Butterell v The Douglas Group Pty Ltd
[2000] NSWSC 942
•10 October 2000
Reported Decision: [2000] 35 ACSR 398
[2000] 18 ACLC 784
New South Wales
Supreme Court
CITATION: Butterell v The Douglas Group Pty Ltd [2000] NSWSC 942 CURRENT JURISDICTION: Equity Division FILE NUMBER(S): SC 3839/99 HEARING DATE(S): 02/08/2000 JUDGMENT DATE: 10 October 2000 PARTIES :
Arthur William Butterell (P)
The Douglas Group Pty Limited (D1)
MNC Holdings Pty Limited (D2)
William John Seery and Ada Seery (D3)JUDGMENT OF: Young J
COUNSEL : F Gleeson (P)
C Gee QC and B Larkin (D1)
J Duncan (D2)
T Alexis and T Hudson (D3)SOLICITORS: Phillips Fox (P)
Grahame Goldberg Partners (D1)
Addisons (D2)
Cole & Butler (D3)CATCHWORDS: CORPORATIONS [267]- Winding Up- Ranking of claims- Mutual insurance company- How reinsurance proceeds dealt with. LEGISLATION CITED: Corporations Law, ss 511, 562A
Law Reform (Miscellaneous Provisions) Act 1946, s 6CASES CITED: Re Babbage [1936] SASR 172
Butterell v Docker Smith Pty Ltd (1997) 23 ACSR 149
Cambridge Credit Corporation Ltd v Lissenden (1987) 8 NSWLR 411
Capita Financial Group Ltd v Triden Properties Ltd (Cole J 6/9/1993)
Ceric v CE Health Underwriting & Insurance (Aust) Pty Ltd (1994) 122 FLR 123
Chan v Cresdon Pty Ltd (1989) 168 CLR 242
Commonwealth Bank of Australia v Butterell (1994) 14 ACSR 343
Re Deighton & Harris' Contract [1898] 1 Ch 458
Re Dominion Insurance Co of Australia Ltd [1980] 1 NSWLR 271
Re Douglas (1909) 9 SR (NSW) 269
Elmslie v Federal Commissioner of Taxation (1993) 46 FCR 576
FAI General Insurance Co Ltd v McSweeney (1997) 73 FCR 379
Federal Commissioner of Taxation v Energy Resources of Australia Ltd (1994) 54 FCR 25
Kiwi Brands Pty Ltd v Commissioner of Taxation (1998) 90 FCR 64
National Mutual Fire Insurance Co Ltd v Commonwealth of Australia [1981] 1 NSWLR 400
Re Palmdale Insurance Ltd [1986] VR 439
Re Saltergate Insurance Co Ltd (No 3) (1984) 2 ACLC 740
Schipp v Cameron (Einstein J 9/7/1998)
Re Universal Distributing Co Ltd (1933) 48 CLR 171DECISION:
THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
YOUNG J
TUESDAY 10 OCTOBER 2000
3839/99 - BUTTERELL v THE DOUGLAS GROUP PTY LIMITED
JUDGMENT
1 HIS HONOUR: These proceedings were commenced by the liquidator of Consulting Engineers Advancement Society of Australia Ltd (“CEASA”) for directions pursuant to section 511 of the Corporations Law. CEASA was a mutual insurance venture on behalf of participating consulting engineers. It operated a mutual insurance scheme and in theory could not have got into financial trouble. The overall plan was that CEASA would bear its own claims up to a ceiling of $350,000 and thereafter it would reinsure. However, its claims experience was worse than anticipated and the directors never got to the point where they made further levies on the participating members in order to top up the funds available to meet claims. When the company went into liquidation, the liquidator sought to make levies, but in Butterell v Docker Smith Pty Ltd (1997) 23 ACSR 149, McLelland CJ in Eq held that the liquidator had no such power. As the directors continued to decline to make further levies, there has been a substantial shortfall in the funds derived from members to meet claims.
2 Indeed, apart from a small amount of money in the liquidator’s hands, the funds which he has or expects to get, come from various treaties of reinsurance. The questions before the Court in the present proceedings involve how those reinsurance moneys should be dealt with.
3 The legislation that I must consider in this litigation is basically section 562A of the Corporations Law. Sub-sections (1) and (2) are as follows:4 Sub-section (3) then sets out a formula that is used where sub-section (2) does not apply, which is not necessary to set out. Sub-sections (4) and (5) are then as follows:
“(1) [Application of section] This section applies where:
(a) a company is insured, under a contract of reinsurance entered into before the relevant date, against liability to pay amounts in respect of a relevant contract of insurance or relevant contracts of insurance; and
(b) an amount in respect of that liability has been or is received by the company or the liquidator under the contract of reinsurance.
(2) [Application of proceeds where greater than amount due] Subject to subsection (4), if the amount received, after deducting expenses of or incidental to getting in that amount, 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 mentioned in section 556, pay the amounts that are so payable under those contracts of insurance.”
5 I should also add section 562A(8):
“(4) [Court may order other application of proceeds] The Court may, on application by a person to whom an amount is payable under a relevant contract of insurance, make an order to the effect that subsections (2) and (3) do not apply to the amount received under the contract of reinsurance and that that amount must, instead, be applied by the liquidator in the manner specified in the order, being a manner that the Court considers just and equitable in the circumstances.
(5) [Matters court may take into account] The matters that the Court may take into account in considering whether to make an order under subsection (4) include, but are not limited to:
(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 contracts 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 to the amount received under the contract of reinsurance."
“(8) [“relevant contract of insurance”] In this section:
“relevant contract of insurance” means a contract of insurance entered into by the company, as insurer, before the relevant date.”
6 At the hearing of these proceedings on 2 August 2000, Mr F Gleeson appeared for the liquidator, Mr C Gee QC and Mr B Larkin appeared for the first defendant which is a representative defendant appointed to represent the interests of all creditors of CEASA in respect of whom CEASA has a liability under a contract of insurance in an amount greater than $350,000 with the exception of MNC Holdings Pty Ltd (the second defendant) and William and Ada Seery (the third defendants). Mr J Duncan appeared for the second defendant who is an insurance creditor of CEASA whose claim was notified during the 1993 policy year on 21 January 1994. Mr T Alexis and Mr T Hudson appeared for the third defendants. The third defendants (the Seerys) were never members of CEASA, but are assignees under a deed of assignment in respect of, amongst other things, a judgment obtained on 8 December 1997 by some architects against D J Cohen & Associates Pty Ltd. D J Cohen & Associates Pty Ltd was the insurance creditor of CEASA. The claim of Cohen & Associates was notified during the 1992 policy year on 28 June 1993.
7 The liquidator has sought various declarations and orders in his claim. The second defendant has filed a cross claim seeking an order that s 562A(2) and (3) not apply. The third defendants have also filed a cross claim. Basically this seeks that the amount due to them in the litigation against the architect and Cohen & Associates either directly or pursuant to s 562A(4) of the Corporations Law be paid.
8 The issues thus are:
1. Declaratory relief is sought in relation to which insurance creditors of CEASA are entitled under s 562A of the Law to share in the reinsurance payments received by the liquidator. In particular, whether the reinsurance payments:
Declaratory Relief
(a) form a pool of funds for the benefit of all insurance creditors of CEASA, irrespective of whether or not their claims against CEASA exceed $350,000;
(b) form a pool of funds for the benefit of only those insurance creditors of CEASA whose claims exceed $350,000;
(c) should be distributed only to the particular insurance creditor of CEASA whose claim exceeds $350,000 and in respect of which claim the liquidator has received a reinsurance payment; or
(d) form a separate pool of funds in respect of each policy year for the benefit of only those insurance creditors of CEASA whose claims exceed $350,000 and were notified within that policy year.
The Seerys’ cross claim2. Does s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 apply, in particular did the event giving rise to the claim for damages or compensation by the architect (Jarvan) against the engineer (Cohen) occur in the 1992/1993 policy year?
3. Does the property the subject of the assignment by the architect (Jarvan) to the Seerys, namely the judgment debt obtained by Jarvan against the engineer (Cohen), include any statutory charge which Jarvan may have against CEASA under s 6 of the Law Reform Act 1946?
4. Does the amount payable by the liquidator of CEASA to Cohen, by reason of the statutory priority afforded to Cohen by section 562A of the Law, represent “insurance monies” payable by CEASA to Cohen in respect of which the Seerys (as the assignees of Jarvan) have a statutory charge by virtue of s 6 of the Law Reform Act 1946?
5. Do the Seerys (as the assignees of Jarvan) have standing to make an application to the Court under s 562A(4) of the Law?
(a) Are the Seerys persons to whom an amount is payable under a “relevant contract of insurance”, being a contract of insurance entered into by CEASA as insurer, relevantly, with its member (Cohen) (see s 562A(8) of the Law)? or
(b) Is Cohen the only relevant person to whom an amount is payable under a “relevant contract of insurance” for the purposes of s 562A(4) of the Law?
6. Directions are sought under s 511 of the Law in relation to the following questions:
Liquidator’s application for directions
(a) the timing of the distribution of the reinsurance payments received by the liquidator, in particular:
(i) whether the liquidator is justified in withholding such distribution until such time as all those persons who are entitled to share in the reinsurance payments in accordance with s 562A of the Law are first ascertained; or
(ii) whether the liquidator is justified in making any interim distribution, and if so, upon what basis.
(b) whether the liquidator is entitled to be indemnified, or to an allowance, out of the reinsurance payments received by him in respect of all his proper costs, charges and expenses incidental to the administration of the reinsurance payments, including distribution to those insurance creditors of CEASA who are found to be entitled thereto.
Costs7. How the costs of these proceedings should be borne.
I will now deal with these issues.
1. Declaratory Relief
9 CEASA entered into various excess of loss reinsurance contracts in respect of the policy years covering the period 1 July 1989 to 30 June 1994. The reinsurance contracts were on a “losses occurring on risks attaching” basis and provided CEASA with certain reinsurance in various layers in excess of $350,000 in respect of each and every claim under contracts of insurance issued by CEASA to its members.
10 For the year ended 30 June 1999 the various reinsurance contracts provided CEASA with three layers: (a) between $350,000 and $600,000; (b) between $600,000 and $1.2 million; (c) between $1.2 million and $2.5 million. For the years ending 30 June 1991 through to 30 June 1994 there was an additional fourth layer commencing at $2.5 million and ending at $5 million.
11 It thus can be seen that at no stage was there any reinsurance in respect of claims of $350,000 or less.
12 Almost all the claims have now been quantified.
13 The insurance expert employed by the liquidator considered that there were nine possible claims over $350,000. One of these has since been settled for under $350,000. Of the remaining eight, six have been quantified and there are two outstanding, one of which is being dealt with in the legal system in Belgium, about which nothing has been heard for the last four years. The second is a claim for $500,000 which is proceeding slowly in this Court in Wollongong.
14 There are five possible ways in which the funds collected from the reinsurers could be administered in this winding up, viz:
(a) that the reinsurance payments form a pool of funds to be distributed to all insurance creditors of CEASA irrespective of whether or not their claims exceed $350,000. This possibility has been considered by all the learned counsel involved and none of them support it. Accordingly, I can just put this to one side and in due course I will answer question 1(a) “No”;(b) (supported by the liquidator) that the reinsurance payments form a pool of funds to be distributed only to those insurance creditors of CEASA whose claims exceed $350,000;
(c)(i) (supported by the second defendant) that the reinsurance money should be distributed only to the particular insurance creditor of CEASA whose claim exceeds $350,000 and in respect of which claim the liquidator has received a reinsurance payment;
(c)(ii) (supported by the first defendant) that the reinsurance payments form a separate pool of funds in respect of each policy year to be distributed only to those insurance creditors whose claims exceed $350,000 and were notified within that policy year;
(d) (supported by the third defendants) that the reinsurance payments received in respect of the Cohen claim should be paid directly to the third defendants and the balance of the reinsurance payments distributed either under (b) or (c) above.
15 It is first useful to look at the history of s 562A. This section was introduced by the Corporate Law Reform Act 1992 effective as at 23 June 1993. Prior to that amendment, a contract of reinsurance was treated as a contract of insurance for the purpose of s 447 of the Companies Code, the predecessor of s 562 of the Law (see Re Dominion Insurance Co of Australia Ltd [1980] 1 NSWLR 271; Re Saltergate Insurance Co Ltd (No 3) (1984) 2 ACLC 740; Re Palmdale Insurance Ltd [1986] VR 439).
16 The Harmer Report, which was the basis of the Corporate Law Reform Act, examined the old s 447. The report took the view that reinsurance was fundamentally different from insurance and that unless there was a special provision it would lead to inequity. The report recommended that unless the Court ordered otherwise, s 447 should not apply to a contract of reinsurance. This was taken up in the explanatory memorandum to the Corporate Law Reform Bill, especially para 952.
17 One of the reasons why the Court might make an order under section 562A(4) that some other regime apply to reinsurance moneys is if particular insureds insisted that their policy be the subject of reinsurance. In no case did that happen with CEASA. The reinsurance taken out by CEASA was not in respect of risks arising in connection with any particular consulting engineer, but rather reinsurance of part of the risks of CEASA under all its policies.
18 It is also necessary to note that the reinsurance recovery by the liquidator was by way of a nett accounting procedure, with reinsurers setting off the amount of any reinstatement premium due from CEASA against the reinsurance payment. The reinstatement premium was required to be paid to reinstate the reinsurance policy in the event of the whole or part of the reinsurance being exhausted by a loss or losses. These set-offs have no relation to the particular contract of primary insurance between CEASA and its members.
19 Mr Gleeson submits that on the proper construction of s 562A(3) the liquidator should distribute any reinsurance payments received proportionately to all persons to whom CEASA is liable in respect of claims which exceed $350,000. He says that this approach is supported by the view taken in the Harmer Report that reinsurance should be viewed as no more than the means adopted by the insurer to satisfy itself that it can pay claims which might be made under all policies which it has issued irrespective of whether it has reinsured its risk under each policy.
20 Mr Gleeson says that that result gives a relatively fair and equal distribution which is in accordance with the spirit of s 562A of the Law.
21 Mr Gee QC and Mr Larkin say that, with reinsurance, one must be careful to look at the terms of the reinsurance and in particular to note that there is not just one reinsurance, but for each insurance year there are layers of reinsurance. Under the policies (Exhibit PX34 was considered to be a typical policy), the reinsurance was for a particular level for losses sustained by the reinsured on risks attaching during the period commencing 1 July in one year and ending on 30 June in the next year. Ordinarily, policies were to be written for 12 months.
22 Thus, apart from liquidation, the only claims that could be considered under any reinsurance were claims made at the appropriate level in the appropriate year. There is nothing irrational about a different dividend being produced in each year. The intention of s 562A is to produce for the “victim” the moneys received by the liquidator. For this reason, looking at the matter on an annual basis fits in with the intention of the statute.
23 Mr Gee QC and Mr Larkin say that Schedule D to Mr Butterell’s affidavit of 3 March 2000 gives the correct approach. This schedule shows that reinsurance moneys have come in for the 1989, 1990, 1992 and 1993 claims years and they should be distributed to the claimants in that year over $350,000 resulting in a dividend somewhere between 0.013 cents in the dollar and 0.521 cents in the dollar. The general average approach taken by Mr Gleeson would produce a return to all creditors with claims greater than $350,000 of 0.322 cents in the dollar.
24 Mr Duncan adopted a similar approach save that he superimposed a tracing exercise. Mr Duncan handed up helpful written submissions and also spoke to them.
25 Mr Duncan’s basic submission was that s 562A of the Corporations Law was enacted to address the vice that could arise in the usual insurance scenario in which an insured with an outstanding claim would receive an arbitrary benefit over other policies with extant claims where, by coincidence rather than design, its policy was reinsured but others were not. The Court was given a discretion under s 562A(4) to fashion orders to suit cases other than the usual case. The present case is an exceptional one. Further, when one looks at the matters set out in paras (a) to (d) in section 562A(5), one can see that there is the flavour that if it is possible to identify particular relevant contracts of insurance, then a particular order should be made. The reason for doing this in accordance with the views of the Harmer Report is to prevent arbitrariness.
26 In the instant case, Mr Duncan submits it is quite possible to identify a relatively small number of policies which were reinsured. It would have been mutually understood by each member of CEASA that if there were a claim it would be protected:
(1) as to the first $350,000 of such claim by CEASA from CEASA’s own funds;(2) if there was any shortfall in CEASA’s funds supplementary subscriptions would be raised; and
(3) as to any part of the claim above $350,000, there would be reinsurance which would cover it.
Accordingly, when reinsurance moneys are received, they should be applied to the particular claim. To do otherwise would undermine the fundamental nature of the CEASA scheme.
27 Mr Gee QC and Mr Larkin say that Mr Duncan’s approach fails to pay sufficient attention to s 562A(3). It also ignores the fact that under the policies there is no additional premium for the first claim, but for the second to seventh claims an additional reinstatement premium of 50 or 40 percent as the case may be, is payable. Accordingly, where one has only one claim in a year there is no adjustment for reinstatement. Where there are two claims, the first claim is paid without adjustment and the second subject to an adjusted premium and likewise with the third through to the seventh claims. If one was able to trace through to each particular insured and each particular claim under the policy of insurance, the extra premiums would be borne by people other than the person who made the first claim in any loss year.
28 The second defendant’s claim was in respect of the claim year 1993. In that year, three claims were made, one unresolved.
29 The method adopted by Mr Duncan really can only be used if the Court exercises its discretion under s 562A(4). In making an order under that section the Court must direct the liquidator to distribute the reinsurance moneys in a way which the Court considers just and equitable in the circumstances. As the standard formula where there is a deficiency is that set out in sub-section (3), one must work out why it is not just and equitable to follow the prescribed formula. The prescribed formula, as I read it, involves taking out of the reinsurance payment all just expenses. One then gives each eligible claimant a fraction of that pool found by taking as the numerator the amount of the claim and the denominator being the total amount of the claims. In my view, that is a fairer way of looking at it than charging the additional premiums against the second and subsequent claims in any particular year and allowing the whole of the fund with respect to the first claim to flow through to the claimant. If one fine-tuned the adjustment by, for instance, averaging out the reinstatement premiums amongst all claimants in the year, one would get so close to the result that one would find if one did not do that exercise, as hardly warranting the making of a special order.
30 Accordingly, in my view there is not sufficient material for me to make a special order under sub-section (4).
31 The choice must therefore be between Mr Gleeson’s submissions and Mr Gee QC’s. Of the two, I prefer Mr Gee QC’s. This is because Mr Gee QC’s submissions take into account that with reinsurance, one is looking at an annual contract and that to just average claims over every insurance year where the policies of reinsurance may be on different terms seems to me to produce an arbitrary result just for the sake of simplicity. To my mind, the intent of the section is that “reinsurance payment” in sub-section (3) means a reinsurance payment for a particular claims year and what one does is to work out the net payments received from reinsurers in a particular year, and that each claimant in that year gets the fraction of that money as set out in sub-section (3).
32 Mr Gleeson submits that such a determination runs contrary to what was the answer by Needham J to question 5 in the Saltergate Insurance case at p 744. That might be so, but from the reasoning on earlier pages, it does not appear that the present distinction was one which was put to Needham J in that case.
33 Accordingly, I should make a declaration as per para 1(d) of the issues as stated in paragraph 8 of these reasons.
2-5. The Seerys’ cross claim
34 Putting it as simply as I can, Cohen was a consulting engineer insured by CEASA. The Seerys had a house at Moree being built for them. The architect, now known as Jarvan Pty Ltd in liquidation, enlisted the professional assistance of Cohen as consulting engineer. The Seerys’ house was built in such a way that it was a complete disaster. The Seerys sued. The builder was found not liable, but the architect was found liable and the architect in due course obtained an order for damages against Cohen which is a claim insured by CEASA. Later, the liquidator of the architect assigned the benefit of its judgment against Cohen to the Seerys. It would seem that the damage to the Seerys’ house first was noticed in November 1992 and the claim was notified on 28 June 1993. Thus both events happened within the 1992/3 claims year.
35 The Seerys claim that they have a charge on the reinsurance moneys under s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (the “1946 Act”) and that they are persons “to whom an amount is payable under a relevant contract of insurance” within the meaning of s 562A(4) of the Corporations Law. They apply under that section for a special order to be made so that they will receive the full amount of the reinsurance payment due to Cohen.
36 Mr Gleeson puts that various problems stand in the Seerys’ way. First, he puts that the facts as disclosed do not necessarily show that the Seerys come within s 6 at all. He points out that there is authority for the proposition that with a “claims made” policy s 6 does not apply unless the event giving rise to the claim occurred within the same period as the policy which responds to the claim: Capita Financial Group Ltd v Triden Properties Ltd (Cole J, 6 September 1993); Schipp v Cameron (Einstein J, 9 July 1998), but cf FAI General Insurance Co Ltd v McSweeney (1997) 73 FCR 379. In the instant case, it appears that both the event and the claim occurred in the same claims year, but there is not enough material to show that on the balance of probabilities. One just does not know whether the architect got a verdict against the consulting engineer in tort or in contract and there is not the material to show when the contract was breached or when the damage under the tort first occurred.
37 Even if that matter were concluded in the Seerys’ favour, the Seerys are not persons “to whom an amount is payable under a relevant contract of insurance”. “Relevant contract of insurance” is defined by s 562A(8) of the Law as “a contract of insurance entered into by the company, as insurer, before the relevant date”. This means a contract of reinsurance entered into by CEASA before 1 March 1996. The relevant contract of insurance in the Cohen’s case was the contract of insurance between CEASA and Cohen for the 1992/3 claims year. The only person to whom moneys are payable under that policy is Cohen.
38 Mr Alexis for the Seerys put that s 6 of the 1946 Act had the effect of putting his clients into the position of a person to whom an amount is payable under a relevant contract of insurance. He took me to the leading cases on s 6 such as National Mutual Fire Insurance Co Ltd v Commonwealth of Australia [1981] 1 NSWLR 400, 403 and Cambridge Credit Corporation Ltd v Lissenden (1987) 8 NSWLR 411, 419-420. See also Ceric v CE Heath Underwriting & Insurance (Australia) Pty Ltd (1994) 122 FLR 123. In the first of these cases, Moffitt P said:
“The legislative purpose of s 6 is to provide for the person to whom the insured is liable direct access to the insurance fund, in those cases where enforcement might be frustrated unless such direct access was available.”
39 In the Ceric case, previous judgments of the Australian courts were summarised and the general flavour of the judgments clearly is that where the section is applicable, the applicant has a charge which arises immediately on the happening of the event giving rise to the claim for compensation which can only be enforced when the Court gives leave to enforce it. In an action to enforce the charge, the applicant has the same rights and liabilities as if the action were against the insured.
40 Mr Alexis says that these rights mean that the Seerys, being the assignee of the applicant against the insured, are the persons to whom the amount is payable under the relevant contract of insurance. On the other hand, Mr Gleeson says that the Seerys are people to whom the amount may be payable under s 6, but that does not make it payable under the relevant contract of insurance. Mr Gleeson says that s 562A(4) of the Corporations Law and s 6 of the 1946 Act simply operate in different fields. Section 6 does cut through the veil separating the various parties, but not to the extent to make the person entitled to the charge a person with standing under s 562A(4). Mr Alexis’ riposte is that the payment can be both under the statute as well as under the contract.
41 What is “under a contract” has come up for decision in its use in section 82Y of the Income Tax Assessment Act 1936. See also section 82V(2)(a) of that Act. Gummow J considered the expression in that statute in Federal Commissioner of Taxation v Energy Resources of Australia Ltd (1994) 54 FCR 25, 53. Before dealing with what his Honour said, I should note that the problem in the Energy Resources case was considered at first instance by Davies J (1994) 28 ATR 67, thence by the Full Federal Court consisting of Beaumont, Gummow and Hill JJ in the report to which I have already referred, and then by the Full High Court in (1996) 185 CLR 66. The High Court thought that the present matter was irrelevant to the question that had to be decided as did Beaumont J and Davies J at first instance and thus they did not discuss it to any material extent. Accordingly, the only two Judges that considered the phrase “under a contract” were Gummow J and Hill J.
42 Gummow J said at 53 that the words “under a contract” could be used in two principal senses: (a) a strict sense; and (b) a loose sense. In the strict sense “a gain made ‘under’ an eligible contract suggests that the gain was made in exercise of a right or discharge of an obligation conferred or imposed, as the case may be, by the terms of the eligible contract… gain as a subcontractor would not suffice as a gain under the head contract…”. He then said that more loosely “it is enough that the contract is, in a broad sense, a source of the gain made by the party in question”. He considered that under the Income Tax Assessment Act the narrower construction was to be preferred to the looser construction.
43 At page 70 Hill J said:
“The expression ‘under a contract’ must, of necessity, be construed by reference to the context in which it appears.”
At 72 his Honour held that the notes in that case were issued under an overriding facilities agreement rather than under individual contracts.
44 The phrase “under a contract” in connection with s 160U of the Income Tax Assessment Act 1936 was considered by the Full Federal Court in Kiwi Brands Pty Ltd v Commissioner of Taxation (1998) 90 FCR 64, 76. The Court, following in this respect what Wilcox J had decided in Elmslie v Federal Commissioner of Taxation (1993) 46 FCR 576, 592 that “‘under’ usually imports a direct connection between the relevant act and the instrument.” The Full Court in the Kiwi case went on to say that s 160U envisaged that there was only one contract to which the section could refer and accordingly it was necessary to see which of the various possible contracts had the direct connection with the relevant disposition.
45 In Chan v Cresdon Pty Ltd (1989) 168 CLR 242, the High Court had to consider whether a guarantor who had guaranteed performance by a lessee of its obligations “under this lease” was responsible for rent owed by a tenant under a lease which had never been registered. The majority held that the guarantor was not so responsible. The majority said at page 249:
“The word ‘under’, in the context in which it appears, refers to an obligation created by, in accordance with, pursuant to or under the authority of the lease.”
An obligation that arose under the common law where a person had entered into possession pursuant to an agreement for lease was not “under the lease”.
46 Applying this approach to the present case, in my view Mr Gleeson is correct. One must look to see what was the ordinary operation of section 562A(4). The ordinary operation would be that the insured would be the person with standing. One then goes to section 6 and sees whether it has the effect of having the chargee as a person who is entitled to the amount payable under the contract. Although in a loose sense the insured is given direct access to the insurance fund, it does not seem to me that on its proper construction section 6 goes further and makes the payment to the chargee a payment under the contract. Rather it is a payment under the statute. I do not consider that Mr Alexis’ point is correct that the payment can be under both.
47 It follows that the Seerys are not in a position to ask the Court to exercise its discretion under s 562A(4) because they do not having the standing to do so.
48 It follows that issue 5(a) must be answered “No”.
49 It is difficult to answer the other matters raised in the other issues affecting the Seerys. Issue 2 as to whether the 1946 Act applies at all is unable to be answered on the evidence presented to the Court because the Court does not know enough about the claim made by the architect against Cohen. If I had to make a decision on the evidence available, the answer would probably be “Yes”, but I hardly think that the evidence is good enough for me to make a final decision on the matter.
50 Issue 3 was not really argued. The issue really is whether, if one assigns rights under a judgment, the assignee also takes the statutory rights under s 6. This really raises two sub-issues, namely: (a) whether the assignment in this particular case was sufficient to assign that right; and (b) even if it was so effective, whether the assignee is a person entitled to the statutory charge.
51 The first sub-issue seems to be able to be answered in favour of the Seerys because the assignment, which is pages 107-108 of TX31, is drawn in very wide terms and expressly mentions the rights under section 6 of the 1946 Act.
52 So far as the second sub-issue is concerned, the answer would seem to be that the consent order made by Rolfe J on 3 December 1999 may mean that there is a determination binding on the parties and section 6 is able to be invoked by the Seerys. Accordingly, issue 3 should be answered “Yes”, but again I would prefer not to answer it because it is of no assistance to anybody in this case because of my decision on issue 5. However, if it is necessary for some other purpose, unless the parties wish to furnish submissions, that answer can be given.
53 So far as issue 4 is concerned, again I would think the answer is “Yes”, but I would prefer not to answer it.
6. Liquidator’s application for directions
54 I then pass to the liquidator’s application for directions. This raises two sub-issues: (a) the timing of the distribution of reinsurance payments; and (b) the liquidator’s fees. Mr Gleeson was the only counsel who made submissions on these matters. Mr Gleeson submitted that the appropriate direction as to timing was that after calling for proofs of debt from those insurance creditors found to be entitled to share in the reinsurance payments and ruling thereon, the liquidator should make an interim distribution of the reinsurance payments received to date on the basis that when calculating the “total amount owed” in the formula in section 562A(3) of the Corporations Law, the total amount of any unresolved claims over $350,000 are to be estimated at the maximum amount payable by CEASA under the relevant contract of insurance pending determination of those claims. This is to ensure that a sufficient amount is held back from the interim distribution to meet those outstanding claims. It seems to me that this is the most sensible way of proceeding and I direct the liquidator accordingly.
55 The second matter is whether the liquidator can deduct from the reinsurance payments all of his proper costs, charges and expenses incidental to administration of the reinsurance payments including distribution.
56 Section 562A(3) defines “reinsurance payment” as “The amount received under the contract of reinsurance, less any expenses of or incidental to getting in that amount”. I have already said that in my view reinsurance payment means that one must deduct the appropriate average of reinstatement premiums. The question is whether it also includes the costs and expenses incurred in administration of the winding up in so far as it relates to the administration of the reinsured payments.
57 Mr Gleeson submits that prima facie that expression would not include all of those costs and expenses. However, he submits as follows:
“Although the words ‘incidental to’ clearly expand the ambit of the words ‘expenses of’, the subject matter of such expenses, namely getting in the reinsurance payments, qualifies the nature of the expenses the subject of the permitted statutory deduction under s 562A of the Corporations Law (see In re Gibson’s Settlement Trusts [1981] Ch 179, 184 in relation to taxation of costs order. See also McIntyre v Perkes (1988) 15 NSWLR 417, 426). For a particular expense to be ‘incidental to’ getting in the reinsurance payments it must, be referable to that object, at least, in the sense of being incurred casually or incidentally in the course of that exercise, namely getting in the reinsurance payment: (see, albeit in a different statutory context, In re Llewellin (1887) 37 Ch D 317, 327).”
58 I am indebted to Mr Gleeson for putting the matter so fairly. As he points out, s 562A(3) seems to make it mandatory that the amount be paid in accordance with the formula and that the reinsurance payment is to be the amount received less expenses, inter alia, incidental to getting in the amount.
59 I do not consider that the cases on costs incidental to the proceedings are in pari materia. The general question that comes under consideration is the liquidator’s overhead costs and general costs of administration which impact on the getting in of the reinsurance moneys.
60 In Re Douglas (1909) 9 SR (NSW) 269, P W Street J at 277 held that commission payable to trustees for their trouble in getting in the assets was an expense of the trust.
61 In Re Babbage [1936] SASR 172, Richards J had to consider whether a trustees’ commission was an expense of or incidental to the carrying out of the trusts. His Honour considered at 177 and following a number of cases dealing with the word “incidental” in the context of payments. His Honour said at 179 that “incidental” normally meant something which was subsidiary from that which was incurred but was not analogous to “consequent upon”. The actual decision went off on a rather technical construction of a particular deed, but his Honour did note at 180 the decision of the English Court of Appeal in Re Deighton & Harris’ Contract [1898] 1 Ch 458, 463 that “any other matter or thing relating or incidental to the sale” was a particularly wide expression.
62 In my view, “expenses of or incidental to” getting in the reinsurance moneys involve both the direct expenses and the fair proportion of overheads etc of the liquidator’s office in getting in the moneys. I am not too sure whether that answer is sufficiently definite for the liquidator. If it is not, then he will need to come back at the short minutes stage for a more precise definition.
63 An alternative argument is put that there is an equitable lien for the liquidator’s costs. Mr Gleeson refers to my decision in Commonwealth Bank of Australia v Butterell (1994) 14 ACSR 343, 349 and to the decision of the High Court of Australia in Re Universal Distributing Co Ltd (1933) 48 CLR 171. In my view, because of the very stark and definite words in the definition, there is no room left for the implication of any equitable lien.
7. Costs
64 Finally, there is the question of costs of these proceedings. As Mr Gleeson points out, the costs of the present application to the Court by the liquidator for directions and orders are not strictly an “expense of or incidental to” the getting in of the reinsurance payments. I agree with that submission. However I consider that this matter is notorious enough not to be ousted by the words of the definition, and courts traditionally have the power to order that the costs of people bona fide disputing as to the distribution of a fund be paid out of that fund. It follows from this that the costs of the liquidator and the costs of the first defendant as representative defendant should be paid out of the fund. The second defendant and the Seerys were unsuccessful. I do not consider that their intervention resulted in any greater costs being incurred. Accordingly the appropriate order is that there be no order as to the costs of the second and third defendants.
65 I think that the best course to take is merely to publish these reasons and leave the parties to bring in short minutes in due course. In view of the complexity of the matter and the number of people that might have to be consulted, I will tentatively list the matter for mention before me on 31 October 2000 at 9.30am. If this is inconvenient to counsel, a different date can be arranged with my Associate so long as she is contacted at least the week before.
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