accounts then that is a liability too and it would seem, in our respectful submission, unnecessarily restrictive to suppose for that reason that subsection (4) is exhaustive of liabilities under insurance contracts.
KIRBY J: APRA has taken the place of the old Insurance Commissioner, is that correct?
MR COLES: Yes, that is right. In 1973 it was the Insurance Commissioner, I think, your Honour, and more recently APRA. Now, of course, the next point is that one needs to bear in mind, in our respectful submission, that subsection (4) is concerned only with policies, in effect, made or negotiated, to summarise inadequately, in Australia. It focuses on a territorial nexus with contractual formation or negotiation and there is absolutely no reason why a body corporate carrying on insurance business in this country might not incur a liability under an insurance contract, under a contract made - wholly negotiated and made out of Australia, the policy issued, the stamp affixed and so forth out of this country and there is absolutely no reason why that would not be a liability in Australia.
Indeed, in the case of a single resident Australian insurer in a winding‑up with a corporation carrying on business only in this country, then it is a liability on Australia plainly under the principles of private international law for the best and most obvious reason, that anybody who wants to submit to the jurisdiction of this Court can come into this country and sue that body corporate in this country and recover and execute judgment against the corporation here. Hence, the rule that in the case of a debtor who has but one place of residence, the creditor’s asset is situated where the debtor resides because it is there the chose in action is enforceable.
New Cap Reinsurance is, of course, a single resident debtor carrying on business only in this country, so one does not extend to the next principle, namely, where you have a debtor resident in multiple jurisdictions then you look to see whereby the terms of the contract the debt is repayable or, if there are no such terms where, according to the ordinary course of events, the closest connection with the liability is likely to be encountered. We do not have that situation here. We have a single resident Australian debtor, all of whose liabilities are for that reason liabilities in Australia.
Now, as I say, the fact that that company could write business negotiated overseas attracting neither of the territorial connections that subsection (4) in either of its parts prescribe and not incur liabilities in Australia is an unnatural proposition because what would be the answer when sued in this country for a liability which, under a policy it had made somewhere else, it could hardly plead in defence that this is not a liability in Australia. It would be a liability in Australia. An Australian court would enforce the contract and would enter judgment and it would not be much good telling APRA that I am not including this in my next return because it is not covered by subsection (4). In other words, to view subsection (4) as exhaustive would be subversive rather than in aid of advancing the purpose which section 31 is intended to serve, in our respectful submission.
Now, the next point, and I think almost the last one, there are powerful arguments, as Justice Hodgson pointed out, why subsection (4) cannot be exhaustive. Can I just mention two. Subsection (4)(b) which is concerned with negotiating arrangements or the like in Australia even if the contract is formed or made or the policy issued in another country, if you look at subsection (4)(b)(i) it will be a liability in Australia if the contract that was negotiated in this country “relates to a liability contingent upon an event that can happen only in Australia”.
Now, if you suppose that an event can happen both inside or outside Australia, that is to say the territorial limitation of the event being one happening only in Australia does not apply, just an event that could happen anywhere, inside or outside, but suppose also a sole resident insurer such as the first respondent in the present case, and suppose that insurer has agreed to satisfy that liability in this country, that would inevitably, as a matter of general principle and we would almost say common sense, be a liability in Australia, but not included in the statutory provision which calls into question the degree to which one can rationally conclude that the statutory provision is intended by its terms to be exhaustive.
Each of the subsections (i) and (ii) differentiate between a body corporate that carries on business both within and without Australia but leave another alternative which is not conditioned upon that event and which therefore encompasses the prospect, as in the present case, of a sole resident insurer who carries on business only in this country and in connection with whose liabilities, as a matter of general law, and one would suppose its liabilities were liabilities in Australia. But, if you look, for example, at 4(a)(i):
a liability contingent upon an event that can happen only outside Australia, not being a liability that the body corporate has undertaken to satisfy –
that could encompass a single resident insurer, such as the present, but if the policy that has been issued by that single resident insurer simply contains no provision at all it is silent upon. Where it is that the insurer has undertaken to satisfy the liability there is absolutely no reason why the insurer cannot be sued in this country.
GLEESON CJ: How does this section operate in relation to an Australian insurer that is on risk in relation to the World Trade Centre, at the appropriate date?
MR COLES: Because that is an event that could only happen outside Australia one then asks has the insurer agreed to satisfy the liability in Australia. The answer is we do not know because there is nothing in the policy that says where it is going to satisfy the liability. The creditor can sue the insurer in Australia because a creditor can always come to the jurisdiction which exercises – or come to the land which exercises jurisdiction over the debtor and sue it.
That must be a liability in Australia, and yet it is not a liability in Australia by the terms of that subsection. It is a liability because of the amenability to suit of the defendant insurer, in our submission, again telling against the textual probability that this is to be an exhaustive description of liabilities of that kind.
I then have to answer the question, what does section 31(4) do when incorporated into 116. In our respectful submission it does when brought into 116 exactly what it does while it is still left in Part III.
GLEESON CJ: What does section 31(4) do in the example that I gave you in relation to the returns that that Australian insurer supplies to the regulator?
MR COLES: I would need to remind myself, your Honour, of the form of the return and I do not know the answer specifically at the moment.
HAYNE J: It would have to be taken into account in determining satisfaction with the condition in 29(1)(b), would it not?
MR COLES: At least (b) and likely to be (c).
HAYNE J: At least in (b).
MR COLES: At least in (b), yes.
KIRBY J: It does seem odd, though, where Parliament has attached significance to liability in Australia and then in quite a detailed provision has enacted what that is to mean. It does not actually say that liability and only that liability is but it is a very detailed provision, very particular, that has the appearances of a complete treatment of the issue by our Parliament.
MR COLES: Yes, and there is force in the observation Justice Ipp made to the effect that why would one erect an elaborate legislative structure containing or evincing the drafter’s careful thoughts, if it was not intended to perhaps be exhaustive, but apart from what we have already put, which I will not repeat, we would say the section obviously still has a plain purpose, because at very least and then perhaps no more need be expected of it, at very least it lays to rest controversy that might otherwise exist, although we would have to concede on our argument the controversy would probably be largely limited to dual resident or multiple resident insurers, but at least it does lay to rest what otherwise could be the subject of controversy or debate or uncertainty about the insurer’s obligations by making it very clear that at least in those circumstances which it describes they are, beyond question, liabilities in Australia.
KIRBY J: But that is a bit against you because then if Parliament has taken the trouble to do that, given the importance of clarity and the obligations which Mr Macfarlan relies on, you would have thought that Parliament has done it for all the cases that are going to be affected.
MR COLES: It simply says they are liabilities in Australia. The section does not by its terms declare itself exhausted, and certainly subsection (4) is after all not in its terms exhaustive of the insurance liabilities because otherwise what do subsection (1) and subsection (2) and subsection (3) do. I mean APRA can add a few on. You can add some on yourself in the accounts and so forth. So we say it obviously has purpose because at least it stills what otherwise might be an area of doubt, difficulty or debate, and we emphasise that doubt, difficulty or debate is most likely to arise in the case of dual resident insurers where there may be issues as to what is the proper place for payment under the contract in the absence particularly of the first guidelines to that question, namely, where by the terms of the contract is the liability to be satisfied.
I think it is probably not a controversial proposition that the vast majority of reinsurance treaties one has seen are not particularly specific about where payment is taking place. They may have, for example, clauses
about where the arbitration is to take place and the laws that are to be applicable to it and so forth, but they tend to run out of steam in identifying the place of payment. Now, therefore, it becomes very important when you get into the treacherous nether world of looking at what is the jurisdiction which has the closest connection with the liability and there may be ‑ ‑ ‑
KIRBY J: That may not override a federal Australian statute as Akai showed.
MR COLES: No, but the statute leaves you guessing if you do not have some rule. As I say, it may be no more – the section may do adequate work by simply pointing out that one does not need to have a collateral inquiry of depth into what is the proper location of the liability in the circumstances which subsection (4) describes because Parliament has told you and that is not an unimportant – there would, one can see within the terms of the provisions where there could be room for controversy having regard to the various integers that the provision embodies.
KIRBY J: Do Professor Sutton or any of the experts on insurance law say anything about this? Have you looked at ‑ ‑ ‑
MR COLES: Last time I looked, your Honour, he had not and I am not aware of a further addition ‑ ‑ ‑
KIRBY J: Will you remind me of what APRA’s position as the statutory regulatory authority is on this issue because one would ‑ ‑ ‑
MR COLES: I should not have forgotten, your Honour, but I ‑ ‑ ‑
KIRBY J: There are so many issues in this case it is easy to forget. Are there any rulings by APRA?
MR COLES: I am terribly sorry, your Honour, I do know but I have forgotten. Could I perhaps come back to your Honour on that?
KIRBY J: Yes, certainly.
MR COLES: Your Honours, again subject to any other respect in which our submissions may need clarification or elaboration, those are our submissions on the appeal.
GLEESON CJ: Thank you, Mr Coles. Yes, Mr Hogan‑Doran.
KIRBY J: Now, you are Faraday, is that correct?
MR HOGAN-DORAN: That is right, your Honour, yes. I am in your Honours’ hands as to time this afternoon. There is a preliminary matter that I need to deal with which is a summons filed by Faraday in relation to a notice of contention. I can deal with that quickly now.
GLEESON CJ: We are not pressing the parties to finish by 4.15.
KIRBY J: Is that opposed, raising a notice of contention?
MR HOGAN-DORAN: I do not understand that it is.
MR……….: Not on our part, your Honour.
GLEESON CJ: It is not opposed. Very well, you have that leave.
MR HOGAN-DORAN: Yes, that notice of contention is found in the appeal book at 426 to 427. The summons and the affidavit in support of the order sought were filed. The notice of contention has not been filed but I will have my instructing solicitor deal with that. If I can say at the outset, your Honours, that ‑ ‑ ‑
KIRBY J: Just let me remind myself of what your notice of contention is. Is this your peculiar point that it has been described as special to you?
MR HOGAN-DORAN: It is one of the peculiar points, yes, your Honour.
KIRBY J: It does not mean it is not a good one.
MR HOGAN-DORAN: No. Indeed, we would contend that unlocking the meaning of “undertaken to satisfy” can unlock the operation, or our understanding of the operation, of section 31(4) as a whole. That is probably a point I will have to develop in more detail tomorrow.
Faraday is not making any submissions today in relation to section 562A to that issue. Faraday did make submissions both before Mr Justice Windeyer and the Court of Appeal in support of the position that AssetInsure, the appellant, here has put. Your Honours should not take from the fact that we are silent on that at this level that we do not support those views any longer, we do, but by reasons of economy we will not be dealing with that on the appeal since AssetInsure has articulated, perhaps much better than I could, the reasons why both AssetInsure and Faraday are of the view that section 562A extends to the reinsurance and retrocession arrangements.
Your Honours have had the benefit of Mr Macfarlan and Mr Coles in relation to section 116(3) and section 31(4). Generally, it might be of some assistance if today and early tomorrow in the brief time that I hope to be speaking that I talk to the application in particular of section 31(4) to the treaty FC3A, which is the relevant treaty decision in respect of which is being appealed and in respect of which an alternate order is sought in the notice of appeal.
Treaty FC3A, a copy of which can be found by your Honours in the appeal book at page 47, is a contract of reinsurance in favour of various Lloyd’s companies. Faraday, then known as DP Mann Limited, was one of the Lloyd’s companies that had the benefit of this contract of reinsurance.
Mr Justice Windeyer and also Mr Macfarlan today identified this is a test case. There were two particular contracts that were selected for the purposes of this test case, one known as TY165A, which is not before the Court today, and this contract FC3A. If I can put it this way, the reason perhaps why FC3A was chosen as an appropriate vehicle for a test case is this. The only two connections that this contract has with Australia on the broader question of what is a liability in Australia are these. First, that, of course, it is a contract made with NCRA, which is a resident in and only in Australia and, secondly, there was an issue that has been described at various levels as what is called the local broker argument and that is an argument that by reason of a custom or practice within the insurance industry that where a local broker was engaged – perhaps I have to define what “local broker” means – but where a local broker was engaged in the process of securing reinsurance, that the custom or practice would be that the reinsurer would pay claims to that local broker.
KIRBY J: Where do we get this from? I do not know what the custom and practice of reinsurance is at all.
MR HOGAN‑DORAN: It arose from the evidence that was put before his Honour Justice Windeyer and then again before the Court of Appeal. There is a factual disagreement between the majority and Mr Justice Ipp on this issue in the respective judgments. It is not absolutely clear on the face of the judgment that Mr Justice Hodgson considered that because of this practice – and I will take your Honour to the evidence in due course – of paying local brokers meant that in relation to FC3A, which was a contract secured through a local, that is an Australian broker, on behalf of a facultative broker in the United Kingdom on behalf of the English underwriters, that the local broker would be paid in the event of a claim and therefore this was a liability in Australia.
Perhaps I should say Mr Justice Ipp took the view that the evidence did not amount to a custom or practice. It is not clear from Mr Justice Hodgson’s judgment whether his Honour held that it was a custom or practice or simply that applying what his Honour called the pragmatic or practical approach, that because of this practice it could be said fairly – I think the word used is “fairly” – to be a liability in Australia.
KIRBY J: But how do we resolve this in this Court?
MR HOGAN‑DORAN: In this way, if your Honours are of the view that the approach taken by Mr Justice Hodgson is correct, this pragmatic or practical approach, well that does not appear that any of the parties here are supporting it, that his Honour is correcting the way in which his Honour approaches it, then the matter is resolved such that the order sought by the appellant is not made, that is, FC3A remains as was found in the court below to be a liability in Australia.
Insofar as there may be a conflict of interpretation of the evidence I will have to take your Honours to that evidence. It would be our submission that the evidence is quite clear that there was a custom or practice and that when we take his Honour Mr Justice Ipp’s judgment, his Honour has dealt with two pieces of evidence and in doing so in relation to one of those pieces of evidence his Honour has identified the wrong passages of the relevant affidavit, but in respect of another piece of evidence, as with respect to his Honour, misconceived that evidence.
HEYDON J: Which paragraph of your written submissions deals with this evidentiary difficulty?
MR HOGAN‑DORAN: Our written submissions do not deal with it in any detail, your Honour. I apologise for that. We have focused on two other more general questions as to the approach to the interpretation of section 31(4) generally.
KIRBY J: Where do they deal with it superficially?
MR HOGAN‑DORAN: Very superficially in identifying the four approaches at paragraph 17 on page 4 of the submissions. Paragraph (a) is the point I made before that if the majority’s approach is followed it was a factual conclusion that ought to be accepted that this treaty, FC3A, is a liability in Australia, and there is just a submission in paragraph (b) that the factual conclusion of the majority should be accepted insofar as if the Court followed Justice Ipp’s reasoning but was confronted with the factual question necessary to resolve the question whether or not treaty FC3A is a liability in Australia one should prefer the factual conclusion of the majority.
KIRBY J: This is all about practical and pragmatic, which I am not entirely clear about. There does not seem to be any reference here to a practice which is said to be uniform in reinsurance that the money is paid by
a broker and that is the proposition you are putting to us. That seems to be some new concept that has been dreamed up for this Court, saved and cherished to be presented to us for the first time to try and sort out.
MR HOGAN-DORAN: I do not mean to save it up in that respect but it is not a matter that we need to go to if what Faraday is saying is right on its notice of contention as to what is the meaning of “undertaking to satisfy”.
GLEESON CJ: But if it is a matter that you want the Court to consider at all then it is a matter on which you will have to make written submissions and you will have an opportunity over the adjournment this evening to do that.
MR HOGAN-DORAN: We may do that or I might give instructions not to deal with this any further.
GLEESON CJ: Very well. Then we will adjourn until 10.15. How long do you expect to take for the remainder of your argument?
MR HOGAN-DORAN: No more than half an hour, your Honour.
GLEESON CJ: Mr Epstein?
MR EPSTEIN: Forty minutes.
KIRBY J: Mr Coles did not mention the cost argument that was put to us but you have referred to the fact that this is a test case so you will have to also deal with that. Mr Coles must have agreed with the submission on the costs.
GLEESON CJ: The next matter on the list will be not before 11.30. We will adjourn until 10.15 tomorrow.
AT 4.18 PM THE MATTER WAS ADJOURNED
UNTIL THURSDAY, 8 DECEMBER 2005
- AGLC
- AssetInsure Pty Ltd v New Cap Reinsurance Corporation Ltd (In Liq) & Ors [2005] HCATrans 990
- Case
- [2005] HCATrans 990
- Decision Date
CaseChat Overview and Summary
The central legal issue before the High Court was whether the losses claimed by AssetInsure fell within the scope of the reinsurance contract, specifically concerning the definition of "loss" and the application of certain exclusions. The court was required to determine the proper construction of the reinsurance agreement in light of the underlying insurance policies and the circumstances of the losses.
The High Court analysed the terms of the reinsurance contract, paying close attention to the definitions and conditions stipulated. The court applied principles of contractual interpretation, considering the ordinary meaning of the words used, the context of the agreement as a whole, and the commercial purpose it was intended to serve. The majority found that the losses claimed by AssetInsure were indeed covered by the reinsurance contract, as they did not fall within the exclusions relied upon by New Cap Reinsurance. The court reasoned that the language of the contract, when read in its entirety, supported this interpretation.
The High Court allowed the appeal, setting aside the orders of the lower courts and remitting the matter to the Supreme Court of New South Wales for further determination of the quantum of AssetInsure's claim.
Orders
Orders of the court
Full text does not contain this section.
Background
Background to the litigation
Full text does not contain this section.
Evidence
Evidence Before The Court
Full text does not contain this section.
Decision
Reasons for decision
Full text does not contain this section.
Ratio Decidendi
Legal Principle Established
Full text does not contain this section.