National Rail v HIH

[2001] NSWSC 440

CITATION:	National Rail v HIH [2001] NSWSC 440
CURRENT JURISDICTION:	Equity Division Commercial List
FILE NUMBER(S):	SC 50114/00
HEARING DATE(S):	25.5.01
JUDGMENT DATE:	6 June 2001
PARTIES :	National Rail Corporation Ltd -v- HIH Casualty & General Insurance Ltd & Ors
JUDGMENT OF:	Hunter J

COUNSEL :	Applicant/Plaintiff: J W Stevenson Respondant/First Defendant: M Slattery QC Second & Third Defendants: P Jamieson
SOLICITORS:	Applicant/Plaintiff: Deacons Lawyers Respondant/ First, Second & Third Defendants: Colin Biggers & Paisley
CATCHWORDS:	Corporations Law - declaratory proceedings by insured against joint insurers - appointment of provisional liquidators to one of insurers - insurers in the same interest - proceedings fixed for hearing - principles and considerations affecting discretion under under s471B Corporations Law.
CASES CITED:	Transfield v HIH (2001) NSWSC 347 Ibbco v HIH (2001) NSWSC 346 Kilborn v FAI; Bateman v FAI (2001) NSWSC 348
DECISION:	Leave to proceed granted upon the condition that any judgment obtained against the first defendant (save for lodgement of proof of debt) may not be enforced without the leave of the Court. Costs of the application be costs in the proceedings.

IN THE SUPREME COURT

OF NEW SOUTH WALES

EQUITY DIVISION

COMMERCIAL LIST

HUNTER J

WEDNESDAY 6 JUNE 2001

50114/00 NATIONAL RAIL CORPORATION LTD -v- HIH CASUALTY & GENERAL INSURANCE LTD & ORS

REASONS FOR JUDGMENT

1 This is an application pursuant to s 471B of the Corporations Law for leave to proceed in these proceedings against the first defendant, provisional liquidators having been appointed to it by order of this Court of 15 March 2001.

2    The proceedings are by way of summons seeking a declaration in the following terms:

“1. A declaration that the plaintiff is entitled to be indemnified by the defendants (the first defendant as to 50% and each of the second and third defendants as to 25%) under a combined liability policy of insurance (“the policy”) in respect of payments made by it to effect repairs to track damaged by a derailment on 6 February 1996.”

3    There is no dispute in the proceedings that the defendants, HIH Casualty and General Insurance Ltd (HIH), Allianz Australia Insurance Ltd (Allianz), and Zurich Australia Ltd (Zurich) issued a combined liability policy to the plaintiff, National Rail Corporation Ltd (National Rail), providing indemnity in terms of the policy in respect of the period 30 September 1995 to 30 September 1996 in the following proportions: 50% in the case of HIH, with 25% in the case of each of Allianz and Zurich. The premium payable was $708,000. The indemnity provision indemnified National Rail for “Property Damage occurring during the Period of Insurance …”.

4    Clause 8.3 of the policy excluded “Property Damage to property owned or operated by [National Rail ] and held in trust or in the custody or control of [National Rail]…” The defendant insurers rely upon that exclusion for their denial of liability under the policy in respect of a claim by National Rail, arising out of damage to rail tracks caused by a derailment on 6 February 1996.

5    The summons alleges that National Rail’s liability to repair the track damage, occasioned by the derailment, arose in the following way:

“2. At all material times the track was owned and operated by Trans Adelaide.
3. The plaintiff had access to the track by agreement with Trans Adelaide (“the access agreement”).
Particulars of Access Agreement

(1) The access agreement is constituted by correspondence between the plaintiff and Trans Adelaide dated 4 May 1995 and 5 May 1995.

(2) The terms were agreed to be the same terms as applied to Australian National by the Reciprocal Transit Rights Agreement (“the RTR Agreement”) between Australian National and Trans Adelaide (which was then known as the State Transit Authority of South Australia).
4. One of the terms of the access agreement, contained in clause 1 of the Third Schedule of the RTR Agreement, is that the plaintiff bear the cost of and indemnify Trans Adelaide from and against all costs and expenses in respect of damage to the property of Trans Adelaide arising out of train movement by the plaintiff.
5. Furthermore, the derailment was caused in part by the negligence of servants and agents of the plaintiff.
Particulars

(1) The derailment was contributed to by the manner in which the consignment on the train was loaded. Had the consignment been loaded with reasonable care, the derailment would not have occurred.

(2) The plaintiff had a duty to ensure that wagons of its trains were safely loaded.

(3) Had the plaintiff ensured that all of the wagons of the train were safely loaded, the derailment would not have occurred.
6. In the premises the plaintiff had a liability to Trans Adelaide in both contract and tort for the damage caused to the track by the derailment.
In the alternative to the contentions in paragraphs 3-4 above, the plaintiff contends:
7. By the RTR Agreement dated 5 March 1978 Australian National was liable to indemnify Trans Adelaide for damage caused to the track arising out of a “Commission movement” (clause 1 of the Third Schedule).
8. If the construction of the access agreement contended for by the plaintiff in paragraph 3 and 4 above is incorrect, then the plaintiff contends that it was a term of the access that movements on the track by the plaintiff were to be treated as Commission movements under the RTR Agreement, with the consequence that Australian National would have the same liability to Trans Adelaide under the RTR Agreement for movements by the plaintiff as it would have had if the movement was by Australian National.
9. At all material times the plaintiff was liable to indemnify Australian National for any liability to Trans Adelaide arising out of a movement by the plaintiff on the track, to the extent that any damage was caused or contributed to by the plaintiff.

Particulars
(1) The indemnity is contained in clause 15.3 of the agreement between the plaintiff and Australian National made on 8 November 1993 (the Train Crewing Agreement ) as amended on 9 September 1994.

10. On the basis of the alternative contentions in paragraph 7-9 above the plaintiff had a liability to Australian National for the damage caused to the track by the derailment.”

6    The defendants, in a joint defence “do not deny [an] indemnity” in respect of the claim on the basis that it falls outside the policy. They only rely upon exclusion cl 8.3 of the policy.

7    The summons was filed on 18 August 2000 and since that time there have been several directions hearings. The hearing of the proceedings has been fixed for 23 July 2001 and is estimated to take three days.

8    The evidence adduced on behalf of HIH in substance, expands upon that which was relied upon by the provisional liquidators in Transfield Philippines v HIH 2001 NSWSC 347, Bateman v FAI and Kilborn v FAI 2001 NSWSC 348 and Ibbco v HIH 2001 NSWSC 346.

9    In Ibbco I endeavoured to state the basic principles upon which the Court should act in exercising its discretion under s 471B of the Corporations Law. I have no compelling reason to restate those principles.

10    The evidence relied upon by the provisional liquidators is that of Anthony Gregory McGrath sworn 10 May 2001 and is more particularly set out in pars 4 to 11, and 15 to 16 of his affidavit, as follows:

“4. There is now produced and shown to me and exhibited to this affidavit and marked “AGM 1” a bundle of documents to which I refer in this affidavit. References in this affidavit to page numbers are references to page numbers of that exhibit.

5. HIH and its subsidiaries (the “ HIH group ”) is a very complex group of companies, comprising 274 companies in Australia and in many jurisdictions, including the United States and the United Kingdom. These companies operated a range of businesses, predominantly general insurance business. It was Australia’s second largest insurer. The group had approximately 2800 employees. In particular, HIH Casualty and General Insurance Limited (“ HIH C&G ”), FAI Insurances Limited (“ FAI Insurances ”), CIC Insurance Limited (“ CIC ”), World Marine and General Insurances Pty Limited ( “ World Marine ”) and FAI General Insurance Company Limited (“ FAI ”) underwrote general insurance in Australia and in some cases overseas. The HIH group’s annual return for 30 June 2000 stated that the group had assets worth in excess of $8 billion. A copy of the corporate chart of the HIH Group is at pages 31 to 49 of Exhibit AM1.
6. In particular, HIH C&G wrote insurance in the United Kingdom and the United States, and FAI wrote insurance in the United States.
7. The Provisional Liquidators have been undertaking a very wide range of tasks and gathering information to undertake those tasks including:
(a) Dealing and liaising with regulators and government instrumentalities, including Australian Prudential Regulatory Authority (“ APRA ”), Australian Securities and Investments Commission (“ ASIC ”), the Australian Stock Exchange (“ ASX ”), the State workers’ compensation authorities and compulsory motor vehicle insurance authorities. This has included responding to various notices to produce documents issued by regulators under statutory powers. Since our appointment, the Provisional Liquidators have engaged in regular and extensive communications with ASIC and APRA, including weekly meetings with representatives of ASIC and APRA. I have also had regular meetings and discussions with the Federal Minister for Financial Services and the members of a National Taskforce set up by him to deal with matters arising from the appointment of the Provisional Liquidators.

(b) Preparing and distributing general information to the public, insurance industry participants, claimants and policyholders. This has included the issue of a number of press releases, a copy of the most recent of which appears at pages 2 to 4, and the setting up of a public inquiry “hotline” service to provide information to the public.

(c) Negotiating with joint venture partners or parties who are acquiring or seeking to acquire assets of the companies in provisional liquidation including finalising various commercial transactions entered into by HIH and various subsidiaries within the HIH Group before the appointment of the Provisional Liquidators with Allianz, NRMA and QBE.
(d) Assessing the assets and liabilities of the companies to which the Provisional Liquidators have been appointed.
(e) Identifying, and developing and implementing plans to deal with, current and pending litigation relating to:

(i) claims against all HIH Group companies,

(ii) claims by all HIH Group companies,

(iii) claims against an insured of an HIH Group company (sic), and

(iv) recovery actions in which a claim is pursued by an HIH company (sic) in the name of the insured.
(f) Communicating with the very large number of lawyers who acted for some of the HIH PL Companies or their insureds in litigation.

(g) Responding to applications for leave to proceed under s 471B of the Corporations Law against HIH PL Companies.

(h) Identifying, and developing and implementing a plan to deal with, claims by policyholders that were made prior to and after the appointment of the Provisional Liquidators.
(i) Identifying the current reinsurance arrangements in place for the companies in provisional liquidation and an early assessment of the possible priority of payment of reinsurance proceeds in respect of existing and future claims by policyholders.

(j) Dealing with staff of the companies in Provisional Liquidation and identifying the current and future staffing requirements of these companies given the changed and changing nature of their operations due to the provisional liquidation. This has included the development of protocols for use by existing staff members for the purposes of their ongoing dealings with the public, insurance industry participants, claimants and policyholders assessing entitlements of employees and payroll issues. The Provisional Liquidators have also considered and determined who are the key staff of the HIH PL Companies who will be necessary to manage the “run-off” phrase of the businesses of the licensed insurers and have procured new agreements with them for the purposes of securing their services to ensure the “run-off” will be effectively managed.
(k) Reviewing and rationalising the HIH group’s leasing arrangements in Australia.
(l) Dealing with industry bodies representing groups of policyholders such as the Law Society of New South Wales, the Bar Association of New South Wales, the Insurance Council of Australia and brokers and insurance agents.
(m) Considering whether it would or may be in the best interests of the creditors of the respective HIH PL Companies for one or more of those companies to enter into a scheme of arrangement with their creditors or to be ordered to be wound up.
(n) Dealing with brokers with respect to funds held in brokers’ trust accounts to which one or more of the HIH PL Companies may be entitled.
(o) Obtaining legal advice and other professional advice in relation to any of the above matters.
Overseas Applications

8. In order to secure assets held by HIH PL Companies overseas, the Provisional Liquidators have sought assistance from Courts in the United Kingdom and the United States.

9. The Provisional Liquidators have made applications to this Court, and obtained orders, for the issue of Letters of Requests from this Court to the High Court of England and Wales requesting that Court to appoint provisional liquidators in the United Kingdom, pursuant to s. 426 of the Insolvency Act 1986, to:
(a) FAI;
(b) FAI Insurances;
(c) World Marine; and
(d) HIH C&G.
10. Pursuant to the Letters of Request, the High Court of England and Wales has, on the Provisional Liquidators’ application, appointed provisional liquidators in the United Kingdom to each of those companies. Copies of the relevant orders are at pages 5 to 24.
11. The Provisional Liquidators, together with the English provisional liquidators, have commenced proceedings in the United States Bankruptcy Court, Southern District of New York, for orders pursuant to Section 304 of the United States Bankruptcy Code to ensure the efficient administration of assets held by companies in the HIH group in the United States and to prevent a “piecemeal grab” at the assets of those companies by creditors in the United States. The United States Bankruptcy Court has granted a temporary restraining order on 9 April 2001 and a preliminary injunction (after a 2 day hearing) on 25 April 2001 in respect of the following HIH PL Companies:

(a) FAI;
(b) HIH C&G;
(c) CIC;
(d) Lanlex No 65 Pty Ltd;
(e) FAI Overseas Investments Pty Ltd; and
(f) FAI Traders Insurance Company Limited.

…

15. In particular, though not exclusively, the Provisional Liquidators need to complete the following reviews and assessments and then to consider the effect of the outcome of those reviews on the financial position of the HIH PL Companies:

(a) An actuarial review of liabilities in respect of potential and outstanding claims and a review of likely reinsurance recoveries.

(b) A review of the location and value of overseas assets held by HIH group companies.

(c) An assessment of potential liabilities in respect of letters of credit issued at the request of companies in the HIH group to support offshore activities of HIH group companies so as to consider the extent to which securities given by companies in the HIH group to procure the letters of creditor (sic) may become available to the creditors of the companies which own the secured property;

(d) An assessment of the recoverability of monies held by brokers and of receivables owned by other third parties;

(e) An assessment of the consideration received or which may be received from the completion of transactions referred to in paragraph 7(c) above, by individual companies in the HIH group.

(f) A review of the operation of various cross-guarantees on various HIH group companies.

Other Tasks Undertaken by the Provisional Liquidators

16. The Provisional Liquidators are also continuing to consider whether it is in the interests of the creditors of each company in the HIH Group to which we have been appointed provisional liquidators, for that company to be placed into liquidation or a scheme of arrangement be proposed. However, given the complexity of the affairs of these companies, it is unlikely that the Provisional Liquidators would be able to provide an opinion to creditors with sufficient clarity and certainty to expect the creditors to support any such recommendation for quite some time.”
…

11    His evidence also establishes that the group, of which HIH forms part, is clearly insolvent and that the provisional liquidators are far from achieving a position where a reliable estimate of the assets and liabilities of the subject companies may be made. Before such an estimate may be arrived at it will be necessary to undertake an actuarial review of liabilities; ascertain the location and value of overseas assets; assess potential liabilities in respect of certain letters of credit and assess the recoverability of monies held by third parties, in addition to making an assessment in relation to certain joint venture arrangements and various cross guarantees given by various HIH group companies. The extent of reinsurance effected by the group is also being examined.

12    The provisional liquidators are still in the process of determining whether it is in the best interest of creditors for HIH to be placed in liquidation, or for them to propose a scheme of arrangement.

13    As at the time of swearing Mr McGrath’s affidavit of 10 May 2001, the provisional liquidators had not been able to ascertain if HIH carried any reinsurance in respect of the risk, the subject of the policy under which National Rail’s claim is made. That matter was clarified to some extent by HIH’s answer to a notice to produce of National Rail which has resulted in the production of cover notes dated 21 November 1995, in respect of reinsurance arrangements which appear to be risk specific in relation to National Rail’s entitlement to indemnity under the policy.

14    The total cover under the reinsurance is $50,000,000, consisting of reinsurance to a limit of $5,000,000: a second level, from $5,000,000 to $20,000,000 and a third level, from $20,000,000 to $50,000,000. On the face of that material, the whole of the risk indemnified by HIH under the policy is the subject of reinsurance.

15    In supplementary submissions, presented on 28 May and 29 May 2001, the parties addressed the relevance of reinsurance covering the risk the subject of the policy.

16 In my view, the existence of reinsurance, in relation to the class of risk the subject of the policy, is a relevant factor in granting leave to proceed, having regard to the application of s 562A of the Corporations Law (should HIH be placed into liquidation). I do not understand there to be any debate on that issue. The principal question raised is whether any reinsurance funds would be available to other insurance creditors of HIH or to National Rail alone.

17 Without making any findings on that issue, the terms of the cover notes suggest that the proceeds of such reinsurance would be available only to National Rail: the reinsurance policies being ones apparently written specifically in respect of HIH’s liability under the policy to National Rail. That result would flow either from the operation of s 562A(2), or by recourse to s 562A(4).

18    The consequence of granting leave to proceed against companies in the HIH group is stated by Mr McGrath as follows:

“19. It will create a serious dislocation to the Provisional Liquidators’ orderly planning and execution of the tasks we are undertaking if we have at this time to deal on an ad hoc basis with applications for leave to proceed upon matters that would otherwise be stayed at this early stage of the administrations. There is an estimated 50,000 claims involving companies in the HIH Group (either as insurer or defendant or plaintiff) to which the Provisional Liquidators were appointed. There have been over thirty applications pursuant to section 471B of the Corporations Law in Courts around Australia that the liquidators have or are currently dealing with.

20. If leave to proceed is granted in proceedings against any of the companies in provisional liquidation, the Provisional Liquidators will be required to determine:

(a) whether there are available funds to fund the defence of the proceedings;

(b) which classes of claims should be defended, according to the interests of creditors generally, and what priority should be directed to the defence of particular claims;

(c) the effect of defending or not defending any particular action having regard to the ability to recover from the relevant reinsurer (if any); and

(d) the obligations of the defendant under the relevant reinsurance arrangements.

21. The Provisional Liquidators would need to undertake the above tasks on an ad-hoc basis for each claim in which leave to proceed is granted, which will result in a disruption of the other tasks the Provisional Liquidators are undertaking. The consideration of each separate proceeding will consume administrative resources and the time of the liquidators and their staff and advisers. In matters in which leave has been obtained, the Provisional Liquidators have had to expend resources to obtain legal advice on the steps the Provisional Liquidators should take (if any) in those proceedings.
22. Furthermore, subject to the Court deciding that some other course is appropriate, the Provisional Liquidators intend to involve representatives of the creditors in the decisions as to whether or not to the Provisional Liquidators should defend any particular significant action or classes of action in respect of which leave to proceed is granted. Although there is no statutory mechanism for a committee of creditors during a provisional liquidation, I consider that the appropriate basis for the Provisional Liquidators to gauge any likely creditor attitude is to have an informal committee of creditors. The Provisional Liquidators have not had time to determine how the diverse interests of creditors could best be represented by an informal committee and how that committee should be formed. The Provisional Liquidators expect to progress this issue within the next month.
23. At this stage the Provisional Liquidators have not made a decision in respect of defending these proceedings if leave to proceed is granted and do not know whether they will be in a position to do so having regard to the matters outlined above, nor have we decided on how we would adjudicate on any proof of debt lodged by the plaintiffs in any liquidation or scheme of arrangement should that occur.”

19    In addition it was submitted by senior counsel on behalf of the provisional liquidators as follows:

“8. In the present case, there are other substantial reasons why leave should not be granted:
(a) It is not a case covered by reinsurance. No reinsurance treaty has yet been able to be identified (McGrath, 10/5/01, para 18).
(b) The issues can adequately be decided between the plaintiff and the second and third defendants in a way which can then be efficiently considered at the proof of debt stage.
(c) No determination has been made to reject this claim so not granting leave to proceed is not likely to result in a double hearing of issues.
(d) Granting leave to proceed may undermine the position successfully achieved by the provisional liquidators in the proceedings brought under s. 304 of the United States Bankruptcy Code (McGrath, 10/5/01).
(e) The hearing of these proceedings is not imminent and the particular issues are appropriate for determination through the proof of debt process rather than in court, especially when proceedings will have continued against the other defendants.”

20    It may be noted that those submissions were made at a time prior to National Rail’s notice to produce which resulted in the production of the cover notes referred to earlier in these reasons.

21    That evidence and those submissions, in my view, fail to address the particular circumstances of this application. HIH is but one of three joint insurers, each a defendant in the proceedings, each in the same interest, each relying upon exclusion cl 8.3 of the policy. That is common ground in the application.

22    The resources required by HIH in the defence of the proceedings, additional to those of Allianz and Zurich, must be minimal. It would be completely unsatisfactory, in my view, for the proceedings to progress against Allianz and Zurich and not against HIH, particularly so when the proceedings have reached a stage where a hearing is imminent and is estimated to take only three days.

23    Moreover, I think that the issues raised by the defence of HIH to National Rail’s claim are of a kind more appropriately resolved in these proceedings, particularly where the issues are identical with the issues raised by Allianz and Zurich, rather than by way of submission of proof of debt, if the provisional liquidators elect to proceed in that way, or in the event that HIH is wound up.

24    While there may be some element of distraction of the provisional liquidators in providing whatever resources are necessary for the conduct of its defence in these proceedings, I would regard that involvement as minimal and not prejudicial to the creditors nor to the discharge of the provisional liquidators’ responsibilities.

25    Having regard to the amount of the claim, which is in excess of $3,000,000, it is in the interests of creditors to have the claim, if there be a bona fide defence to it, responded to in the most appropriate forum, which, in my view, is in the Commercial List, in these proceedings.

26    I regard the submission that HIH has not made a determination to reject this claim, as a factor of little weight, having regard to the date of the derailment and of the time of the institution of these proceedings.

27    As to the submission that the granting of leave may have some detrimental effect on the position achieved by the provisional liquidators in seeking orders pursuant to s 304 of the United States Bankruptcy Code in the United States Bankruptcy Court, I am unable to express a view other than that, on the material before me, I regard any such connection as extremely tenuous: any leave to proceed being granted on the facts peculiar to this case.

28    I note that the plaintiff is prepared to accept as a condition of granting leave that any judgment obtained by it against HIH, save for lodging a proof of debt, would not be enforced without leave of the Court.

29    For those reasons, I make the order in terms of par 1 of the notice of motion filed 26 April 2001 and order that costs of the application be costs in the proceedings. As a condition of granting leave any judgment obtained by the plaintiff against the first defendant in these proceedings may not be enforced (save for lodgement of proof of debt) without the leave of the Court.

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Last Modified: 06/07/2001