Johnston v McGrath & Honey in their capacities as Liquidators of HIH Insurance Limited & Anor

Johnston (the plaintiff) brought proceedings against McGrath and Honey, in their capacities as liquidators of HIH Insurance Limited (in liquidation) and HIH Casualty and General Insurance Limited (in liquidation) (the defendants). The plaintiff sought declarations that certain payments made by HIH Insurance Limited to the plaintiff were not voidable as against the defendants, and that the defendants were not entitled to recover those payments from the plaintiff. The matter was heard in the High Court of Australia.

The central legal issue before the High Court was whether the plaintiff, as a creditor of HIH Insurance Limited, could rely on the defence of change of position to resist a claim by the liquidators for the recovery of payments made to the plaintiff at a time when HIH Insurance Limited was insolvent. This defence, if established, would prevent the liquidators from recovering the funds, notwithstanding that the payments were made when the company was unable to pay its debts as they fell due.

The High Court considered the principles of insolvency law and the defence of change of position. It was held that the defence of change of position is available to a recipient of voidable payments in certain circumstances, even in the context of liquidations. However, the application of the defence requires a demonstration that the recipient acted to their detriment in good faith, relying on the mistaken payment, and that it would be inequitable to require repayment. The court analysed the specific facts to determine if these elements were satisfied, focusing on the plaintiff's knowledge of HIH's financial position and the nature of the detriment suffered.

The High Court ultimately allowed the appeal, finding that the plaintiff had established the defence of change of position. Consequently, the liquidators were not entitled to recover the payments made to the plaintiff.