QBE Underwriting Limited v New Cap Reinsurance Corporation Limited

[2008] NSWSC 526

CITATION:	QBE Underwriting Limited v New Cap Reinsurance Corporation Limited [2008] NSWSC 526
HEARING DATE(S):	28 May 2008
JUDGMENT DATE :	29 May 2008
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	Windeyer J at 1
DECISION:	Leave to proceed given.
CATCHWORDS:	CORPORATIONS - winding up - leave to proceed against company in liquidation
LEGISLATION CITED:	Corporations Act 2001
CATEGORY:	Principal judgment
CASES CITED:	Ex parte James [1874] 9 Ch App 609
PARTIES:	QBE Underwriting Limited (suing for and on behalf of all members of Lloyd's syndicate 1215 for the 1995 and 1996 years of account) (Plaintiff) New Cap Reinsurance Corporation Limited (In Liquidation) (First Defendant) John Raymond Gibbons (Second Defendant)
FILE NUMBER(S):	SC 2554 of 2008
COUNSEL:	Mr S Street QC with him Ms J Chambers (Plaintiff) Mr J Sheahan SC with him Mr B Katekav (Defendants)
SOLICITORS:	Freehills Lawyers (Plaintiff) Henry Davis York (Defendants)

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

WINDEYER J

THURSDAY 29 MAY 2008.

2554/08 QBE UNDERWRITING LIMITED (suing for and on behalf of all members of Lloyd’s Syndicate 1215 for the 1995 and 1996 years of account) v NEW CAP REINSURANCE CORPORATION LIMITED (In Liquidation)

JUDGMENT

1 The plaintiff (the Syndicate) seeks leave under s 500(2) of the Corporations Act 2001 to commence proceedings against New Cap Reinsurance Corporation Limited (In Liquidation) (New Cap) and its liquidator, Mr Gibbons. New Cap was placed into liquidation pursuant to a resolution of creditors of 16 September 1999.

2 The facts which the plaintiff wishes to plead and upon which its claim would be based are set out in the following paragraphs.

3 The Syndicate entered into a retrocession agreement with Lexington Insurance Company (Lexington) under which it reinsured Lexington under a claims made excess policy in respect of Lexington’s involvement in medical negligence liability insurance first for a 12 month period commencing on 1 July 1995 and second for a 12 month period commencing on 1 July 1996.

4 The Syndicate then entered into two facultative reinsurance agreements in respect of each of those years with New Cap under which New Cap reinsured the Syndicate for its excess loss in respect of each of the years covered by the Lexington agreements.

5 Under the facultative reinsurance New Cap was required to provide irrevocable letters of credit as security for the reinsurance obligations of New Cap to the Syndicate, each letter of credit being for an amount of US$2,240,000. The Syndicate undertook that it would only draw down on the letters of credit in certain circumstances, the circumstance relevant here being if notice of non-renewal of the letter of credit was received from the issuing bank.

6 Letters of credit were provided by Chase Manhattan Bank as required with the necessary “evergreen” condition.

7 In December 2005, the bank which provided the letters of credit gave notice that they would not be renewed beyond their next expiry date which was 17 November 2006.

8 The liquidator of New Cap informed the Syndicate that various options or courses of action were available, namely (a) cancellation on the basis the letters of credit were no longer required; (b) an alternative arrangement option under which the letters of credit would be drawn down with the funds being placed in escrow with the accounts to be balanced between the parties in due course; (c) the arranging of an alternative letter of credit provider.

9 There is evidence sufficient to satisfy me these facts can be established.

Proposed claim

10 The claim which the plaintiff wishes to bring is that after the notice of non-renewal was received and the letter from the liquidator setting out the various options was received, there were negotiations between the parties in which it was agreed that it was likely there would be a loss to the Syndicate in respect of the Lexington agreements thereby bringing about the liability in New Cap under the facultative arrangement and that after further negotiations and discussions a contract arose under which it was agreed that the Syndicate would not call on the letters of credit but that replacement letters of credit would be provided through Bank West which was an acceptable issuer for a replacement letter of credit.

11 In essence the first contract claim of the Syndicate is that New Cap through its liquidator, has, in consideration of the Syndicate not calling on the letters of credit as it was entitled to do, offered to implement either the cancellation of the letters of credit, the alternative arrangement or the replacement option; that the Syndicate accepted the replacement option which required replacement of letters of credit before the expiry date of the original letters of credit unless some alternate arrangement was agreed in the meantime, which it was not. It is intended to plead that claim in a number of ways, but that is the outline of it.

12 The Syndicate wishes to bring an alternative claim of promissory estoppel based on representations as to provision of replacement letters of credit, inducement by the liquidator to the Syndicate to rely upon that representation, and not call upon the original letters of credit and the detriment which has arisen through having done so, the replacement letters of credit not having been provided prior to expiry of the original letters of credit and the liquidator refusing thereafter to provide them.

13 The final claim which is proposed to be made is one under the rule in Ex parte James [1874] 9 Ch App 609. It is accepted that New Cap was required, in order to obtain the original letters of credit, to provide security for this to the issuing bank. Part of that security was provided by New Cap and part by an associated company. The security which was provided by New Cap, which amounted to approximately $1,568,000, was released upon the letters of credit expiring. It is claimed that this release enriched the insolvent estate of New Cap at the expense of the Syndicate.

14 The main relief the plaintiff seeks is an order for specific performance of a contract to provide alternative letters of credit. There are alternate claims for damages or equitable compensation and for particular orders relating to the Ex parte James claim.

15 The question for decision in determining matters of this kind is whether or not there is a serious question to be tried on the case the Syndicate wishes to bring which has a reasonable prospect of success. I do not consider it desirable to go too closely into the evidence, its strengths and weaknesses. There is written material of communications which could possibly with supplementation support a contract claim; the same material with supplementation could support an estoppel claim. While it is fair to note that there have been much stronger contract claims, it could not be said that the claim the Syndicate wishes to pursue is groundless, is doomed to fail or would be an unjustified incursion upon the winding up of New Cap involving needless expense and tribulation to that company and its liquidator. There is at least an issue to be tried as to whether in negotiations the communications between the parties brought into existence an agreement to provide alternative letters of credit in consideration of Syndicate not calling on the original letters of credit as it was entitled to do. In same way there is a proper question to be tried on the claim based on estoppel by representation.

16 So far as the Ex parte James part of the claim is concerned and the fact that such a claim must be brought by a creditor or contributory, while it is clear that the Syndicate is not an actual creditor, I am of the view that it is a contingent creditor. That would of course depend upon evidence of claims against the Syndicate under the Lexington agreement of which there is no evidence at the present time. This particular claim could not, of course, give a right to an order for reestablishment of the letters of credit, but it could possibly give a right to particular directions to the liquidator in respect of $1,568,000 returned to New Cap by the original letter of credit provider on the expiry of the letters of credit.

17 I have therefore come to the conclusion that leave should be given to the Syndicate to commence the action which it wishes to bring. The main claim is a claim for specific performance and the provision of replacement letters of credit pursuant to the claimed contract for this. As I have said, while there is no certainty this claim will succeed that is not the test. The test is whether there is a serious question to be tried as to the existence of a contract and a breach of contract which, as I have said, I consider there is. Insofar as there may ultimately be some judgment for damages or compensation as distinct from specific performance, it is accepted there should be an order made that such judgment not be enforced without leave of the court.

18 Make the orders sought in paragraph 1 of the originating process filed on 29 April 2008.

19 Make the orders should in paragraph 2 of the originating process.

20 Order that any judgment for money obtained by the plaintiff against the defendants not be enforced without leave of the court.

21 The exhibits may be returned.

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