McGrath & Anor re HIH Insurance Limited

The applicants in this matter sought an order that certain sums of money, paid by HIH Insurance Limited upon the termination of reinsurance contracts, be applied in satisfaction of the costs and expenses of the liquidation of HIH Insurance Limited. The application was made in the Federal Court of Australia, where it was determined by Justice Gilmour. The legal issues before the court were whether the sums paid by HIH Insurance Limited on the negotiated termination of reinsurance contracts were to be regarded as insurance proceeds, and thus within the scope of section 562A of the Corporations Act 2001. This section provides that, in the winding up of an insurance company, the liquidator is to be paid from the insurance company’s assets, in priority to other creditors, the costs and expenses of the winding up. If the sum paid on the termination of the reinsurance contracts was an insurance proceeds payment, the liquidator would be entitled to an order that these sums be applied in satisfaction of the liquidator’s costs and expenses. The court held that the sums paid by HIH Insurance Limited were not to be regarded as insurance proceeds, and thus were not payable to the liquidator in priority to other creditors. The court found that the reinsurance contracts had been subject to a negotiated termination, which meant that the sums paid were not made in circumstances that were akin to a payment of insurance claims. The court found that the reinsurance contracts had been subject to a negotiated termination, which meant that the sums paid were not made in circumstances that were akin to a payment of insurance claims. As the sums paid on the termination of the reinsurance contracts were not within section 562A of the Corporations Act 2001, the applicants’ application was dismissed.