New Cap Reinsurance Corporation Ltd v All American Life Insurance Company

[2004] NSWSC 366

Reported Decision: 49 ACSR 417
(2004) 22 ACLC 1043

Supreme Court

CITATION:	New Cap Reinsurance Corporation Ltd & Anor v All American Life Insurance Company [2004] NSWSC 366
HEARING DATE(S):	19/04/04
JUDGMENT DATE:	5 May 2004
JUDGMENT OF:	Gzell J
DECISION:	Interlocutory process dismissed with costs.
CATCHWORDS:	CORPORATIONS - Winding Up - Unfair preferences - Reinsurance contracts - Bank issued letters of credit - Application to strike out statement of claim - Whether in pleading an unfair preference under the Corporations Act 2001 (Cth), s 588FA and affectation upon the company's assets must be identified - Whether in a multi-step transaction the date of entry upon the transaction must be identified - Whether all steps of the transaction must occur in the 6 month period ended on the relation-back day
LEGISLATION CITED:	Corporations Act 2001 (Cth) Supreme Court Rules 1970
CASES CITED:	Dey v Victorian Railways Commissioners (1948-1949) 78 CLR 62 General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 Penthouse Publications Ltd v McWilliam (unreported, 14 March 1991, CA (NSW) Mutual Life & Citizens' Assurance Co Ltd v Evatt (1970) 122 CLR 628 Re Emanuel (No 14) Pty Ltd (in liq) (1997) 147 ALR 281 Walsh v Natra Pty Ltd (2000) 1 VR 523 New Cap Reinsurance Corp Ltd v Somerset Marine [2003] NSWSC 540 Somerset Marine Inc v New Cap Reinsurance Corp Ltd (in liq) [2003] NSWCA 338
PARTIES :	New Cap Reinsurance Corporation Ltd (in liq) - Plaintiff/Respondent John Raymond Gibbons (as liquidator of the first plaintiff - 2nd Plaintiff/Respondent All American Life Insurance Company - Defendant/Applicant
FILE NUMBER(S):	SC 2369/02
COUNSEL:	Mr B Coles QC with Ms L McCallum for the Plainitffs/Respondents Mr Robinson SC for the Defendant/Applicant
SOLICITORS:	Henry Davis York Lawyers Holdings Redlich

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

GZELL

WEDNESDAY 5 MAY 2004

2369/02 NEW CAP REINSURANCE CORPORATION (IN LIQUIDATION) & ANOR v ALL AMERICAN LIFE INSURANCE COMPANY

JUDGMENT

1 By its interlocutory process, the defendant sought to strike out the statement of claim as disclosing no reasonable cause of action.

2 The second plaintiff was the liquidator of the first plaintiff. He was earlier appointed administrator on 21 April 1999 and, in consequence, the winding up of the first plaintiff was deemed to have commenced on that date under the Corporations Act 2001 (Cth), s 513B and it was the relation-back day.

3 By their statement of claim, the plaintiffs sought recovery of US $1,660,311 alleged to have been an unfair preference given to the defendant in terms of the Corporation Act 2001 (Cth), s 588FA(1) which was in the following terms:

“A transaction is an unfair preference given by a company to a creditor of the company if, and only if:
(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and
(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction was set aside and the creditor were to prove for the debt in a winding up of the company;
even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.”

4 The statement of claim alleged that the first plaintiff carried on a reinsurance business and had reinsured the defendant. It was alleged that it was a term of each reinsurance contract that the first plaintiff would provide a letter of credit to the defendant equal to the first plaintiff’s proportion of the defendant’s loss reserves. It was alleged that the first plaintiff thereby became liable to the defendant in the above amount.

5 The pleading alleged that on 12 December 1998 the first plaintiff was requested to establish a letter of credit in respect of the above amount from 31 December 1998, that on 4 January 1999 it arranged for Chase Manhattan Bank to issue the letter of credit, that the bank did so on 7 January 1999 and that the defendant fully drew upon it on 17 December 1999. The pleading described these four steps as the LOC transaction.

6 The Corporations Act 2001 (Cth), s 588FE(2) provided:

“The transaction is voidable if:
(a) it is an insolvent transaction of the company; and
(b) it was entered into, or an act was done for the purpose of giving effect to it;
(i) during the 6 months ending on the relation-back day; or
(ii) after that day but on or before the day when the winding up began.”

7 It was pleaded that the LOC transaction was a “transaction” within the meaning of that term in the Corporations Act 2001 (Cth), s 9, that it was entered into at a time when the first plaintiff was insolvent and during the six months ending on the relation-back day and that it resulted in the defendant receiving from the first plaintiff more than it would have received if the LOC transaction was set aside and the defendant was to prove for the debt in the winding up. It was pleaded that the LOC transaction was an unfair preference within the meaning of s 588FA, that it constituted an insolvent transaction within s 588FC and that it was voidable at the suit of the second plaintiff pursuant to s 588FE(2).

8 The defendant complained that the word “arranged” in describing the second step of the LOC transaction was vague. Particulars had been sought and given in subsequent correspondence. Mr Robinson SC, who appeared for the defendant, conceded that had the matters contained in that correspondence been pleaded as particulars of the arrangement he would have no complaint. However, it was submitted that particulars could be altered and there was more security for a defendant if the matters were contained in the body of the pleading. He pointed out that the plaintiffs had been invited to replead but had declined to do so.

9 The principles applicable to summary dismissal of an action are well understood. The case must be very clear to justify summary intervention to prevent a plaintiff submitting the case for determination in the appointed manner (Dey v Victorian Railways Commissioners (1948-1949) 78 CLR 62 at 91). The court’s powers of summary dismissal should not be exercised to deny a plaintiff access to the courts unless the lack of a cause of action is clearly demonstrated (General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 129). It was for the defendant to demonstrate that the statement of claim was beyond saving by legitimate amendment (Penthouse Publications Ltd v McWilliam (unreported, 14 March 1991, CA (NSW) citing Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1970) 122 CLR 628 at 631).

10 Once particulars were given of the alleged arrangement, the defendant was aware of the case it had to meet, the pleading ceased to be embarrassing and it ceased to be appropriate to strike out that portion of it. I do not regard the giving of particulars in subsequent correspondence as distinct from in the pleading itself as justifying a strike out. Any departure from particulars contained in correspondence carries the same ramification as does a departure from particulars in a pleading.

11 The definition of the term “transaction” in the Corporations Act 2001 (Cth), s 9 was by way of examples – a conveyance, charge, guarantee, payment, obligation, release, waiver and loan. It was noted in Re Emanuel(No 14) Pty Ltd (1997) 147 ALR 281 at 288 that the process of exemplification typified the forms of conduct or dealing engaged in by a company that were characterised as a transaction. The Court said:

“Common to the examples is the characteristic that the conduct or dealing engaged in by the debtor company has the consequence of effecting a change in the rights, liabilities or property of the company itself.”

12 It was submitted that the statement of claim was defective in that the pleading of the LOC transaction did not specify any change in the rights, liabilities or property of the first plaintiff.

13 Again, however, that was the subject of correspondence between the parties and counsel for the appellant conceded that, in substance, the plaintiffs had given particulars of such a change – the letter of credit was issued by the bank at the expense of the first plaintiff.

14 Furthermore, Mr Coles QC who with Ms McCallum appeared for the plaintiffs, pointed out that the Corporations Act 2001 (Cth), s 588FA(1) directed attention to the advantage received by the creditor. It was no element of an unfair preference that there should be some adverse affectation upon the assets of the insolvent company. Reference was made to the observation of Phillips JA in Walsh v Natra Pty Ltd (2000) 1 VR 523 at 538, in rejecting an argument that there was no affectation upon the general body of creditors, that s 588FA did not in terms look to the effect of a transaction on other creditors as did the former legislation: rather the question was whether the transaction resulted in the creditor receiving more than it would in a winding up if the transaction were to be set aside and creditor were to prove.

15 In my view, it is no part of the proof of an unfair preference to establish an affectation upon the assets of the insolvent company and it is unnecessary to plead any such affectation. The definition of “transaction” in the Corporations Act 2001 (Cth), s 9 is not a closed class. Arrangements that have a neutral effect on the assets of a company may constitute transactions. A simple example is a put option for an off-market sale of listed shares at the last on-market price per share.

16 In this case the evidence at trial is likely to reveal a depletion of the assets of the first plaintiff in consideration for the issue of the letter of credit by the bank. Since that is not an essential element in the constitution of an unfair preference, however, that fact need not be pleaded.

17 The purpose of a pleading is to state, as briefly as the nature of the case admits, the material facts upon which reliance is to be placed. It is no part of the pleader’s task to set out the evidence (Supreme Court Rules 1970, Pt 15 r 7 and r 8).

18 In my view, the pleading was sufficient to identify for the defendant the allegation made with respect to a transaction alleged to fall within the scope of the Corporations Act 2001 (Cth), s 588FA. The pleading identified the steps of the alleged transaction and asserted the benefit obtained by the defendant from its participation in it. The defendant was forewarned with sufficient particularity of the nature of the case it must meet.

19 Mr Robinson pointed out that there was no pleading of when the parties entered into the LOC transaction. The four steps in the pleaded transaction occurred on different dates. He submitted that the pleading in that form was prejudicial or embarrassing to the defence.

20 The Corporations Act 2001 (Cth), s 588FG(2)(b) provided that the court was not to make an order materially prejudicing a right or interest of a person if the transaction was not an unfair loan or an unreasonable director-related transaction and it was proved that at the time the person became a party it had no reasonable grounds for suspecting that the company was insolvent or would become insolvent and a reasonable person in its circumstances would have had no such grounds for so suspecting. It was submitted that until a time when the parties entered into the transaction was specified, the defence was unable to assess whether this provision had any scope for operation.

21 Mr Coles submitted that when the parties entered into the transaction was a conclusion to be drawn by the court from the evidence. The date of entry was not a separate fact and was not required to be pleaded. I agree with that submission. The LOC transaction was pleaded as a multi-stepped arrangement. Those steps were identified and the dates upon which they occurred were pleaded. It was no part of the pleader’s duty to plead the consequence and allege when the parties entered into the transaction.

22 The last step of the LOC transaction as pleaded occurred after the six month period ended on the relation-back day. However, the Corporations Act 2001 (Cth), s 588FE(2)(b) did not, in terms, require all acts giving effect to the impugned transaction to have occurred during the six month period. It required the parties to have entered into the impugned transaction in that period or performance of some act giving effect to it to have occurred in that period.

23 In New Cap Reinsurance Corp Ltd v Somerset Marine [2003] NSWSC 540, which concerned a similar transaction between the plaintiff and Somerset Marine, I characterised the transaction with elements beyond the six month period. On appeal, in Somerset Marine Inc v New Cap Reinsurance Corp Ltd (in liq) [2003] NSWCA 338, Hodgson JA at par 22 re-characterised the transaction with the elements of call upon the letters of credit and the bank reimbursing itself at the expense of the plaintiff occurring outside the six month period.

24 In my view, the Corporations Act 2001 (Cth), s 588FE(2)(b) did not require all elements of a transaction to have occurred within the six month period. At the least that is a strongly arguable proposition such that the pleading should not be struck out at this stage on that basis.

25 I dismiss the defendant’s interlocutory process and order it to pay the plaintiffs’ costs.

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Last Modified: 05/07/2004