New Cap Reinsurance Corporation Limited (in liquidation) v Daya

[2010] NSWSC 1226

CITATION:	New Cap Reinsurance Corporation Limited (in liquidation) v Daya [2010] NSWSC 1226
HEARING DATE(S):	21 & 22 September 2010
JUDGMENT DATE :	27 October 2010
JURISDICTION:	Equity
JUDGMENT OF:	White J
DECISION:	Refer to paras 69-78 of reasons.
CATCHWORDS:	PRACTICE AND PROCEDURE – application to strike out amended defence – where pleadings concern non-disclosure by insured to insurer’s agent – whether remedies under Insurance Contracts Act 1984 (Cth), s 28 available where allegation of non-disclosure by insured to insurer’s agent – issue not to be decided on interlocutory application for strike out - PRACTICE AND PROCEDURE – where lack of specificity in pleadings alleged – where certain matters pleaded should be clear to plaintiff – where pleadings of sham transactions require further particularity – where failure to plead content of foreign law relied upon with sufficient particularity – where pleading of deliberate or reckless non-disclosure by insured impugned – whether necessary to plead non-disclosure was dishonest and with intention to deceive - PRACTICE AND PROCEDURE – where pleading of reckless violation of Corporations Act, s 588G by plaintiffs raises issue of plaintiffs’ actual knowledge and subjective belief of insolvency – where material facts of knowledge and belief not properly pleaded - PRACTICE AND PROCEDURE – application for discovery – no question of principle
LEGISLATION CITED:	Corporations Act 2001 (Cth) Law Reform (Miscellaneous Provisions) Act 1946 (NSW) Insurance Contracts Act 1984 (Cth)
CATEGORY:	Procedural and other rulings
CASES CITED:	Lindsay v CIC Insurance Ltd (1989) 16 NSWLR 673 Ayoub v Lombard Insurance Co (Aust) Pty Ltd (1989) 97 FLR 284 Macquarie Bank Limited v National Mutual Life Association of Australia Limited (1996) 40 NSWLR 543 Commercial Union Assurance Co of Australia Limited v Beard [1999] NSWCA 422; (1999) 47 NSWLR 735 Permanent Trustee Australia Co Limited v FAI General Insurance Company Limited (2001) 50 NSWLR 679 Permanent Trustee Australia Limited v FAI General Insurance Co Limited (in liq) [2003] HCA 25; (2003) 214 CLR 514 Sagacious Legal Pty Ltd v Wesfarmers General Insurance Ltd (No 4) [2010] FCA 482 Green v CGU Insurance Limited [2008] NSWSC 825 Wickstead v Browne (1992) 30 NSWLR 1 Wickstead v Browne (1993) 10 Leg Rep SL2 Ingot Capital Investments Pty Ltd & Ors v Macquarie Equity Capital Markets [2007] NSWSC 124 Ingot Capital Investments Pty Ltd v Macquarie Equity Capital markets [2008] NSWCA 206; (2008) 73 NSWLR 653 Snook v London & West Riding Investments Ltd [1967] 2 QB 786 Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 Scott v Federal Commissioner of Taxation (No 2) (1966) 40 ALJR 265 Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2005) 218 CLR 471 Raftland Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia [2008] HCA 21; (2008) 238 CLR 516 Regie Nationale des Usines Renault SA v Zhang [2002] HCA 10; (2002) 210 CLR 491 Dawes Underwriting Australasia Pty Ltd v Roth [2009] NSWCA 152 Krakowski v Eurolynx Properties Ltd [1995] HCA 68; (1995) 183 CLR 563 Derry v Peek (1889) 14 App Cas 337 Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd [1990] VR 919 Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 1 ANZ Insurance Cases 60-813 (Young J at first instance); (1988) 12 NSWLR 250 (Court of Appeal); [1989] HCA 22; (1989) 166 CLR 606
PARTIES:	1st Plaintiff: New Cap Reinsurance Limited (in liquidation) 2nd Plaintiff: John Raymond Gibbons (liquidator) 1st Defendant: Azmin Firoz Daya 2nd Defendant: Paul Laurence Williams 3rd Defendant: Udayan Daniel Ghose 4th Defendant: William Peck 5th Defendant: CX Reinsurance Company Limited 6th Defendant: GE Frankona Reinsurance Limited 7th Defendant: Aviva Insurance Limited 8th Defendant: David Jonathan Marshall & Ors (Lloyd's Syndicate No. 39] as lead underwriters at Lloyd's evidence by contract 9th Defendant: Royal & Sun Alliance plc 10th Defendant: Certain Underwriters at Lloyd's evidence by contract 11th Defendant: International Insurance Company of Hannover Ltd
FILE NUMBER(S):	SC 2005/259074
COUNSEL:	Plaintiffs: A W Street SC with S R Derham 4th Defendant: L Gor 5th to 11th Defendants: J E Sexton SC with E Muston
SOLICITORS:	Plaintiffs: Henry Davis York 4th Defendant: n/a 5th to 11th Defendants: HWL Ebsworth Lawyers

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

WHITE J

Wednesday, 27 October 2010

2005/259074 New Cap Reinsurance Corporation Limited (in liquidation) & Anor v Azmin Firoz Daya & Ors

JUDGMENT

1 HIS HONOUR: By these applications the plaintiffs seek to strike out substantial parts of an amended defence filed by the fifth to eleventh defendants. They also seek discovery of documents from those defendants. There is also an application by the fourth defendant for orders for discovery against the plaintiffs and against the fifth to eleventh defendants.

The Pleadings

2 The first plaintiff (“NCRA”) carried on the business of reinsurance from late 1996 until about April 1999. It was a subsidiary of New Cap Reinsurance Corporation Holdings Limited (“NCRH”). On 21 April 1999 it went into voluntary administration. On 16 September 1999 it was ordered to be wound up. The second plaintiff was appointed its liquidator. The first to fourth defendants were directors of NCRA.

3 In these proceedings the plaintiffs allege that NCRA was insolvent throughout the period from and including 31 December 1998 to 21 April 1999. They allege that the first, second and fourth defendants contravened s 588G(2) of the Corporations Act 2001 (Cth) by failing to prevent NCRA from incurring debts during the period from 31 December 1998 to 21 April 1999. They allege that at the time the debts were incurred there were reasonable grounds for suspecting that NCRA was insolvent. They allege that each of the first, second and fourth defendants was aware at that time that there were reasonable grounds for suspecting that NCRA was insolvent, or that a reasonable person in a like position in a company in NCRA’s circumstances would have been so aware. They seek to recover loss or damage suffered by the creditors because of NCRA’s insolvency.

The fifth to eleventh defendants (“the Insurers”) are joined as the insurers of the first and fourth defendants under an insurance policy styled “International Directors’ and Officers’ Liability Insurance”. The policy provided cover to directors or officers of “the company” which was defined to mean NCRH and all its subsidiaries. The plaintiffs allege that the Insurers are liable to indemnify the first and fourth defendants in respect of those defendants’ liability to the plaintiffs. The plaintiffs allege that by reason of s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) the liquidator is entitled to recover from the Insurers the amounts which he is entitled to recover from the first and fourth defendants.

4 In their amended defence, the Insurers plead that the insurance policy was entered into on their behalf by an underwriting agent, Victor O. Schinnerer & Co Limited through its division called “ENCON Underwriting Agency” (“ENCON”). The Insurers plead that ENCON was their agent for the purpose of receiving and considering proposals, and underwriting and binding insurance cover for directors’ and officers’ liability insurance. They allege that ENCON received the proposal for the policy from a broker acting on behalf of NCRA and its directors, that ENCON considered the proposal and other information provided by the broker, and determined on what terms and at what premium insurance cover would be provided. They plead that ENCON agreed to bind cover on behalf of the Insurers on the terms reflected in the policy.

5 The Insurers plead that the law of Bermuda, or alternatively, the law of England, is to be applied to determine the duty imposed on prospective insureds to make disclosure prior to the policy of insurance being entered into, and the effect of any non-disclosure upon any rights of the first and fourth defendants and the plaintiffs pursuant to the policy. (As appears below the pleading was not in these terms, but it is to that intended effect.) The Insurers plead that in breach of their duty of disclosure the first, second and fourth defendants failed to disclose matters identified in paragraph 40 of the amended defence to the Insurers or ENCON.

6 The Insurers alternatively plead that if the proper law of the policy is the law of Australia, the first, second and fourth defendants had a duty to disclose to the Insurers or ENCON the matters referred to in paragraph 40 of the amended defence prior to ENCON underwriting the policy on behalf of the Insurers and agreeing to bind cover on the Insurers’ behalf. They allege that the first, second and fourth defendants failed to disclose the matters disclosed in paragraph 40 of the amended defence to the Insurers or to ENCON before ENCON underwrote the policy on the Insurers’ behalf.

7 In paragraph 50 of the amended defence the Insurers plead that:

“ 50. The failure on the part of the First, Second and Fourth Defendants to disclose to Insurers or ENCON Underwriting Agency those matters identified in paragraph 40 above occurred deliberately or, alternatively, recklessly and without regard to whether adequate disclosure had been made. ”

8 The Insurers plead that had the matters identified in paragraph 40 been disclosed, ENCON would not have agreed to underwrite the policy on behalf of the Insurers with any of the first, second and fourth defendants as an insured person or bind insurance cover on behalf of the Insurers so as to do so.

9 The matters identified in paragraph 40 which it is alleged the first, second and fourth defendants had a duty to disclose and which were not disclosed were pleaded as follows:

“ 40. Insurers say that prior to the entry of the Policy, the First, Second and Fourth Defendants knew of the following matters:
(a) at all material times prior to 30 June 1998, part of NCRH’s financing consisted of a US$47m loan from a syndicate of banks led by Dresdner Bank (‘ syndicate facility ’);
(b) pursuant to the syndicate facility, NCRH had covenanted to declare its net worth quarterly and to maintain a minimum net worth of US$175m as at 30 June 1998, to be certified in accordance with accounts prepared under US GAAP (‘ net worth covenant ’);
(c) in early 1998, the First, Second and Fourth Defendants became concerned about the poor trading performance of NCRH, the poor quality of the reinsurance business that had been written by NCRH and its subsidiaries, the poor capital base of NCRH and its subsidiaries and the likelihood that NCRH would be in breach of the net worth covenant in June 1998;
(d) NCRH sought to arrange a whole account aggregate excess of loss policy to be taken out with General & Cologne Re (‘ GCR ’) in sums ranging between US$30-50m (‘ big stop loss ’), to cover the 1998 year of account. The purpose behind that proposed arrangement was to assist in fulfilment of the net worth covenant;
(e) negotiations in respect of the placement of the big stop loss continued through until about June/July 1998;
(f) a number of NCRH’s directors, including the First, Second and Fourth Defendants, were concerned that half year accounts to 30 June 1998 for NCRH could not be signed off as true and fair if the big stop loss was purchased and accounted for, on the basis that the big stop loss contained a requirement that a back to back catastrophe excess of loss reinsurance be entered into by NCRH in favour of GCR, which would have the overall accounting effect that the big stop loss would at all times be cash positive for GCR and, at worst, neutral in financial outcome for GCR;
(g) the big stop loss was not placed;
(h) NCRH negotiated a restructuring of the syndicate facility, with effect from 30 June 1998, to the effect:
i. the loan was reduced to US$25m;
ii. the syndicate was to be replaced by Dresdner Bank as a lender on its own; and
iii. the minimum net worth requirement was reduced to US$125m as at 30 June 1998, to be certified in accordance with accounts prepared under US GAAP (‘ revised net worth covenant ’);
(i) by late August 1998 the First, Second and Fourth Defendants were aware that on the basis of its then financial position NCRH would not (or would be unlikely to) comply with the revised net worth covenant;
(j) as a result of NCRH’s non-compliance with the revised net worth covenant, Dresdner Bank was entitled to call for the immediate repayment of the loan;
(k) at that time, NCRH was not in a position to immediately repay the loan to Dresdner Bank if required to do so;
(l) on or about 2 September 1998, the board of NCRH agreed that NCRH purchase a whole account aggregate excess of loss policy (‘ little stop loss ’) that had the following attributes:
i. it provided retrospective cover for the year commencing 1 January 1998 in the amount of US$7.5m;
ii. it was payable in the event that there was an ultimate net loss in excess of the ultimate net loss ratio of 82.5%;
iii. a premium of US$2m, US$1m to be paid in September 1998, and a further US$1m to be paid in early 1999;
iv. it contained a back to back catastrophe excess of loss reinsurance (‘ CXL ’) to be entered into by NCR in favour of GCR; and
v. the cover provided under the little stop loss and the CXL were, in substance, one transaction;
(m) at the time of that agreement:
i. the draft half year accounts to 30 June 1998 for NCRH revealed that the ultimate net loss ratio of 82.5% for the 1998 year of account had already been exceeded;
ii. the draft half year accounts to 30 June 1998 for NCRH had been drawn up showing a credit in respect of the anticipated benefit from the proposed stop loss cover;
iii. the existence of the CXL had been concealed from auditors at the time they were invited to provide their certification in respect of the draft half year accounts to 30 June 1998 for NCRH;
iv. the initial claims settlement under the little stop loss, being the sum of $7.5m credited to the draft half year accounts to 30 June 1998 for NCRH, was not to occur until 1 July 2000, and there was to be a mutual set-off between that obligation and NCRH’s obligation to pay under the CXL, having the effect that there would be a neutral cash flow position on settlement;
v. there was no legitimate commercial benefit for the purchase of the little stop loss;
vi. the purchase of the little stop loss was solely to assist in the false presentation of NCRH’s accounts for the half year to 30 June 1998 so as to give the false impression that NCRH had complied with the revised net worth covenant;
vii. the draft half year accounts to 30 June 1998 for NCRH presented a misleading picture of the financial position of NCRH as at 30 June 1998, on the basis that the accounting treatment adopted for the little stop loss had the effect of artificially increasing the net assets of NCRH from $121m to $126m;
(n) the half year accounts to 30 June 1998 for NCRH, drawn in terms of that identified above, were presented to Dresdner on 2 September 1998;
(o) the little stop loss was not taken out until 4 September 1998;
(p) the First, Second and Fourth Defendants were prepared to and did enter into sham transactions; and
(q) alternatively, the First, Second and Fourth Defendants were prepared to and did enter into sham transactions for the purpose of financial statement manipulation for the purposes of misleading and/or deceiving NCRH’s lenders. ”

10 The Insurers separately pleaded that had the matters identified in paragraph 40(a)-(c) and (h)-(k) been disclosed (that is, matters going to the financial position of NCRH) ENCON would not have agreed to underwrite the policy on behalf of the Insurers with any of the first, second or fourth defendants unless there was an endorsement that excluded liability arising from or attributable to the bankruptcy or insolvency of NCRH or its subsidiaries.

11 The policy contained an exclusion for claims arising from or attributable to any deliberately wrongful or malicious act or omission, or any wilful or reckless violation of any statute or regulation or other legal obligation by the directors, officers and employees. The first, second and fourth defendants plead reliance on s 588H of the Corporations Act that at the time when the alleged debts were incurred they had reasonable grounds to expect and did expect that NCRA was solvent and would remain solvent even if it incurred the debts and any other debts that it incurred at that time. In paragraph 56A of the amended defence the Insurers plead:

“ 56A. If it is found that:
(a) NCRA was insolvent during the Insolvency Period (which is not admitted); and
(b) any one or more of the first, second and fourth defendants had actual knowledge of this insolvency,
then the claim made against that defendant by the plaintiffs in these proceedings arises out of or is attributable to a reckless violation of s588G of the Corporations Law by that defendant. ”

Plaintiffs’ objection to the Insurers’ amended defence

12 Mr Street SC, who appeared with Dr Derham for the plaintiffs, raised objections to many of the allegations in paragraph 40 of the Insurers’ amended defence. He contended that the pleading was unclear in various respects and made particular objection to the pleading of sham in subparagraphs 40(p) and (q). The plaintiffs also object that the Insurers have not pleaded the foreign law of Bermuda and England relied upon. They also challenged paragraphs 47-55 of the amended defence. Those paragraphs allege that if the proper law of the policy is Australian law, the Insurers were entitled pursuant to s 28(2) of the Insurance Contracts Act 1984 (Cth) to avoid the policy, or alternatively the Insurers’ liability to meet any claim made on the policy was reduced to nil, by virtue of s 28(3) of the Insurance Contracts Act. Counsel submitted that the Insurers were not involved in the decision to write the policy as the policy was written under the authority conferred on ENCON by the terms of a binder agreement. Counsel submitted that the defence failed to plead facts necessary to justify avoidance by the Insurers of the policy pursuant to s 28(2) or (3) of the Insurance Contracts Act because the Insurers allege that if the matters in paragraph 40 had been disclosed, ENCON would not have agreed to underwrite the policy, whereas, according to the submission, the right to avoid only arose if the non-disclosure affected the decision of the Insurers to enter into the contract. They submitted that s 28(1) contemplated that the particular insurer must have been influenced by the failure to make disclosure. They submitted that if the particular insurer was not influenced by the failure to make disclosure because it had delegated the function to an underwriting agent under a binder agreement, the insurer could not rely on s 28(2) or (3). The Insurance Contracts Act, so it was said, required that an undisclosed circumstance be relevant to a particular insurer’s assessment and acceptance of risk. Similarly, if a policy were to be avoided for misrepresentation, the misrepresentation must have induced the particular insurer to enter into the contract.

13 There is a separate objection in relation to the adequacy of the allegation of fraud for the purposes of s 28(2). Other objections were taken to paragraphs 54 and 56A.

14 The plaintiffs seek discovery of, amongst other documents, documents which record matters to which underwriters making a decision in respect of the writing or acceptance of insurance risk on behalf of insurers were to refer to or to have regard to insurance in respect of directors’ and officers’ liability insurance over a period spanning 1998. The Insurers say that such discovery should not be ordered because it would be oppressive, and because it would be irrelevant, except for documents of that kind used by ENCON.

15 Whereas the plaintiffs submit that s 28 does not apply if the particular Insurer was not influenced by an insured’s failure to comply with the duty of disclosure and the defence should be struck out because the Insurers do not plead that they themselves would not have agreed to underwrite the policy, but only that their agent, ENCON, would not have so agreed, the Insurers contend that as the policy was written on their behalf by ENCON, it is irrelevant what documents might reveal as to the Insurers’ own underwriting practices, as distinct from those of their agent.

Challenge based on pleading of agency

16 The application of the Insurance Contracts Act where an insured or an insurer acts through an agent is not always clear. Under s 21 an insured has a duty to disclose to the insurer every matter which is known to the insured that the insured knows to be relevant to the decision of the insurer whether to accept the risk, and if so on what terms, or which a reasonable person in the circumstances could be expected to know to be a matter so relevant. It has been held in a number of decisions that the matters known to the insured that must be disclosed include matters known to the insured’s agent, particularly (though not exclusively) where the insured has delegated the task of obtaining insurance to the agent (Lindsay v CIC Insurance Ltd (1989) 16 NSWLR 673; Ayoub v Lombard Insurance Co (Aust) Pty Ltd (1989) 97 FLR 284; Macquarie Bank Limited v National Mutual Life Association of Australia Limited (1996) 40 NSWLR 543 at 611; Commercial Union Assurance Co of Australia Limited v Beard [1999] NSWCA 422; (1999) 47 NSWLR 735 at 745, [37]-[39]); Permanent Trustee Australia Co Limited v FAI General Insurance Company Limited (2001) 50 NSWLR 679). However, in Permanent Trustee Australia Limited v FAI General Insurance Co Limited (in liq) [2003] HCA 25; (2003) 214 CLR 514, McHugh, Kirby and Callinan JJ, in upholding the appeal from the Court of Appeal said (at [30]):

“ ... It is also noteworthy, particularly if it should become necessary to deal with the other grounds of appeal, that the knowledge of which the sub-section speaks, either actual or constructive, is the knowledge of the insured, and not of any insurance intermediary, a term defined by the Act and clearly embracing an agent of the kind that Sedgwick was. This is at least to suggest that the reference to the insured is intended to be a reference to the insured personally and not to its agent or broker. However, it is not essential to our reasons to determine this point. ”

17 On the other hand, Gummow and Hayne JJ, who would have dismissed the appeal, said (at [86]) that knowledge of relevant employees and agents of an insured may be taken into account.

18 The present issue concerns agents of an insurer. It might be thought that most insurers are corporations and thus only able to act through agents, or, in the case of members of the Lloyd’s syndicates, would employ an underwriting agent. Counsel for the plaintiffs submitted that to avoid a policy for non-disclosure or misrepresentation, the particular insurer, rather than its agent, must have been influenced by the non-disclosure or the misrepresentation. Counsel referred to Permanent Trustee Australia Ltd v FAI General Insurance Company Ltd (In Liq) [2003] HCA 25; (2003) 214 CLR 514 at [70], where Gummow and Hayne JJ said “... Under the Act, attention is shifted from the prudent insurer to the particular insurer. It is that insurer's decision which, as we have said, is the fulcrum about which the section turns.” Counsel for the plaintiffs did not submit that s 28 had no application where the contract of insurance was entered into for the insurer by an agent acting under a binder. Rather, they submitted that s 28 required proof of what the insurer, as distinct from the insurer’s agent, would have done had the insured not failed to comply with the duty of disclosure.

19 It was common ground that this question has not previously fallen for decision. As Mr Sexton SC for the Insurers submitted, there are cases which have assumed that s 28 may be satisfied on evidence that an underwriting agent acting on behalf of the insurer would not have entered into the contract of insurance had the duty of disclosure been complied with (e.g. Sagacious Legal Pty Ltd v Wesfarmers General Insurance Ltd (No 4) [2010] FCA 482 at [21], [35]-[40], [59]; Green v CGU Insurance Limited [2008] NSWSC 825 at [230]-[287] (where the underwriting agents were employees of the insurer)). Mr Sexton SC submitted that the fact that the obligation of disclosure under s 21 is an obligation to disclose matters known by the insured to be relevant to the decision of the particular insurer, rather than to a prudent insurer, so that the focus is on the particular insurer’s decision (Permanent Trustee Australia Ltd v FAI General Insurance Company Ltd (in liq) [2003] HCA 25; (2003) 214 CLR 514 at [70]), is not inconsistent with the inquiry under s 28 being as to how the agent of the insurer would have acted had the duty of disclosure been complied with if the insurer has delegated entry into the insurance contract to the agent. Mr Sexton SC also submitted that if the plaintiffs’ submissions were correct the insured could not comply with the insured’s duty of disclosure under s 21 of the Act by making disclosure to the insurer’s agent as that section requires disclosure to the insurer. (If the plaintiffs’ submission is correct, it might follow that where an insurer’s decision whether to accept the risk is to be made through an agent (or at least an agent operating under a binder), so that the insurer itself, as distinct from its agent, does not make any decision whether to accept the risk, and if this is known to the insured, then the insured has no duty to disclose anything.) Similarly, if the plaintiffs’ submission is correct, it would seem to follow that the obligation placed on the “insurer” by s 22 to inform clearly the insured in writing of the general nature and effect of the duty of disclosure could not be discharged by such an agent.

20 Were it not for the observations of McHugh, Kirby and Callinan JJ in Permanent Trustee Australia Ltd v FAI General Insurance Company Ltd (in liq) at [30] (quoted at para [16] above), I think it would be clear that Part IV of the Act accommodates the case of an insurer who enters into contracts of insurance through an agent acting under a binder in a like manner to the way obligations are imposed by Part IV on an insured who used an agent. That is to say, where an insurer is acting through an agent, the insured could discharge its duty of disclosure by making disclosure to the insurer’s agent. The insured would not be required to disclose matters that either the insurer itself or its agent already knew (s 21(2)(c)). The insured would not be required to disclose matters where the insurer’s agent had waived compliance (s 21(2)(d)). The insured would be required to disclose matters that the insured knew were related to the decision of the insurer or its agent whether to accept the risk, and, if so, on what terms (s 21(1)(a)). The insurer could perform its obligation to inform the insured of the insured’s duty of disclosure through its agent (s 22). The insurer would have a right to avoid a contract of insurance if the insured fraudulently breached its duty of disclosure or made a fraudulent representation unless the insurer, or the insurer’s agent, would have entered into the contract for the same premium on the same terms and conditions if the insured had not failed to comply with its duty of disclosure or had not made the misrepresentation.

21 However, the observations of McHugh, Kirby and Callinan JJ in Permanent Trustee Australia Ltd v FAI General Insurance Company Limited (in liq) at [30], although not necessary for their decision, show that there is a real question as to whether the reference to “the insured” in Part IV of the Act includes a reference to the insured’s agent. If so, the same question arises whether the reference to “the insurer” includes the insurer’s agent.

22 These are not questions that should be decided on an interlocutory application to strike out a pleading or for the discovery of documents. In Wickstead v Browne (1992) 30 NSWLR 1, Kirby P said (at 5):

“ ... as the trial must now proceed, there is merit (as it seems to me) in permitting the appellant to present his case in various ways. The marginal utility to the respondent of preventing the appellant from proceeding upon the alternative cause of action in negligence is minimal. But the marginal cost of doing so would be very great if, subsequently, the trial was concluded, limited by the orders proposed, and it was then held, either by this Court or by the High Court of Australia, that the appellant's cause of action in negligence was viable;
2. Common experience teaches that it is usually more efficient and just to consider the viability of a cause of action when the facts said to support it are adduced and the suggested action can be judged with a full understanding of all relevant evidence. Testimony gives colour and content to the application and development of legal principle. ”

23 His Honour dissented on the question whether a disputed cause of action pleaded in negligence should have been permitted, but his decision was upheld in the High Court (Wickstead v Browne (1993) 10 Leg Rep SL2).

24 It follows that I refuse to strike out the impugned paragraphs of the amended defence on the basis that they plead that had the allegedly required disclosure been made, the Insurers’ agent would not have entered into the contract of insurance on the Insurers’ behalf. But because the plaintiffs’ contentions are arguable I should not refuse discovery on the basis that approaches to underwriting that might have been made by employees of the Insurers, or the underwriting agents of the Lloyd’s syndicates that are the eighth and tenth defendants, are irrelevant.

Challenge to specificity of paragraph 40 of amended defence

25 The plaintiffs attacked the pleading in paragraph 40(l), (m) and (n) of the amended defence on the basis that the Insurers did not plead that the back-to-back catastrophe excess of loss reinsurance (the CXL transaction) was entered into. They submitted that the reference to the concealed CXL transaction in paragraph 40(m)(iii) was embarrassing as the defence did not plead that such a transaction existed. Similarly it was said that the allegation that the existence of the catastrophe excess of loss reinsurance had been concealed from the auditors, and that the draft half yearly accounts were misleading because they accounted only for the little stop loss reinsurance and not the back-to-back catastrophe excess of loss reinsurance, was embarrassing, because the excess of loss reinsurance transaction was not identified.

26 Whilst the pleading ought to have pleaded the entry into the back-to-back catastrophe excess of loss reinsurance, it must be clear to the plaintiffs that the Insurers intend to plead that it was entered into. The liquidators could be in no doubt about it. Counsel admitted that the back-to-back contract had been entered into with General & Cologne Re (GCR). In proceedings no. 50169 of 2001 (Ingot Capital Investments Pty Ltd & Ors v Macquarie Equity Capital Markets [2007] NSWSC 124; Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets [2008] NSWCA 206; (2008) 73 NSWLR 653) NCRA sued the directors for alleged breach of duty in entering into the transaction. The liquidator alleged that the purpose of the transaction was to permit the fraudulent preparation of the NCRH consolidated 30 June 1998 half yearly accounts. NCRA pleaded that that transaction consisted of two legs, namely Leg One (which corresponds with what the Insurers have called the “little stop loss” save that NCRA pleaded that it (not NCRH) was the contracting party) and Leg Two (which corresponds with what the Insurers call the “back-to-back catastrophe excess of loss reinsurance” (CXL) save that again NCRA pleaded that it and not NCRH or “NCR” was the contracting party). NCRA pleaded that the contract it called Leg One was entered into on 17 September 1998 and the contract it called Leg Two was entered into on 4 September 1998.

27 It is clear that the Insurers contend that there was no legitimate commercial benefit for NCRH to have entered into a whole of account aggregate excess of loss policy with GCR. The Insurers contend that that policy was but part of a larger transaction which also included a reinsurance policy whereby “NCR” (semble NCRH, see para 40(m)(iv)) insured GCR, and that claims settlements under both policies were not to occur until 1 July 2000 at which time there would be a mutual set-off giving rise to neutral cash flow on settlement. The Insurers allege that the purpose of entering into the reinsurance contracts was to allow NCRH to account in its draft half year accounts at 30 June 1998 for recoveries under the little stop loss contract and that it did so in order artificially to increase the net assets of NCRH from $121 million to $126 million (thereby purportedly complying with the revised net worth covenant in the restructured syndicate facility agreement), without accounting for the back-to-back catastrophe excess of loss reinsurance. The Insurers say that when the little stop loss policy was entered into with GCR, the trigger for the policy had already been exceeded so that recoveries under the policy could be booked as an asset in the accounts of NCRH. But, the Insurers say, the catastrophe excess of loss reinsurance meant that NCRH would not have been entitled to those recoveries as there would have been a set-off under both policies. The Insurers allege that the catastrophe excess of loss reinsurance was concealed from the auditors. Thus the Insurers claim that:

(a) there was no legitimate commercial reason for the entering into of the policies;

(b) the purchase of the little stop loss was solely to assist in the false presentation of NCRH’s accounts for the half year to 30 June 1998 to give the false impression that NCRH had complied with the revised net worth covenant;

(c) the draft half year accounts to 30 June 1998 for NCRH were misleading; and

(d) the directors concealed from the auditors the existence of the back-to-back catastrophe excess of loss reinsurance.

28 I understand the Insurers to allege that the accounts were misleading both because the draft half year accounts to 30 June 1998 included a recovery under the little stop loss which was not entered into until September 1998 and because the accounts did not account for the back-to-back catastrophe excess of loss reinsurance. The Insurers allege that these were matters that ought to have been disclosed by the first, second and fourth defendants. On a reasonable reading of the pleadings it should be clear to the plaintiffs what is alleged.

29 Paragraph 40(p) and (q) is in a different position. It is there alleged that the first, second and fourth defendants were prepared to and did enter into sham transactions, and that they did so for the purpose of manipulating the financial statements to mislead or deceive NCRH’s lenders. The earlier subparagraphs of paragraph 40 allege that the purpose of entering into the transactions was to mislead or deceive NCRH’s lenders and that there was no legitimate commercial benefit to NCRH from the transactions. That is not the same as the allegation that the transactions were a sham, although the oral submissions for the Insurers suggested to the contrary.

30 I understand the allegation in paragraph 40(p) and (q) to be that the parties to the little stop loss and the back-to-back catastrophe excess of loss reinsurance did not intend that the documents recording the transactions should operate in accordance with their tenor, that is, that the documents should not have the apparent, or any, legal consequences (Snook v London & West Riding Investments Ltd [1967] 2 QB 786 at 802; Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 at 453-454; Scott v Federal Commissioner of Taxation (No 2) (1966) 40 ALJR 265 at 279; Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2005) 218 CLR 471 at 486 [46].

31 In Raftland Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia [2008] HCA 21; (2008) 238 CLR 516 at [35] the High Court referred to the ambiguity in the use of the word “sham” and noted that the term, when correctly employed, denoted an objective of deliberate deception of third parties. The Insurers use the term in that sense. However, for paragraphs 40(p) and (q) to plead additional material facts, they must also be understood as pleading that NCRH and GCR did not intend the little stop loss and the catastrophe excess of loss reinsurance to operate in accordance with the tenor of the documents which purportedly embodied those transactions. If that is the allegation the Insurers are making, then it is arguably an additional matter that ought to have been disclosed to the Insurers. But such an allegation requires particulars of who it is alleged on behalf of NCRH and GCR did not intend that the documents operate in accordance with their tenor.

32 If, as was suggested in oral submissions, the intended allegation is that only NCRH did not intend the documents to operate in accordance with their tenor, in other words that NCRH intended that the transactions be sham transactions, then that should be clearly pleaded.

33 As presently pleaded paragraph 40(p) and (q) do not identify the specific transactions alleged to be sham transactions. The Insurers’ solicitors provided purported particulars that the sham transactions were “those particularised in the preceding subparagraphs”. That was unhelpful because it is clear that the Insurers do not allege that, for example, the syndicate facility or the restructured syndicate facility were sham transactions. In oral submissions, Mr Sexton SC accepted that the transactions alleged to be sham transactions were the little stop loss and the catastrophe excess of loss reinsurance. That should be made clear on the pleadings. If the Insurers contend that neither NCRH nor GCR intended those transactions to operate in accordance with their tenor and hence the transactions were shams, or if they contend that officers of NCRH intended that the transactions not operate in accordance with their tenor and intended them to be shams, that should be clearly pleaded and the persons identified. Paragraph 40(p) and (q) should be struck out with the liberty to replead.

34 I do not accept that the lack of particularity in the allegations of sham in paragraph 40(p) and (q) “seeps into the whole of the defence” such that the whole of paragraphs 38-46 should be struck out. Plainly it does not.

35 The plaintiffs attacked paragraph 40(j) because it is alleged that it is inconsistent with paragraph 40(h)(iii) and (i). I see no inconsistency.

Pleading foreign law

36 In paragraphs 41-47 of the amended defence the Insurers plead:

“ 41. Insurers say that it is the law of Bermuda, or alternatively the law of England, that is to be applied in the determination of:
(a) the duty imposed upon the plaintiff to make disclosure prior to the Policy being entered into; and
(b) the effect of any such non-disclosure upon any rights the plaintiff may have pursuant to the Policy.
42. Insurers say that:
(a) each of the matters identified in paragraph 40 comprise matters that would have had an effect on the mind of a prudent insurer in estimating the risk to be accepted by underwriting the Policy with each of the First, Second and Fourth Defendants as an insured person; and
(b) the First, Second and Fourth Defendants each had a duty to disclose those matters to Insurers or ENCON Underwriting Agency at all times prior to ENCON Underwriting Agency binding insurance cover on behalf of Insurers on terms recorded in the Policy on or about 20 October 1998.

43. At all times prior to the entry of the Policy, in breach of the duty identified in paragraph 42(b) above, the First, Second and Fourth Defendants failed to disclose to Insurers or ENCON Underwriting Agency the matters identified in paragraph 40 above.
44. Had the matters identified in paragraph 40 been disclosed, ENCON Underwriting Agency would not have agreed to underwrite the Policy on behalf of Insurers with any of the First, Second and Fourth Defendants as an insured person and would not have bound insurance cover on behalf of Insurers so as to do so.
45. In the circumstances, Insurers are entitled, as they have done, to avoid the Policy, ab initio , as against the First, Second and Fourth Defendants.
46. In the circumstances, the First and Second Plaintiffs are not entitled to any relief against Insurers.
Non-disclosure: Application of Law of Australia
47. In the alternative, if, which is denied, the proper law of the Policy is the law of Australia, Insurers say that each of the matters identified in paragraph 40 comprised matters that:
(a) the First, Second and Fourth Defendants knew, of itself, or in combination with other matters in paragraph 40, to be relevant to the decision of ENCON Underwriting Agency whether to accept the risk and bind insurance cover on behalf of Insurers and, if so, on what terms; and
(b) a reasonable person in the circumstances of the First, Second and Fourth Defendants could be expected to know to be a matter so relevant. ”

37 The plaintiffs contend that the Insurers have failed to plead the content of the foreign law on which they rely. In Regie Nationale des Usines Renault SA v Zhang [2002] HCA 10; (2002) 210 CLR 491, Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ said (at [68]):

“ ... If, however, either party seeks to rely on foreign law, rules of court and general principles of pleading may oblige the party to plead the relevant foreign law. As is said in Bullen & Leake & Jacob's Precedents of Pleadings:

Where a party relies on foreign law to support his claim or as a ground of defence thereto, he must specially plead the foreign law relied on in his statement of claim or defence, as the case may be, and he should give full particulars of the precise statute, code, rule, regulation, ordinance or case law relied on, with the material sections, clauses or provisions thereof. A mere allegation that an instrument depending on foreign law is null and void is too vague.” (citations omitted)

38 It can be inferred that the Insurers allege that under the law of Bermuda and the law of England a prospective insured has a duty to disclose to a prospective insurer or its agent matters that would have an effect on the mind of a prudent insurer in estimating the risk to be accepted. However, that is not specifically alleged. Nor are particulars given of the statute, code, rule, regulation, ordinance or case law relied on. Whatever the precise rule of law of Bermuda and England is relied on, it should be pleaded with proper particularity. Paragraphs 41-46 should be struck out with liberty to replead.

39 I do not accept the other attacks made on paragraphs 41-46. For the reasons given earlier, the pleading should not be struck out on the basis that it alleges a duty to disclose matters either to the Insurers or to ENCON. Whilst there might be a technical objection to paragraph 42 in that it alleges that “each of the matters identified in paragraph 40 comprise matters that would have had an effect on the mind of a prudent insurer in estimating the risk to be accepted by underwriting the policy ... “ (my emphasis) I do not think that the plaintiffs are in any real doubt as to the case they have to meet. The same applies to the attack on paragraph 47.

Challenge to paragraph 50 of the amended defence

40 Paragraph 50 of the amended defence is quoted at para [7] above. The plaintiffs submit that paragraph 50 does not squarely plead the allegation of fraudulent non-disclosure by reason of which the Insurers allege in paragraph 52 that they were entitled to and have avoided the policy. However, paragraph 50 pleads that the alleged non-disclosure was deliberate, or, alternatively was reckless and without regard to whether adequate disclosure had been made. That pleading mirrors the requirements for pleading fraudulent misrepresentation where it is necessary and sufficient to plead that the representations are known to be false or were made recklessly without caring whether they be true or false (Dawes Underwriting Australasia Pty Ltd v Roth [2009] NSWCA 152 at [43]-[44]). When asked to identify what element of fraud was missing from the pleading, Mr Street SC submitted that to establish fraudulent non-disclosure within s 28(2) it was necessary to plead that the non-disclosure was dishonest and with an intention to deceive.

41 I understand the allegation that the non-disclosure was deliberate to mean that it is alleged that the insureds knew that disclosure was required, but deliberately refrained from making disclosure. The allegation that the non-disclosure was reckless means that the insureds acted without regard to whether adequate disclosure had been made. No authority was cited to support the submission that something more is required to establish fraudulent non-disclosure. The plaintiffs’ submission that it is necessary to plead that the insureds intended to deceive the Insurers is not consistent with the reasoning in Krakowski v Eurolynx Properties Ltd [1995] HCA 68; (1995) 183 CLR 563 at 579-580 and Derry v Peek (1889) 14 App Cas 337 at 374.

42 In Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd [1990] VR 919, Brooking J said (at 925) that the meaning of “fraudulent” in s 28(2) is not clear. In Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 1 ANZ Insurance Cases 60-813 (Young J at first instance); (1988) 12 NSWLR 250 (Court of Appeal); [1989] HCA 22; (1989) 166 CLR 606, an earlier rejection of insurance to a co-insured was a matter relevant to the insurers’ decision whether to accept the risk and hence was required to be disclosed under s 21(1)(a). At first instance, Young J (as his Honour then was) and on appeal to the Court of Appeal, Samuels JA, held that the non-disclosure was fraudulent because it was deliberate. On the basis of the finding of fraudulent non-disclosure against one co-insured the High Court held the insurer was entitled to avoid the policy against both insureds.

43 In Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd, Brooking J said that a possible view was that fraud would be established if the case fell within s 21(1)(a) and in addition the insured failed to make the disclosure because he believed that if he did so the insurer might either decline the risk or accept it only on special terms.

44 It is at least arguable that a non-disclosure is fraudulent if the non-disclosure is deliberate or reckless. I do not consider that the pleading of fraudulent non-disclosure should be struck out.

Miscellaneous challenges to paragraphs 54 and 55 of the amended defence

45 Next the plaintiffs took issue with the separate pleading in paragraphs 54 and 55 of the amended defence that had the matters in paragraph 40(a)-(c) and (h)-(k) been disclosed, ENCON would not have agreed to underwrite the policy on behalf of the Insurers, except with an exclusion of liability arising from or attributable to the bankruptcy or insolvency of NCRH or its subsidiaries. The plaintiffs submit that non-disclosure is grounded on moral hazard, and nothing is pleaded that would connect that ground with the insolvency of NCRH or its subsidiaries so as to justify the alleged exclusion. I do not agree. The argument was not developed and is not self-evident.

46 The plaintiffs also argued that the insureds could have been under no duty to disclose the matter alleged in paragraph 40(k) because it was hypothetical. Paragraph 40(k) does not merely state an hypothesis. It asserts a fact as to NCRH’s financial position and its ability to repay the loan to Dresdner Bank. Whether the insureds were under a duty to disclose the matters in paragraph 40(a)-(c) and (h)-(k) should be determined at the final hearing. It is reasonably arguable that there was such a duty. I will not strike out paragraphs 54 and 55.

Pleading of exclusion for reckless violation of the Statute

47 Paragraphs 56, 56A and 57 of the amended defence seek to invoke the exclusion in section VI, subsection (k) of the policy in respect of claims arising from or attributable to any reckless violation of a statute or other legal obligation. In the amended statement of claim the plaintiffs plead amongst other things that the first, second and fourth defendants failed to prevent NCRA from incurring debts and was aware at the time the debts were incurred that there were reasonable grounds for suspecting that NCRA was insolvent. The defendants denied that allegation. Paragraph 56A is set out at para [11] above.

48 The plaintiffs do not allege that the first, second and fourth defendants knew that NCRA was insolvent at relevant times. Rather, the plaintiffs plead that those defendants were aware that there were reasonable grounds for suspecting insolvency. The Insurers’ allegation of a reckless violation of s 588G of the Corporations Law is premised on those defendants’ having actual knowledge of insolvency. But the Insurers do not allege that those defendants had that knowledge. The pleading is rather premised upon the possibility that the court might make a finding to that effect in deciding the claim between the plaintiffs and the first, second and fourth defendants. The Insurers plead that the first, second and fourth defendants have put in issue in the proceedings the question of their subjective belief as to, and their actual knowledge of, the solvency of NCRA.

49 The Insurers are required to plead the material facts relevant to this defence. If, as is asserted, a material element of the defence is that the first, second and fourth defendants knew that NCRA was insolvent during the relevant period, then that fact should be pleaded if it can be properly pleaded. It may be that on a review of available materials the Insurers or their legal representatives do not consider that they could properly plead that the first, second and fourth defendants had actual knowledge of insolvency. So be it. If that is the position, the defence should not be raised. I will strike out paras 56, 56A and 57 of the Insurers’ defence with liberty to replead.

Discovery

50 The plaintiffs seek orders that the fifth to eleventh defendants give discovery of the following categories of documents:

“ 1. Documents, including any policies, correspondence, memoranda, minutes, notes or any other document, which constitute, record, refer to or evidence any insurance or reinsurance contract, agreement or arrangement entered into in the period between 1 July 1994 and 6 July 2004 by any one or more of the fifth to eleventh defendants on the basis of a decision made by one or more directors, officers or employees of the said defendants (or any director, officer or employee of any agent of one or more of the said defendants) who was or were the Policy Underwriter, and which included any of the following features:
(a) back to back excess of loss reinsurance contracts which would have the overall accounting effect that one of the said contracts would at all times be cash positive for the other party or parties to the contract or at worst be neutral in financial outcome for those parties;
(b) two or more interdependent contracts of reinsurance, the combined effect of which was to provide financial assistance to one or more of the parties to those contracts;
(c) two or more interdependent contracts of reinsurance, the combined effect of which was to substantially or completely reduce the insurance risk assumed by at least one of the parties under any one or more of the contracts;
(d) two or more interdependent contracts of reinsurance, the purpose of which was to disguise the financial position of any one or more of the parties to the contracts as disclosed in that party’s financial statements;
(e) any arrangement that might be described as financial reinsurance
including any report, minute, memorandum, note, correspondence or other document in which the said contract, agreement or arrangement was referred to, considered, deliberated upon or discussed.
2. Documents, including any manuals, guidelines, policy statements, memoranda, minutes, notes or any other document, which record, list or refer to facts, matters or things to which any underwriter or person making a decision in respect of the writing or acceptance of insurance risk on behalf of any one or more of the fifth to eleventh defendants (including but not limited to any Policy Underwriter) was to refer or have regard to when deciding whether to write or accept insurance risk in respect of directors and officers liability in the underwriting years between 1994 and 2009 (inclusive).
3. Without limiting the generality of the preceding paragraph, Documents, including any manuals, guidelines, policy statements, memoranda, minutes, notes or any other document, which record, list or refer to facts, matters or things to which any underwriter or person making a decision in respect of the writing or acceptance of insurance risk on behalf of any one or more of the fifth to eleventh defendants (including but not limited to any Policy Underwriter) was to refer or have regard to when deciding the premium to be accepted as consideration for the acceptance of insurance risk in respect of directors and officers liability insurance in the underwriting years between 1997 and 1999 (inclusive).
4. Any court or administrative process, report, minute, memorandum, note, correspondence or any other document forming part of, recording or referring to any action, suit, claim or proceeding against or regulatory inquiry regarding any one or more of the fifth to eleventh defendants or any Policy Underwriter commenced in the period between 1 July 1998 and 1 July 2007, in which:
(a) one or more of the fifth to eleventh defendants or any Policy Underwriter is alleged to have entered into one or more contracts, agreements or arrangements of the type identified in paragraph [1] above in the period between 1 July 1998 and 1 July 2007; or
(b) one or more of the fifth to eleventh defendants or any Policy Underwriter is alleged to have engaged in improper accounting practices in respect of the disclosure of one or more contracts, agreements or arrangements of the type identified in paragraph [1] above in the period between 1 July 1998 and 1 July 2007; or
(c) one or more of the fifth to eleventh defendant or any Policy Underwriter has been, or may be, ordered to restate its financial results for any period by reason of having engaged in improper accounting practices in respect of the disclosure of one or more contracts, agreements or arrangements of the type identified in paragraph [1] above in the period between 1 July 1998 and 1 July 2007;
together with any report, minute, memorandum, note, correspondence or other document in which the said action, suit, claim or proceeding was referred to, considered, deliberated upon or discussed. ”

51 “Policy Underwriter” was defined to mean:

“ ... in respect of each of the fifth to eleventh defendants (including any agent of one or more of the fifth to eleventh defendants), the person or persons who decided that that defendant should:
(a) enter into the Policy;
(b) underwrite the Policy; and/or
(c) accept the risk under the Policy;
and/or who calculated the premium payable under the Policy or determined that the premium payable under the Policy was acceptable consideration for that defendant to accept the risk under the Policy. ”

52 The “Policy” means the particular insurance policy in issue in the proceeding.

53 Category 1 seeks only documents of persons who made the decision that the Insurers enter into the Policy, or who calculated the premium payable under the policy. On the evidence, such persons were officers or employees of ENCON. The Insurers accept that ENCON should produce documents falling within categories 1-4. They contend that because the individual Insurers played no part in the decision to write the policy, discovery should not be required of documents in categories 1-4 from the Insurers “personally”. That question does not arise in relation to category 1 because of the use in that paragraph of the defined term “Policy Underwriter”. However, the issue is raised in respect of paragraphs 2 and 3.

54 For the reasons given earlier, it is arguable that, if it be held that the insureds did not comply with their duty of disclosure, the inquiry under s 28 is what the Insurers themselves would have done, through their employees, rather than what ENCON would have done, had the duty of disclosure been complied with. That being so, documents which record the Insurers’ own guidelines and practices in relation to the acceptance of insurance risk for policies of directors’ and officers’ liability insurance and in relation to the premium to be charged for such insurance are relevant and should be discovered.

55 However, paragraphs 2 and 3 are extremely broad, not only as to time, but as to the range of documents which would need to be searched for. The categories are not confined to manuals, guidelines and policy statements. Whilst the documents sought are those to which the persons making the relevant decisions were to refer or were to have regard to when making their decisions (as distinct from those recording matters which the relevant persons did have regard to in making their decisions) if an order were made in the terms sought, it would be necessary for the Insurers to search all of their files in relation to policies of directors’ and officers’ liability insurance entered into, or considered, during the specified period to search, for example, for any memorandum of instructions by one employee to another as to what matters were to be considered. That would be oppressive. Moreover, the time period to which the request relates is excessive. Documents showing the basis upon which such decisions were to be made after 1998 would not be relevant, except insofar as they threw light on the Insurers’ practices at the time the policy was entered into. The documents to be discovered in categories 2 and 3 should be confined to manuals, guidelines and policy statements. The period for which such documents should be required should be limited to the underwriting years between 1996 and 2000, save in the case of category 3 where the period should be limited to 1997 to 1999, as sought.

56 The Insurers’ English solicitor, Mr Stuart Hall, swore an affidavit as to the difficulties which the Insurers would experience if required to give the discovery sought. He deposed that some of the Insurers had “merged” with other insurers (although the nature of the mergers was not clear), that many of the employees of the Insurers who were concerned with the writing of directors’ and officers’ liability insurance in 1998 had left their employment, and that in some cases there are inadequate records of policies written. The fact that there have been corporate reorganisations is irrelevant to the Insurers’ obligations to give discovery. This evidence provides no reason not to order discovery limited in the ways indicated above.

57 The Insurers did not submit that the fourth category of documents sought is irrelevant. The extent to which, if at all, the Insurers themselves wrote policies of financial reinsurance could well be relevant to whether the insureds had a duty to disclose the policies written between GCR and NCRH (or NCRA). If policies (often described as financial reinsurance) whose purpose was to allow the insurer (reinsured) to report in the short term an improved balance sheet position, without the reinsurer assuming a significant insurance risk, were commonplace in the insurance industry, or were products provided by the Insurers themselves, that could well be relevant to whether the insureds had a duty to disclose that NCRH or its subsidiaries had entered into such policies. If there were court or administrative proceedings, or regulatory inquiries, in which the Insurers were involved, such proceedings or inquiries could be expected to show the extent to which any Insurer so involved wrote such policies.

58 But it would not follow that every document produced or received by any such Insurer in relation to any such court or administrative proceeding, or regulatory inquiry, should be discovered. It may well be that none of the fifth to eleventh defendants has been involved in any such court or administrative proceeding, or regulatory inquiry. If any such insurer has been so involved, then the scope of the documents to be produced can be further considered when the nature of the proceeding or inquiry is known. The Insurers should discover any documents recording the institution of any court or administrative proceeding against them, or the institution of any regulatory inquiry in respect of them, between 1 July 1998 and 1 July 2007 in which it is alleged that they entered into one or more contracts, agreements or arrangements of the type referred to in paragraph 1. The Insurers should discover documents produced in any such court or administrative proceeding or regulatory inquiry recording or describing any such contracts, agreements or arrangements and the purpose for which they were entered into.

59 Subparagraphs 4(b) and (c) are unnecessary because if there were any proceedings or inquiry concerning improper accounting practices or restatement of financial results by reason of the non-disclosure or the disclosure of any such contracts, that would be picked up by the requirement to discover documents recording the proceeding or inquiry regarding entry into such contracts, agreements or arrangements.

60 I will make an order for the discovery accordingly.

Interlocutory Process of the Fourth Defendant

61 Some issues on the fourth defendant’s interlocutory process were resolved during the hearing. The outstanding questions on the fourth defendant’s interlocutory process concern discovery to be given by the Insurers and by the plaintiffs. The only remaining issue concerning discovery by the Insurers concerns the documents in the following categories:

“ 31. Financial insurance/reinsurance products (also known as finite insurance/reinsurance) or smoothing covers negotiated or concluded by any cross defendant to the Third Cross Claim covering all or part of the calendar years 1997, 1998, or 1999. This extends to both contracts of insurance (whether as insurer or insured) and reinsurance (whether as reinsured or reinsurer) which either alone or together with another contract of insurance/reinsurance is designed not to transfer any (or significant) risk, but to:
31.1 achieve compliance with a banking or lending covenant; or
31.2 achieve a minimum net asset position or a minimum net profit position; or
31.3 comply with minimum prudential or capital requirements.
32. Documents recording communications with brokers for the purpose of entering into insurance and reinsurance transactions described in paragraph 31.
33. Documents recording discussions, consideration or deliberation of the insurance and reinsurance transactions described in paragraph 31.
34. Documents recording communications with regulators for the purpose of restating financial statements, reports and/or accounts as a result of entering into insurance and reinsurance transactions described in paragraph 31. ”

62 The documents sought, if they exist, would be relevant to the question whether the insureds had a duty to disclose the transaction alleged to have been entered into between NCRH and GCR. This was not disputed. It would not be oppressive for the Insurers to be required to produce such documents. I will make the order sought in respect of the further discovery to be given by the Insurers.

63 The fourth defendant also seeks discovery against the plaintiffs of documents relating to the roles performed by named individuals in the management and staff of NCRH, NCRA and NCRB (New Cap Reinsurance Corporation (Bermuda) Limited). The documents are clearly relevant to the defendant’s defence. The objection is that the individuals in respect of whom discovery is sought extend beyond the individuals named in the defence of the fourth defendant as persons whom the fourth defendant believed to be competent and reliable persons responsible for providing to the fourth defendant adequate information about NCRA’s solvency. The fourth defendant deposed that he relied upon various “teams” responsible for the financial management, underwriting, claims management, back office and administration, and the actuarial functions. The documents sought may be necessary for the defendant to provide further particulars of this part of the defence. That is not an objection to giving discovery. The documents sought are clearly relevant. The company’s resources would have been better employed in giving the discovery sought than in disputing the obligation to do so.

64 The fourth defendant also seeks from the plaintiffs discovery of the following documents:

“ 23. Documents recording the terms of settlement or compromise of these proceedings between Gibbons and/or NCRA and:
23.1 any director or officer of NCRA, NCRB, NC Re [NC Re Capital Limited] , or NCRH; and/or
23.2 NCRB, NC Re, or NCRH, including the deed of settlement of 3 February 2006. ”

65 The plaintiffs do not dispute that the documents are relevant. They say that they are confidential and that discovery at this stage is premature. The plaintiffs accept that the quantum of their claim against the fourth defendant must take into account recoveries received in the liquidation and returns to creditors.

66 There should be no issue about the amount of recoveries received by NCRA as the result of the compromise of any claims against any other directors or officers of NCRA, or as the result of the compromise of any proceedings between NCRA and other companies in the group of which NCRA forms part, or as a result of claims against other persons. The plaintiffs should have given particulars of the quantum of their claims, but they will in any event have to provide affidavit evidence on quantum. There should not be any issue as to the amount which NCRA may be entitled to receive as the result of any such compromise.

67 Unless and until an issue arises as to the quantum of the plaintiffs’ claim arises, it is not appropriate to order discovery.

68 Accordingly the fourth defendant’s application that the plaintiffs provide discovery of the documents described in category 23 of Schedule B to the interlocutory process is premature.

Orders

69 On the plaintiffs’ interlocutory process of 2 August 2010 I order that within a time to be fixed the fifth to eleventh defendants give discovery of:

(a) the documents in paragraph 1 of the schedule to the interlocutory process;

(b) the documents in paragraph 2 of the schedule to the interlocutory process confined to manuals, guidelines and policy statements for the underwriting years 1996 to 2000;

(c) the documents in paragraph 3 of the schedule to the interlocutory process confined to manuals, guidelines and policy statements for the underwriting years 1997 to 1999; and

(d) documents recording the institution of any court or administrative process or regulatory inquiry against any of them between 1 July 1998 and 1 July 2007 in which it was alleged that they or any of them entered into any contracts, agreements or arrangements of the type referred to in paragraph 1 of the schedule to the interlocutory process and any documents produced in any such proceeding or inquiry recording or describing any such contracts, agreements or arrangements, and the purpose for which they were entered into.

70 On the plaintiffs’ interlocutory process of 7 September 2010, I order that paras 40(p) and (q), 41-46, and 56-57 of the fifth to eleventh defendants’ amended defence be struck out with liberty to replead. I direct that any further amended defence be filed and served within 28 days.

71 I order that the plaintiffs’ interlocutory processes of 2 August 2010 and 7 September 2010 be otherwise dismissed.

72 On the fourth defendant’s interlocutory process filed on 21 September 2010, I order that by a date to be fixed the fifth to eleventh defendants give discovery of the documents in the categories in paragraphs 31 to 34 of Schedule A to the interlocutory process.

73 On 21 September 2010, in the course of the hearing I gave the Insurers leave nunc pro tunc to use in these proceedings documents obtained by them from the first or second plaintiffs in connection with proceedings number 50169 of 2001. It was agreed that that resolved the other issues between the fourth defendant and the Insurers. Accordingly I also order that paragraph 2 of the fourth defendant’s interlocutory process be dismissed and that the fifth to eleventh defendants give discovery, by a time to be fixed, of documents in the categories in paragraphs 4-12, 14-16, 18-19, and 26-29 of Schedule A to the interlocutory process.

74 By consent I make an order in accordance with paragraph 5 of the fourth defendant’s interlocutory process.

75 I order that by a time to be fixed the plaintiffs provide discovery of the documents in the categories in paragraphs 3, 4 and 5 of Schedule B to the fourth defendant’s interlocutory process.

76 I order the fourth defendant’s interlocutory process of 21 September 2010 be otherwise dismissed.

77 The plaintiffs also filed an interlocutory process on 8 September 2010 which is identical to their interlocutory process of 2 August 2010. I order that the plaintiffs’ interlocutory process of 8 September 2010 be dismissed.

78 I will hear the parties on the times to be fixed for giving discovery. Prima facie the costs of the applications should be costs in the proceedings. I will hear the parties on costs if any party seeks a different costs order.

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