In the matter of HIH Underwriting Insurance (Australia) Pty Ltd (in liquidation and subject to a scheme of arrangement)
[2015] NSWSC 36
•10 February 2015
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New South Wales |
Case Name: | In the matter of HIH Underwriting Insurance (Australia) Pty Ltd (in liquidation and subject to a scheme of arrangement) |
Medium Neutral Citation: | [2015] NSWSC 36 |
Hearing Date(s): | In Chambers |
Decision Date: | 10 February 2015 |
Jurisdiction: | Equity Division - Corporations List |
Before: | Black J |
Decision: | Orders made under Corporations Act 2001 (Cth) s 562A(4). |
Catchwords: | CORPORATIONS – Winding up – Insolvency – Proceeds of contract of reinsurance – Application for orders under Corporations Act 2001 (Cth) s 562A(4) – Whether “just and equitable” to make orders sought. |
Legislation Cited: | - Corporations Act 2001 (Cth) ss 562A, 562A(1), 562A(1)(a), 562A(1)(b), 562A(2), 562A(3), 562A(4), 562A(5), 562A(5)(d) |
Cases Cited: | - Amaca Pty Ltd v McGrath as liquidators of HIH Underwriting and Insurance (Australia) Pty Ltd [2011] NSWSC 90 |
Category: | Procedural and other rulings |
Parties: | Amaca Pty Ltd (under NSW administered winding up (First Plaintiff) |
Representation: | Counsel: |
File Number(s): | 2013/378933 |
JUDGMENT
By Interlocutory Process filed on 2 February 2015, the Plaintiffs, Amaca Pty Ltd (under NSW administered winding up) (“Amaca”) and others seek an order, under s 562A(4) of the Corporations Act 2001 (Cth) that ss 562A(2) and 562A(3) of the Corporations Act do not apply, for the policy years commencing 31 March 1980, 31 March 1981 and 31 March 1982, to amounts of $226,339 received from Peoples Insurance Company of China (“PICC”) (“PICC Receipt”) and $74,420 received from Nipponkoa Insurance Company Ltd (“Nipponkoa”) (“Nippon Receipt”) (together, “the Receipts”). The Plaintiffs seek orders that the Receipts instead be applied by the liquidators of the HIH Group of Companies (“Liquidators”) by deducting expenses of and incidental to getting in the Receipts, in specified amounts, deducting any dividends or distributions already paid in respect of the Receipts, and paying the balance of the Receipts to Amaca. The orders sought may be made by consent, as between the Applicants and the Liquidators, but the Court must nonetheless be satisfied that they are properly made so far as they involve the exercise of a statutory discretion.
The factual background to the application
This application relates to reinsurance receipts received in relation to the period which has been described in earlier proceedings as the “Occurrence Years”. The dealings between the Plaintiffs, the HIH Group and reinsurers in the 1981/82 and 1982/83 policy years were considered by Barrett J in Amaca Pty Ltd v McGrath as liquidators of HIH Underwriting and Insurance (Australia) Pty Ltd [2011] NSWSC 90 (“Amaca 1”). His Honour held that, having regard to the circumstances in which insurance had been placed by the James Hardie Group with HIH Underwriting and Insurance (Australia) Pty Ltd (in liquidation and subject to a scheme of arrangement) (“HIHUI”) and relevant reinsurers, and the direct relationship between HIHUI and those reinsurers, the reinsurance proceeds obtained by HIHUI from that cover ought properly to be available to the Plaintiffs. His Honour ordered that ss 562A(2) – (3) of the Corporations Act did not apply to certain reinsurance monies received by HIHUI in relation to those policy years and that, pursuant to s 562A(4) of the Corporations Act, those reinsurance receipts should instead be paid by HIHUI to the Plaintiffs.
On 20 December 2013, I made further orders that ss 562A(2) – 562A(3) of the Corporations Act did not apply to further reinsurance monies received by HIHUI in relation to the 1981/82 and 1982/83 policy years, and that, under s 562A(4) of the Corporations Act, those further reinsurance receipts should be applied, after deducting certain expenses and costs and any dividends already paid, to Amaca.
I also considered the dealings between those parties in the Occurrence Years in Re HIH Underwriting Insurance (Australia) Pty Ltd (in liq) and subject to a scheme of arrangement [2014] NSWSC 484 (“2014 Application”). I summarised, in paragraphs 4 – 10 of my judgment in the 2014 Application, the evidence as to dealings between the James Hardie Group and HIHUI in respect of the 1980/81 policy year and also set out the structure of the insurance cover held by James Hardie Industries Ltd (now known as ABN 60 Pty Ltd (under NSW administered winding up), the Third Plaintiff) in that year. I referred to the evidence of Mr Langlands, who was involved as a broker for the James Hardie Group in obtaining insurance cover in that policy year, as to the manner in which the premium paid by James Hardie was forwarded by the HIH Group to reinsurers in the London market. I also referred to the evidence of Mr Rod Waites dated 20 August 2010, which was read both in Amaca 1 and in the 2014 Application, in respect of the 1980/81 Policy year. In paragraph 10, I observed that:
“Several features of the arrangements in this year provide a factual basis for an order under s 562A(4) of the Corporations Act. The relevant reinsurance contracts were obtained by HIHUI solely in respect of the cover obtained by the Plaintiffs. In this year, as in the years considered in Amaca 1, Amaca 2 and Amaca 3, the insurance contracts under which HIHUI provided cover to the Plaintiffs can readily be matched with the reinsurance contracts in favour of HIHUI. HIHUI entered into those reinsurance contracts for the purpose of providing cover for the Plaintiffs that HIHUI would not have been able to provide without that reinsurance and where several of the reinsurers could not have insured the Plaintiffs directly. The insurance provided by HIHUI was plainly dependent on the provision of reinsurance cover, since it was plainly understood that HIHUI did not itself have the capacity to provide that cover other than with back-to-back reinsurance arrangements. The premiums paid by the Plaintiffs to HIHUI were identical to the premiums paid by HIHUI to the reinsurers, apart from HIHUI’s commission to which I referred above. The James Hardie Group was also aware, through its broker, of the arrangements by which the risk nominally undertaken by HIHUI had in fact been placed in the London market by facultative reinsurance contracts obtained for that purpose.”
I summarised the evidence as to dealings between the James Hardie Group and HIHUI in respect of the 1981/82 and 1982/83 policy years in paragraphs 11 – 16 of my judgment in the 2014 Application. I noted that the position in those years had been considered in detail by Barrett J in Amaca 1 and the Court had subsequently made several further orders in respect of distributions relating to those years on a basis consistent with his Honour’s judgment and I referred to the evidence read in Amaca 1 and in the 2014 Application in respect of those years. I referred to Barrett J’s summary, in Amaca 1, of the matters that he considered had the result that there was no difficulty, in the 1981/82 and 1982/83 years, in matching the insurance contracts under which HIHUI granted cover to the Plaintiffs with the reinsurance contracts written in its favour and supported findings that HIHUI entered into those contracts to provide cover which it could not itself provide and which the reinsurers could not directly provide and noted his conclusion (at [78]–[79]) that:
“The reinsurance was the means by which the reinsurers provided, through [HIHUI] the insurance the plaintiffs required. The reinsurance was obtained for the express purpose of fulfilling the plaintiffs’ needs.
On that basis, the reinsurance proceeds derived by [HIHUI] ought properly be regarded as part of what [HIHUI], as insurer, was committed to provide to the plaintiffs upon and by reason of their sustaining the relevant loss.”
I also observed (at [16] of my judgment in the 2014 Application) that:
“I have had regard to the evidence read as to those years in this application and I gratefully adopt Barrett J’s description of the process adopted in those years, which was consistent with that evidence. That evidence supports the view that the dealings between James Hardie, HIHUI and the London reinsurers in those years had the features noted above in respect of the previous year which in turn provide the factual basis for the making of a further order under s 562A(4) of the Corporations Act in respect of those years, consistent with the orders previously made by the Court in respect of those years.”
The Plaintiffs rely, in this application, on the Court Book on which they relied in the 2014 Application and on a further affidavit of Ms Narreda Grimley dated 22 January 2015. Ms Grimley is the General Manager of Asbestos Injuries Compensation Fund Limited, and her affidavit refers to evidence previously led before the Court in respect of the involvement of PICC and Nipponkoa in providing reinsurance cover in the Occurrence Years. The Plaintiffs submit, and I accept that, although the recoveries PICC and Nipponkoa were not previously the subject of orders in Amaca 1 or the 2014 Application, the application relates to the same policies of insurance that were the subject of the earlier proceedings.
The PICC Receipt was received by HIHUI by payment under a commutation entered into with HIHUI on 19 August 2014 involving a payment of $226,339, which related to the commutation of PICC’s 1% participation in the $30m in excess of $20m layer for the 1980/81 policy year, PICC’s 0.5% participation in the $15m in excess of $10m layer in the 1981/82 policy year, and PICC’s 0.48% participation in the $15m in excess of $10m layer in the 1982/83 policy year. The circumstances of the entry into that cover had been the subject of evidence in the 2014 Application. The Nippon Receipt related to amounts that Amaca has paid out to asbestos claimants as to which Amaca had submitted claims to HIHUI, which had in turn partly reinsured the relevant liability with Nipponkoa, and as to which reinsurance monies were then paid Nipponkoa to HIHUI.
In the present case, it seems to me that each of the factors that led the Courts to make orders under s 562A of the Corporations Act in the earlier proceedings apply to the PICC Receipt and the Nippon Receipt which are of a relevantly identical character to the other receipts, by way of commutations and claims, considered in the earlier proceedings.
I have referred to the operation of that section of the Corporations Act in several other judgments in these proceedings, drawing upon the observations as to the scope of that section by the High Court of Australia in AssetInsure Pty Ltd v New Cap Reinsurance Corporation Ltd (in liq) [2006] HCA 13; (2006) 225 CLR 331 and on the detailed consideration of the section by Barrett J in Re HIH Casualty & General Insurance Ltd [2005] NSWSC 240; (2005) 190 FLR 398. It will not be necessary to repeat that analysis here.
In summary, s 562A(1) of the Corporations Act provides that that 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.”
The requirements of s 562A(1)(a) of the Corporations Act are satisfied in this application for the reasons set out in the judgment in the 2014 Application. So far as the PICC Receipt involves a commutation, I have previously held that the first requirement in s 562A(1)(b) of the Corporations Act, that an amount “in respect of that liability” is received by the insurer, is satisfied in respect of a settlement by commutation of past and future or contingent liabilities and I proceed on that basis in this application: Amaca Pty Ltd (under NSW administered winding up) v McGrath & Honey (as liquidators of the HIH Group of Companies) [2012] NSWSC 176; (2012) 87 ACSR 625 (“Amaca 2”) at [7]; Amaca Pty Ltd (under NSW administered winding up) v McGrath & Honey (as liquidators of HIH Group of Companies) [2012] NSWSC 1523; (2012) 92 ACSR 105 (“Amaca 3”) at [7]. I have also previously held that the second requirement under s 562A(1)(b) of the Corporations Act, that an amount is received by the insurer under the contract of reinsurance, can be satisfied where payments are made in commutation of rights under the contract of reinsurance (Amaca 3 at [8]) and I also proceed on that basis.
The usual position is that a liquidator must distribute reinsurance proceeds among the insured creditors in the manner specified in s 562A(2) – (3) of the Corporations Act. However, the Court may make an order providing for a different allocation of reinsurance proceeds under s 562A(4) of the Corporations Act which relevantly provides that:
“(4) 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.”
That section allows the Court to displace the operation of s 562A(2)-(3) of the Corporations Act and, by order, substitute a manner of application of the amount of reinsurance proceeds that is different from that which would have otherwise applied under the displaced provisions, being a manner of application of those proceeds that the Court “considers just and equitable in the circumstances”. I have reviewed the scope of the “just and equitable” criterion in that section in Amaca 2 at [13] – [15] and need not repeat that review here.
Several matters that the Court may take into account in considering whether to make an order under s 562A(4) are specified, in an inclusive manner in s 562A(5), as follows:
“(5) 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.”
It seems to me that it is just and equitable to make an order under s 562A(4) of the Corporations Act in respect of the PICC Receipt and the Nippon Receipt, since the Plaintiffs have established the historical pattern of dealings between James Hardie, HIHUI and the reinsurers in the Occurrence Years in the evidence led in the earlier applications and in this application. Although evidence of a decision, or a finding of fact, in another Australian proceeding is not admissible in this proceeding to prove the existence of the fact that was in issue in that proceeding, by reason of s 91(1) of the Evidence Act 1995 (NSW), the Court can have regard to the factual matters established by uncontested evidence in the earlier applications, and noted in the earlier judgments, where the corresponding evidence was led in these proceedings.
That evidence establishes that the relevant reinsurance contracts were obtained by HIHUI in respect of the cover sought by the James Hardie Group and the Plaintiffs and that, for the purposes of s 562A(5) of the Corporations Act, it is possible to identify particular contracts of insurance as being the contracts in respect of which the contracts of reinsurance were entered into. HIHUI entered into those reinsurance contracts for the purpose of providing cover for the Plaintiffs that it would not have been able to provide without that reinsurance and in circumstances where the reinsurers could not insure the Plaintiffs directly. The insurance provided by HIHUI depended on the provision of that reinsurance cover. The James Hardie Group and its broker actively assisted the HIH Group to obtain the relevant reinsurance cover and were aware, through their broker, that substantially the whole of the risk nominally undertaken by HIHUI had in fact been placed in the London market by facultative reinsurance contracts obtained for that purpose.
It seems to me that the Plaintiffs would be “severely prejudiced”, for the purposes of s 562A(5)(d) of the Corporations Act, if s 562A(2) – (3) applied in this case, for the reasons noted by Barrett J in Amaca 1 which I have followed in several subsequent applications. In particular, the Plaintiffs would be prejudiced if they did not receive the direct benefit of the reinsurance monies for which they had bargained, where they would not have contracted for cover from HIHUI without that reinsurance. As I noted in Amaca 3, the conclusion that it is just and equitable to make the orders sought is supported by the fact that the adverse impact of those orders on other insurance creditors of the HIH Group is diversified and the detriment suffered by any particular creditor is limited, whereas the prejudice to the Plaintiffs of being deprived of the proceeds of the reinsurance for which they bargained would be significant. The position in respect of this application is identical to that in the 2014 Application, since the present policies are a subset of those which I considered in that application.
Accordingly, I am satisfied that orders should be made in the form agreed between the parties, and I make those orders as follows:
For policy years commencing 31 March 1980, 31 March 1981 and 31 March 1982:
1 Pursuant to s 562A(4) of the Corporations Act 2001 (Cth) (“the Act”), subsections 562A(2) and 562A(3) of the Act do not apply to:
(a) $226,339 received from Peoples Insurance Company of China (“PICC”) (“the PICC Receipt”);
(b) $74,420 received from Nipponkoa Insurance Company Limited (“Nipponkoa”) (“the Nipponkoa Receipt”)
(together “the Receipts”) and the Receipts must instead be applied by the Defendants by:
(c) deducting expenses and incidental to getting in the Nippon Receipt, being 2.5% of the Nippon Receipt;
(d) deducting expenses and incidental to getting in the PICC Receipt, being 20% of the PICC Receipt;
(e) further deducting any dividends or distributions already paid by the Defendants in respect of the Receipts; and
(d) paying the balance of the Receipts to the First Plaintiff.
2. No order as to costs.
I otherwise stand over the matter to 8 February 2016 before the Corporations Judge, with liberty to apply on 7 days’ notice.
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