HIH Casualty & General and related matters

[2001] NSWSC 1186

Reported Decision: 40 ACSR 214

New South Wales

Supreme Court

CITATION:	HIH Casualty & General and related matters [2001] NSWSC 1186
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 1800/01; 1801/01; 1806/01; 1808/01; 1810/01; 1814/01; 1815/01
HEARING DATE(S):	13/12/01, 14/12/01
JUDGMENT DATE:	19 December 2001
PARTIES :	World Marine & General Insurances Pty Ltd HIH Underwriting & Insurance (Australia) Pty Ltd CIC Insurance Ltd FAI General Insurance Company Ltd HIH Casualty & General Insurance Ltd FAI Reinsurances Pty Ltd HIH Underwriting & Agency Services Ltd
JUDGMENT OF:	Barrett J

COUNSEL :	Mr A.P. Ryan (Solicitor) - Liquidators Mr T. McBride - Heath Lambert Australia Pty Ltd - Brokers Ms N. Maude (Solicitor) - Jardine Lloyd Thompson Australia Pty Ltd - Brokers Ms H. Brennan (Solicitor) - Marsh Pty Ltd
SOLICITORS:	Blake Dawson Waldron - Liquidators
CATCHWORDS:	CORPORATIONS - winding up - contracts by liquidators not to be performed within three months - contracts entailing statutory non-compliance will not be approved - INSURANCE - agents and brokers - statutory duties of broker to account to insurer
LEGISLATION CITED:	Australian Securities and Investments Commission Act 2001 (Cth) Corporations Act 2001 (Cth) Insurance (Agents and Brokers) Act 1984 (Cth)
CASES CITED:	Brooklyn Co-operative Society Ltd v Federal Commissioner of Taxation (1980) 147 CLR 441 Re CIC Insurance Ltd (2001) 38 ACSR 181 Re FAI General Insurance Co Ltd [2001] NSWSC 882 G A Listing & Maintenance Pty Ltd (1994) 15 ACSR 181 (1994) 15 ACSR 308 Re Greater West Insurance Brokers Pty Ltd [2001] NSWSC 825 Re HIH Insurance Group Ltd [2001] NSWSC 308 Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 11 ACLR 108 Registrar of Aboriginal Corporations v Bibelman [2001] FCA 136 Roxborough v Rothmans of Pall Mall Australia Pty Ltd [2001] HCA 68
DECISION:	Approval for liquidators to enter into agreements with second application brokers granted; Approval for liquidators to enter into agreements with first application brokers refused

2

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BARRETT J

WEDNESDAY, 19 DECEMBER 2001

1800/01 – WORLD MARINE & GENERAL INSURANCES PTY LTD
1801/01 – HIH UNDERWRITING & INSURANCE (AUSTRALIA) PTY LTD
1806/01 – CIC INSURANCE LTD
1808/01 – FAI GENERAL INSURANCE COMPANY LTD
1810/01 – HIH CASUALTY & GENERAL INSURANCE LTD
1814/01 – FAI REINSURANCES PTY LTD
1815/01 – HIH UNDERWRITING & AGENCY SERVICES LTD

HIS HONOUR:
The present applications

1 Before the court are two interlocutory applications made by the liquidators of each of seven companies in the HIH Group, being World Marine & General Insurances Pty Ltd, HIH Underwriting & Insurance (Australia) Pty Ltd, CIC Insurance Ltd, FAI General Insurance Company Ltd, HIH Casualty & General Insurance Ltd, FAI Reinsurances Pty Ltd and HIH Underwriting & Agency Services Ltd. I shall refer to these entities as “the insurance companies”. The liquidators’ first application was made on 13 December 2001 by interlocutory process filed in court and made returnable instanter. The second was initiated in the same way on 14 December 2001. On the latter occasion, I also heard further argument on the first application. Mr Ryan appeared for the liquidator on both days. On 14 December 2001, I received oral submissions made by Ms Brennan for Marsh Pty Ltd, Mr McBride for Heath Lambert Australia Pty Ltd and Ms Maude for Jardine Lloyd Thompson Pty Ltd, they being parties interested in the first application. By leave, supplementary written submissions were filed on 18 December 2001 by those interested parties and the applicants.

2 The first interlocutory application made by the liquidators of each insurance company seeks an order of the court under s.477(2B) of the Corporations Act 2001 (Cth) approving the making by them, as liquidators, of three agreements, each being an agreement between the seven insurance companies and an insurance broker. The three insurance brokers in question are Marsh Pty Ltd, Heath Lambert Australia Pty Ltd and Jardine Lloyd Thompson Pty Ltd. I shall refer to them, for convenience, as “the brokers” or, as necessary, “the first application brokers”. The liquidators also seek a direction under s.479(3) as to whether the liquidators would be justified in entering into the agreement in each case.

3 The liquidators’ second interlocutory application seeks an order under s.477(2B) approving the making by them, as liquidators, of an agreement in a different form with each of several other named insurance brokers which I shall call “the second application brokers”. There are 304 such insurance brokers.

4 The need for approval under s.477(2B) arises because obligations under each proposed agreement may, according to the terms of the agreement, be discharged more than three months after the agreement is entered into.

The proposed agreements

5 The agreement between the insurance companies now in liquidation and a particular insurance broker will, if entered into, regulate various matters concerning money received by the broker from persons who, through the broker’s intermediation, effected or sought to effect insurance cover with one the insurance companies. In the normal course of events, a broker receiving moneys in respect of insurance arranged by it for an insured will account to the relevant insurer for the premium after retaining its own commission and any other sums to be outlaid in respect of the relevant cover, such as stamp duty and fire service levy. This normal course of events is reflected in and regulated by the Insurance (Agents and Brokers) Act 1984 (Cth).

6 Both before and after the appointment of provisional liquidators of the insurance companies by the court on 15 March 2001, numerous brokers were holding funds received from various persons seeking or renewing cover with those insurance companies. The insurance companies are now insolvent and in liquidation. In those circumstances, the persons seeking or renewing cover, or some of them, have asserted or may assert that the moneys paid by them and held by the broker, to the extent that they would normally be paid by the broker to the insurer, should not be so paid and should instead be returned to them. The proposed agreement between the broker and the insurer is intended to make provision as to the holding of those moneys pending resolution of such assertions.

Background to the proposed agreements

7 Important background to the proposed agreements is found in their recitals. Those recitals are, in relevant respects, the same in the form of agreement intended to be entered into with the first application brokers and the form of agreement intended to be entered into with the second application brokers. This is so even though there are differences between the two forms of agreement in the ways in which they actually work. The relevant recitals may usefully be quoted in full:

“On 15 March 2001, provisional liquidators were appointed to each of the Insurers. On 27 August 2001, liquidators were appointed to each of the Insurers.

The Broker has, at various times before and after 15 March 2001, received from Insureds payments comprising premiums payable to an Insurer in relation to policies issued by that Insurer before 15 March 2001. The Insurers recognise, however, that in particular circumstances an Insured may assert that moneys it has paid to the Broker are not payable as premiums by the Broker to the Insurer.

Section 26 of the IABA [i.e, the Insurance (Agents and Brokers) Act 1984] imposes obligations on brokers to pay premiums received from insureds into insurance broking accounts.

Section 27 of the IABA imposes obligations on brokers to pass premium amounts to insurers in certain circumstances, usually within 90 days of the inception of the relevant policy, or in some circumstances as soon thereafter as is reasonably practicable for the broker to do so.

Section 27(12) of the IABA provides that an act done in contravention of various subsections of section 27 constitutes an offence for which the penalty is imprisonment for up to two years.

As at the date of this agreement, the Broker continues to hold in its insurance broking accounts moneys received from Insureds in payment of premium in relation to policies issued by an Insurer.

By letter dated 5 June 2001 (the ‘ASIC Letter’ ) ASIC [i.e, the Australian Securities and Investments Commission] gave notice that it would not enforce the provisions of section 27(12) of the IABA against the Broker by reason of the Broker’s failure to comply with section 27 of the IABA if the Broker complied with the following conditions:

(i) The Broker provide to ASIC a note from its auditor certifying that the HIH premium moneys are separately accounted for, including accounting for interest accruing;

(ii) The HIH premium moneys will be held in an insurance broking account with a bank, building society or credit union and invested in a deposit or cash management account that is liquid and “at call” immediately;
(iii) The separate insurance broking account in which HIH premiums are held will be included and separately identified in the audited accounts required by ASIC pursuant to section 21(3A) of the IABA (being the audited accounts to be produced to ASIC within four months after the end of the accounting period);
(iv) The Broker may not retain profits or income earned from the HIH premiums held in the insurance broking account;
(v) The Broker must have obtained legal advice directly, or have access to relevant advice obtained by other brokers, to ensure that they have a sound basis for taking this approach;
(vi) The Broker communicates in writing any decision to hold moneys in this manner to relevant clients and the provisional liquidator;
(vii) The Broker, either directly or through industry organisations, takes further steps to resolve the legal uncertainties surrounding this issue so that the moneys could be passed on or returned as promptly as possible, once a determination, judgment or other resolution is reached.
In the ASIC Letter, ASIC stated that, subject to compliance with the terms described above, ASIC did not intend to letter its “no action” approach until 1 September 2001.
In a document entitled ‘Notice to Brokers’ dated 20 June 2001 (the ‘ Notice to Brokers ’), the provisional liquidators of the Insurers stated their position in relation to the settlement of funds held in insurance broking accounts having regard to the ASIC Letter, which was to be read in conjunction with the provisional liquidators’ circular dated 23 May 2001 in relation to policy cancellation and premium treatment entitled ‘Provisional Liquidators’ Response to Issues Raised by NIBA’. The Notice to Brokers contemplated three scenarios which may have applied to brokers subsequent to the ASIC Letter:
(i) The first scenario contemplated brokers who had not paid premium to the Insurer pursuant to section 27 of the IABA and who were seeking advice in relation to those moneys in the manner contemplated by the ASIC letter. In that scenario, the provisional liquidators’ expectations were that the broker fully comply with the conditions set out in the ASIC Letter and communicate to the provisional liquidators any decision to hold moneys whilst seeking legal advice.
(ii) The second scenario contemplated brokers who had sought and obtained legal advice, or who had access to relevant advice obtained by other brokers, to the effect that they had a sound basis for not immediately complying with section 27 of the IABA . In that scenario, the provisional liquidators’ expectations were that the broker fully comply with the conditions set out in the ASIC Letter and forward a summary of their position to the Insurers which should include details of the Insureds, policy numbers, a clear statement of the broker’s position, moneys held in the Insurance Broking Accounts and any other relevant information.
(iii) The third scenario contemplated was one in which brokers were not seeking legal advice in relation to the premiums held in their Insurance Broking Accounts or who had received advice to the effect that they should comply with section 27 of the IABA . In that scenario, the provisional liquidators’ expectations were that brokers comply with section 27 of the IABA .”

8 Further background is provided by the affidavit of Mr Macintosh, one of the liquidators, read on both the application in relation to the first application brokers and the application in relation to the second application brokers. It is useful to quote the following from it:

“7. The Liquidators consider that, subject to certain possible exceptions, the HIH Company is entitled to payment of the premium in accordance with section 27 of the IABA . However, some Insureds claim that they have a right to a refund of that premium from their broker.
8. Certain brokers who were unsure as to the proper treatment of the premiums moneys received from Insureds and held by the brokers, sought advice from the Australian Securities and Investments Commission (‘ ASIC ’). By letter dated 5 June 2001 (the ‘ ASIC Letter ’) ASIC gave notice that it would not, until 1 September 2001, enforce the provisions of section 27(12) of the IABA against brokers by reason of the broker’s failure to comply with section 27 of the IABA if the broker complied with the conditions outlined in the letter. Annexed hereto and marked ‘A’ is a copy of the ASIC Letter.
9. In summary, ASIC would not take any action so long as the premium moneys be held in insurance broking accounts until the broker had obtained legal advice as to the proper treatment of these moneys.
10. In a document entitled ‘Notice to Brokers’ dated 20 June 2001 (the ‘Notice to Brokers’ ), the Provisional Liquidators stated their position to brokers who dealt with HIH Companies in relation to the premium moneys held by the brokers in insurance broking accounts having regard to the ASIC Letter. A copy of the Notice to Brokers is annexed hereto and marked ‘B’.

11. In summary, the Provisional Liquidators in the Notice to Brokers outlined their position as follows:

(a) For those brokers who had not paid the premiums to HIH Companies and who were seeking advice in relation to those moneys, the provisional liquidator’s expectations were that the broker fully comply with the conditions set out in the ASIC Letter;

(b) For those brokers who had sought and obtained legal advice to the effect that they had a sound basis for not immediately paying the premiums to the HIH Companies, the provisional liquidator’s expectations were that the broker fully comply with the conditions set out in the ASIC Letter and forward a summary of their position to the HIH Company; and

(c) For those brokers who were not seeking legal advice in relation to the premiums held or who had received advice to the effect that they should comply with section 27 of the IABA , the provisional liquidator’s expectations were that brokers comply with section 27 of the IABA .
12. Since September 2001, ASIC has met with the Liquidators and a number of larger brokers in an attempt to resolve disputes over the premiums held in the broking accounts. A combined meeting of those parties was held on 13 September 2001.
13. In a circular to brokers issued by ASIC dated 8 November 2001, entitled ‘HIH: Premium held in Insurance Broking Accounts’ (‘ ASIC Circular to brokers ’), ASIC outlined the recommended approach to dealing with the premium moneys following the meeting of 13 September 2001. Annexed hereto and marked ‘C’ is a copy of the ASIC Circular to brokers.
14. In summary, the proposal suggested by ASIC at the meeting on 13 September 2001 was that all the HIH Company premiums held in insurance broking accounts be quarantined in a single account pending resolution of claims to the premiums. ASIC noted that the HIH Companies would enter into an agreement with the brokers under which an account would be created to receive all quarantined premiums currently held by brokers and a process would be established to determine disputes over an Insured’s entitlement to a refund of the premiums.”

The difference between the two forms of agreement

9 This brings me to the essential difference between the proposed agreements involving the first application brokers and those involving the second application brokers.

10 In the case of the first application brokers, the form of agreement contemplates that the special bank account referred to in paragraph 14 of Mr Macintosh’s affidavit will be established by the broker and that the broker will retain the funds in question, transferring them from the bank account in which they are currently lodged (being an account maintained in accordance with the Insurance (Agents and Brokers) Act) to the broker’s newly established bank account which will also be maintained in accordance with the Act.

11 In the case of the form of agreement relevant to the second application brokers, the special bank account will be established by the insurance company, not the broker. The moneys in question will, in accordance with the agreement, be paid over by the broker to the insurance company to be held by the insurance company in the special bank account established by it pursuant to the agreement. It is the location and ownership of the special bank account (with the broker in the first case and with the insurer in the second) which is the chief point of distinction between the two contractual regimes.

12 The relevant account is called, in each case, the “Master IBA Account”. The difference between the two forms of agreement is illustrated by the following provisions:

1. In the agreement with the first application brokers:
(a) (by clause 1.1) that “Master IBA Account” means an account established by the broker, details of which are set out in clause 3.1;
(b) (by clause 3.1) “The Master IBA Account will be an interest bearing account held by the Broker and will have joint signatories, one of which will be one of certain persons nominated by the liquidators and the other(s) of which will be persons nominated by the broker. The Broker will maintain the account and make all banking records available to the insurers … The only moneys held in the Master IBA Account will be those referred to in clause 2.1 of this agreement” .
2. In the agreement with the second application brokers:
(a) (by clause 1.1) “Master IBA Account” means an account established by the Insurers, details of which are set out in clause 3.1;
(b) (by clause 3.1) “The Insurers must maintain the Master IBA Account in accordance with the following details …” ;
(c) (by clause 3.2) “The Insurers must, upon receipt of the payment referred to in clause 2.1, deposit the money so received into the Master IBA Account” .

13 Apart from the difference regarding the special bank account, there is really nothing of any consequence distinguishing one form of agreement from the other.

General assessment of the proposed agreements

14 Leaving to one side issues arising under the Insurance (Agents and Brokers) Act to which I shall come presently, the liquidators have made out a case for approval under s.477(2B) in relation to the agreements with both the first application brokers and the second application brokers.

15 The guiding principle in such cases begins with the proposition that a winding up is generally expected to proceed with reasonable dispatch, with the liquidator collecting and realising assets, ascertaining liabilities and distributing available funds in an orderly fashion under a process which does not become unduly prolonged. The section is intended not as a means of having the court check or second guess the liquidator’s commercial judgment but, rather, so that it may scrutinise proposed commitments of the liquidator against the expectation of reasonable dispatch in the completion of the winding up, with a term greater than three months being selected as the statutory criterion for identifying the cases requiring such scrutiny: see G A Listing & Maintenance Pty Ltd (1994) 15 ACSR 308, Re HIH Insurance Group Ltd [2001] NSWSC 308; Re CIC Insurance Ltd (2001) 38 ACSR 181; Registrar of Aboriginal Corporations v Bibelman [2001] FCA 136; Re FAI General Insurance Co Ltd [2001] NSWSC 882.

16 The creation of a contractual framework for the resolution of difficulties and disputes about ownership of and entitlement to moneys received from intending insureds in respect of cover made effectively worthless by the financial failure of the insurer is something which, in the context of a complex corporate collapse such as the present, the liquidators may properly undertake. The fact that there are more than 300 brokers involved, each of whom in all likelihood holds relevant money referable to several clients, shows the extent of the problem and the clear public interest in seeing it appropriately resolved. The fact that ASIC has played a key role in considering the plan the agreements will put into effect underlines the public interest to which I have referred. Mr Macintosh’s affidavit deals explicitly with the benefits that will flow to creditors of the insurance companies by reason of avoiding cost and promoting certainty. The complexity of the liquidations and the expectation that they will be protracted makes it virtually inevitable that the contractual framework to which I have referred needs to be of a duration greater than three months. Viewed in their own right and in isolation, therefore, the several agreements in contemplation deserve the approval of the court under s.477(2B).

17 These observations are sufficient to dispose of the proposed agreements with the second application brokers. Orders may appropriately be made approving the making of those agreements by the liquidators. Those agreements are not affected by the matters of possible illegality to which I am about to turn. This is because they involve payment of all relevant moneys by the second application brokers to the insurance companies and retention of the moneys in dedicated bank accounts established and maintained by the insurance companies.

Insurance (Agents and Brokers) Act 1984

18 In relation to the proposed agreements involving the first application brokers (being Marsh Pty Ltd, Heath Lambert Australia Pty Ltd and Jardine Lloyd Thompson Pty Ltd), however, there is an issue which requires further examination. That issue concerns provisions of the Insurance (Agents and Brokers) Act and the question whether implementation of the proposed agreement with each of the first application brokers will involve contravention of those provisions.

19 Sections 26 and 27 of the Act are both concerned with money received by a registered insurance broker from or on behalf of an insured or intending assured for or on account of an insurer in connection with a contract of insurance or a proposed contract of insurance. Section 26 requires such money to be paid by the broker into a bank account designated “insurance broking account” maintained by the broker solely for the purposes of that section. The general nature of this kind of account was considered by Young CJ in Eq in Re Greater West Insurance Brokers Pty Ltd [2001] NSWSC 825 (6 September 2001).

20 Section 27 deals with payment of the money by the broker to the insurer. Under s.27(1), an obligation to pay arises when the risk to which the contract relates is accepted by or on behalf of the insurer and the broker is informed of, or otherwise ascertains, the amount of the premium or instalment to be paid. Section 27(2) specifies the time within which an amount payable under s.27(1) is to be paid. The general rule is that it must be paid within 90 days after the day on which the relevant insurance cover becomes effective or the first day of the period to which the instalment relates, as the case may be. That period of 90 days is called “the relevant period”. The general rule is modified by s.27(2)(b) which deals with a case where “it is not practicable for the broker to pay the amount within the relevant period”. In such a case, the broker must make the payment “as soon after the expiration of that period as it is reasonably practicable for the broker to do so.”

21 It should also be noted that, by virtue of s.14, receipt of premium moneys paid by an insured (or intended insured) to the broker is a discharge, as between the insurer and the insured, of the liability of the insured to the insurer in respect of those moneys.

22 The proposed agreement between the insurance companies and each first application broker proceeds on the footing that relevant moneys currently lodged in the broker’s s.26 account will be withdrawn from that account and paid into the newly established and separate bank account maintained by that broker, where it will remain until the dispute about its appropriate ultimate destination is resolved. The contractual requirement that the funds be retained by the broker in the new bank account pending resolution of the dispute will obviously mean that it is not paid over to the insurer. (This is subject to the argument considered below based on a concept of constructive payment.)

23 This feature of the agreement with each first application broker means that performance of it will entail non-compliance with s.27 of the Act, assuming always that the deadline by which s.27(2) requires the money to be paid over to the insurer has already passed when the agreement is made and assuming also that no other countervailing factor has intervened. On those assumptions, the effect of the agreement will be to sanction retention by the broker of moneys which, under the Act, should already have been paid over to the insurer. The first application brokers submit, however, that the s.27(1) requirement does not need to be satisfied in those cases where an insured objects to moneys being paid over to the relevant applicant insurance company (with the objection, in some cases, taking the form of a direct threat of legal proceedings).

24 Several possible bases for such a view should be separately examined, although the task is not a straightforward one. It is difficult and dangerous to generalise. A definitive answer to the question whether the requirement under s.27(1) has or has not become due for performance in a particular case can be given only on the basis of a full consideration of the facts of that case. No such luxury is available here. The matter must be approached in a generic way, remembering that the real question is whether the court should exercise a discretionary power to approve a course of action contemplated by liquidators who are officers of the court subject to general requirements to deal prudently and to act within the law.

The total failure of consideration argument

25 The main conceptual basis of the first application brokers’ submission is that the conditions which s.27(1) requires to be satisfied before a broker is required to pay money to the insurer are not satisfied where the cover extended by the insurer is effectively illusory because the insurer is insolvent and therefore unable, in any practical sense, to perform the contract. The notion is one of total failure of consideration of the kind recently considered by the High Court in Roxborough v Rothmans of Pall Mall Australia Ltd [2001] HCA 68 (6 December 2001). Gummow J there identified as one species of failure of consideration “the failure to sustain itself of the state of affairs contemplated as a basis for the payments the appellants seek to recover”.

26 But it is by no means clear that, even if there has been a total failure of consideration as between an insured and an insurance company, the s.27(1) conditions for payment by a broker to the insurance company have not been satisfied. There are three such conditions. There can be no dispute, presumably, about the first (s.27(1)(a)) which entails no more than that money of the relevant character has been received by the broker. Nor, one assumes, is there any dispute about the third (s.27(1)(c)) which is that the broker who received the money has become aware of the amount of the premium or instalment to be paid to the insurer. The only possible area of doubt can exist in relation to the second condition, namely, that the relevant “risk” has been “accepted” by or on behalf of the insurer.

27 It seems to me, however, that any total failure of consideration does not necessarily justify a conclusion that the “risk” has not been “accepted”. As is pointed out by Colin Ying in his article “Whose premium is it anyway” (2001) 13 ILJ 54, an insurer “comes on risk” when the contract of insurance begins to operate, unless by its terms the contract defers commencement of risk to some future point it identifies, such as payment of the premium. Although a contract with an insolvent insurer may be commercially worthless, it is nonetheless a contract under which the insurer accepts the relevant risk. It may be, depending on precise circumstances, that the insured has a right to claim restitution in respect of the premium for the commercially worthless cover or is entitled to regard the contact as having been repudiated. But in any such event the statutory condition in s.27(1)(b) seems nevertheless to be technically satisfied.

The voidable contract argument

28 A separate but conceptually similar argument in favour of the position sought by the first application brokers is to the effect that the formation of each relevant contract of insurance was attended by an express or implied representation by the insurer that it was at the time and would remain solvent, or that it became an implied term of the contract that the insurer was and would continue to be solvent. But even if assertions of that kind could be made out, they would, at best, enable the insured to avoid an existing and acknowledged contract under which the insurer accepted the risk (even though lacking the financial capacity to perform its promise to indemnify).

29 It is, of course, dangerous to attempt to generalise since every case will depend on its own particular facts. There is nevertheless substantial conceptual difficulty with the proposition that s.27(1) does not operate where a concluded contract of insurance is affected by some factor which may enable the insured to avoid or terminate it. The event upon which the operation of the section is predicated, being contract formation, has nevertheless occurred.

The “not practicable” argument

30 I come now to the second general basis on which the first application brokers contend that any s.27 obligation to pay money to the insurance companies has not become due for performance. The thesis here is that, because of the client’s objection to payment, the case is within s.27(2)(b) – payment by the broker within the initial period of 90 days was made “not practicable” by the client’s objection and will not be “reasonably practicable” until the client’s objection is resolved.

31 This argument proceeds on a particular view of the word “practicable”. Young J observed in Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 11 ACLR 108 that “practicable involves it being capable of being put into practice … or feasible”. Given that s.27(2) is concerned with the payment of money, it seems to me that the capability and feasibility with which it is concerned are principally those going to the act of payment. I note, however, that Young J took the view in the case to which I have referred that “something is not practicable if it can only be done either in breach of the law or by paying the price of damages for breach of contract”. It is a wider notion of what is “practicable” that the first application brokers assert in the present case and I accept that, in the present context, it would not be “practicable” for a broker to make payment to an insurer if, by so doing, it broke the law or incurred some legal liability at the suit of the insured or some other person.

32 There is, of course, no suggestion that payment by the brokers to the insurance companies will be in breach of the law: on the contrary, the suggestion is that it is failure to pay which entails breach of the law. That raises the question whether the brokers will be in breach of contract or will otherwise commit some civil wrong as against their clients if they make the payments to the insurance companies. Again, it is impossible to give any definitive answer to this question except by reference to the facts of the particular case. That said, however, the submissions made by the first application brokers do not clearly identify any basis on which a dissatisfied client would maintain an application for an injunction restraining the broker from paying the relevant money to the insurance company.

33 To the extent that the submissions sought to suggest such a basis, they relied again on repudiation and “fundamental breach” by the insurer. That may well affect matters as between insurer and insured in ways already noticed. But, as I see it, it can scarcely give the insured any right or interest of a proprietary kind in money paid to and held by the intermediary in respect of which an obligation to account to the insurer exists.

The contracting out argument

34 The next argument advanced in support of the scheme envisaged by the form of agreement with the first application brokers is that, even if the conditions in ss.27(1) and (2) have been satisfied so that those provisions require moneys to be paid by the brokers to the insurance companies, the fact that the insurance companies will, by the agreements, sanction retention of the moneys is sufficient to justify such retention. There will be, in other words, a contracting out of the statutory requirement by the parties affected by it.

35 The short answer to that is found in s.27(12) which says that an act done in contravention of s.27(1) or s.27(2) (among other provisions) constitutes an offence against the subsection concerned “notwithstanding that it was done with the consent of the insurer or of the insured or intending insured, as the case may be”. In other words, acquiescence in non-payment by the designated recipient does not change the illegal character of the non-payment.

36 I am assuming here that the reference in s.27(12) to an “act” includes a reference to a failure to pay money when required by a relevant provision to do so and I did not understand any of the submissions received to suggest otherwise. That is an assumption also reflected by the ASIC materials annexed to Mr Macintosh’s affidavit of which more will be said in a moment.

The ASIC Act s.12DI argument

37 The first application brokers argued in written submissions that, under s.12DI of the Australian Securities and Investments Commission Act 2001 (Cth), each of the insurance companies is precluded from accepting the premium moneys from the brokers where the liquidators cannot ensure payment on all or any claims that may be made under the relevant policy of insurance.

38 If the conditions for its operation are otherwise met, s.12DI prohibits the acceptance by a corporation of payment or other consideration for financial services (a term defined by s.12BA in such a way as to include the writing of an insurance contract) if, at the time of the acceptance, the corporation intends not to supply the services or to supply services “materially different from the services in respect of which the payment or other consideration is accepted” or there are reasonable grounds of which the corporation is or ought reasonably to be aware for believing that it will not be able to supply the services within the contracted period or, if there is none, within a reasonable period.

39 Section 14 of the Insurance (Agents and Brokers) Act, to which brief reference has already been made, is relevant here. The liability of each insured to the relevant insurance company in respect of premium was, by force of that section, discharged at the past point at which the insured paid moneys to the broker. It is therefore doubtful, to say the least, that subsequent payment by the broker to the insurance company in obedience to s.27 involves acceptance by the insurance company of payment or other consideration for the provision of the insurance contract. It is much more likely that the consideration for that service passed when s.14 deemed the liability to the insurance company to be discharged.

40 Even if, contrary to the foregoing, scope remains for the operation of s.12DI of the Australian Securities and Investments Commission Act, there is another obstacle. Because, by virtue of the definitions in s.12BA, the writing of an insurance contract amounts to the supply of financial services, the s.12DI prohibition would operate only if, when the insurance company accepted the premium from the broker, it intended not to write the policy or to write a “materially different” policy. Since, as already discussed, the existence of the policy as the means by which the insurer comes on risk is one of the conditions to be satisfied before payment by broker to insurer is required under s.27 of the Insurance (Agents and Brokers) Act, it may be expected that, in general, the creation of the insurance contract will have predated the receipt by the insurance company from the broker. That being so, there is not, to my mind, any clear basis on which the s.12DI would enter the picture as a barrier to acceptance by the insurer of money required to be paid to it by the broker. An insurance contract conferring a defined indemnity does not cease to be what it purports to be when the insurer loses the meaningful financial wherewithal to satisfy its promise to pay. The contract remains a contract nonetheless.

The ASIC no-action argument

41 It is clear from the ASIC material to which I have referred that ASIC has expressed an intention not to take enforcement action under s.27(12) of the Insurance (Agents and Brokers) Act if moneys are retained by brokers in accordance with guidelines ASIC itself has issued. The relevant ASIC statement reads in part as follows:

“ASIC does not presently intend to take enforcement action under IABA in relation to this issue while current legal and financial uncertainties are still being resolved. In proposing this approach however, we must be confident that:

· HIH premiums are secure and quarantined from other funds,

· The broker continues to seek resolution concerning disposition of HIH premiums, and

· ASIC is, at all times fully informed as to the action being taken by the broker in relation to HIH premiums.

To that end, our current approach not to take any immediate enforcement action is subject to prior compliance by brokers with each of the following conditions:
1. The broker provides to ASIC a note from its auditor certifying that the HIH premium moneys are separately accounted for, including accounting for interest accruing;
2. The HIH moneys will be held in an insurance broking account with a bank, building society or credit union and must be invested in a deposit or cash management account that is liquid and ‘at call’ immediately;
3. The separate insurance broking account in which HIH premiums are held will be included and separately identified in the audited accounts required by ASIC pursuant to section 21(3A) IABA (being the audited accounts to be produced to ASIC within four months after the end of the accounting period;
4. The broker may not retain profits or income earned from the HIH moneys held in the insurance broking account;
5. The broker must have obtained legal advice directly, or have access to relevant advice obtained by other brokers, to ensure that they have a sound basis for taking this approach;
6. The broker communicates in writing any decision to hold moneys in this manner to relevant clients and the provisional liquidator;
7. The broker, either directly or through industry organisations, takes further steps to resolve the legal uncertainties surrounding this issue so that the moneys can be passed on or returned as promptly as possible, once a determination, judgment or other resolution is reached.
If a broker elects to adopt this approach, then any subsequent decision to pay moneys in the broking account either to the provisional liquidator of HIH or back to the client, should be notified to ASIC by giving two clear business days’ notice prior to the transaction taking place.”

42 It is thus clear that ASIC is taking a pragmatic approach which it judges best suited to achieving an outcome in the interests of all stakeholders. A body having responsibility for the administration and enforcement of a law possesses a certain degree of latitude in deciding whether or not to initiate a prosecution for contravention. But the exercise of such discretion so that apparent offences are not prosecuted in a particular case does not make lawful that which is unlawful.

43 If anything, the statements by ASIC of its intentions regarding enforcement and prosecution hinder rather than help the case sought to be made in favour of the agreements with the first application brokers. It is clear that ASIC has strong concerns that retention of moneys by brokers in the context under discussion will entail non-compliance with the Act.

The constructive payment argument

44 I come finally to a submission which attacks the matter from a different perspective. It assumes that all conditions necessary to activate the s.27 payment requirements have been satisfied. The effect of the proposed agreement with each first application broker will be, it is said, that payment by the broker to the relevant insurance company occurs, even though the relevant funds remain in the ownership of the broker. It is argued that the contractual obligations the broker will assume in relation to those funds are such as to justify a conclusion that they will in reality be paid to the insurance company.

45 The following observation of Mason J in Brookton Co-operative Society Ltd v Federal Commissioner of Taxation (1980) 147 CLR 441 was cited in support of this proposition:

“Payment of a dividend may occur in a variety of ways not involving payment in cash or by bill of exchange, as, for example, by an agreed set-off, account stated or an agreement which acknowledges that the amount of the dividend is to be lent by the shareholder to the company and is to be repaid to the shareholder in accordance with the terms of that agreement.”

46 The theme common to these examples of less obvious forms of payment is that the money passes into the dominion of the payee who thereby comes to enjoy the benefit of it. That is not what is proposed here. The money will remain in the ownership of the broker and, while expenditure or release of it will, as a matter of contract, require the consent of the insurance company, there will be no immediate dominion or benefit conferred on that insurance company.

47 I am therefore unable to accept the argument that the form of agreement with the first application brokers will entail some form of constructive payment to the insurance companies which will satisfy s.27.

Conclusion on agreements with first application brokers

48 None of the submissions made in relation to the proposed agreements with the first application brokers seems to me to provide any distinct basis for a conclusion that it will, in every case, be consistent with the requirements of s.27 of the Insurance (Agents and Brokers) Act for the relevant broker to retain the moneys in relation to which the proposed agreement with the insurance companies will operate. Putting this another way, it has not been shown that the positive obligation apparently arising under s.27 has somehow been deferred or made inoperative (or even satisfied) by some generally prevailing circumstance so that the retention of funds by the brokers as contemplated by the proposed agreements can be taken in every case to be lawful.

49 I must again emphasise that definitive conclusions about the correct way of handling particular moneys held by a broker (as well as rights in relation to that money) could be reached only in the light of the facts of the particular case and after full argument. Nothing I have said about the generality of cases should be taken as a conclusion about any particular case.

50 At the same time, however, observations about the generality of cases are sufficient to dispose of the applications in relation to the proposed agreements with the first application brokers. Notwithstanding the commercial advantages perceived by the brokers and ASIC, the reality that performance of each agreement will entail what appears on the face of things to be a contravention of ss.27(1) and therefore an offence under s.27(12) means that the court simply cannot give approval under s.477(2B) in relation to the agreements the liquidators seek to have the insurance companies conclude with the first application brokers. Nor can it advise the liquidators that it would be a proper course of action in the liquidations for them to commit the insurance companies to those agreements.

51 Unlike ASIC, the court is not a regulatory and enforcement authority. It possesses nothing akin to a prosecutor’s discretion to stay its hand where an offence appears to have been committed but some greater public interest is considered to be served by overlooking it. In exercising discretions reposed in it, the court must always uphold the law and insist that statutory requirements be observed and obeyed.

52 It is, of course, no part of the function of the court to suggest alternative courses of action. It can be said, however, that the feature involving retention of relevant moneys by the brokers, so that those moneys do not pass to the insurance companies, is the only aspect of the proposed agreements with the first application brokers which has caused exercise of the court’s discretion in favour of those agreements to be withheld.

Orders

53 The orders of the court are as follows:

1. Order, pursuant to s.477(2B) of the Corporations Act 2001, that the following is approved, namely, the making by the applicants, Anthony Gregory McGrath and Alexander Robert Mackay Macintosh, as liquidators of and on behalf of each of World Marine & General Insurances Pty Ltd, HIH Underwriting & Insurance (Australia) Pty Ltd, CIC Insurance Ltd, FAI General Insurance Company Ltd, HIH Casualty & General Insurance Ltd, FAI Reinsurances Pty Ltd and HIH Underwriting & Agency Services Ltd of an agreement in or substantially to the effect of the form entitled “Master Broking Account Agreement” which is the exhibit ARMM1 to the affidavit of Alexander Robert Mackay Macintosh sworn 14 December 2001 filed in proceedings 1810 of 2001 between those companies and each of the 304 persons, firms and corporations named in the annexure “A” to that affidavit.

2. Order that the amended interlocutory processes of World Marine & General Insurances Pty Ltd, HIH Underwriting & Insurance (Australia) Pty Ltd, CIC Insurance Ltd, FAI General Insurance Company Ltd, HIH Casualty & General Insurance Ltd, FAI Reinsurances Pty Ltd and HIH Underwriting & Agency Services Ltd dated 14 December 2001 in respect of proposed agreements with Marsh Pty Ltd, Heath Lambert Australia Pty Ltd and Jardine Lloyd Thompson Pty Ltd be dismissed.

54 Order 1 may be taken out forthwith if the liquidators so desire.

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Last Modified: 12/20/2001