re HIH Insurance Ltd

[2004] NSWSC 5

CITATION:	HIH Insurance Ltd and related matters [2004] NSWSC 5
HEARING DATE(S):	17/12/03, 02/02/04, 17/02/04
JUDGMENT DATE:	19 February 2004
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	Barrett J
DECISION:	Orders under ss.477(2A) and 477(2B), Corporations Act 2001 (Cth); directions under s.479(3)
CATCHWORDS:	CORPORATIONS - winding up - application by liquidators for approval of compromise of debts and to enter into contracts not to be performed within three months - principles to be applied - application by liquidators for directions
LEGISLATION CITED:	Corporations Act 2001 (Cth), ss.477(2A), 477(2B), 479(3)
CASES CITED:	Re Ansett Australia Ltd (2002) 115 FCR 409 Re CIC Insurance Ltd (2001) 38 ACSR 181 Re FAI Traders Insurance Co Pty Ltd [2002] NSWSC 1080 Re G A Listing & Maintenance Pty Ltd (1994) 15 ACSR 308 Re HIH Casualty & General Insurance Co Ltd [2002] NSWSC 1036 Re Luxtrend Pty Ltd [1997] 2 QdR 86 Re Oliver Davey (Pacific) Pty Ltd [1999] VSC 241 Re Spedley Securities Ltd (1992) 9 ACSR 83 Re Tietyens Investments Pty Ltd (1999) 31 ACSR 1 Re United Medical Protection Ltd [2003] NSWSC 237
PARTIES :	Anthony Gregory McGrath and Alexander Robert Mackay Macintosh in their capacity as as Liquidators of HIH Insurance Limited (In Liquidation)
FILE NUMBER(S):	SC 1799/01; 1815/01; 1810/01; 1806/01; 1805/01; 1808/01
COUNSEL:	Mr S J Gageler SC - Applicants Mr W I B Enright, Solicitor - The Commissioner of the State of California Department of Insurance
SOLICITORS:	Blake Dawson Waldron - Applicants Ebsworth & Ebsworth - The Commissioner of the State of California Department of Insurance

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

BARRETT J

THURSDAY, 19 FEBRUARY 2004

1799/01 HIH INSURANCE LTD
1815/01 HIH UNDERWRITING AND AGENCY SERVICES LTD
1810/01 HIH CASUALTY & GENERAL INSURANCE LTD
1806/01 CIC INSURANCE LTD
1805/01 FAI INSURANCE LIMITED
1808/01 FAI GENERAL INSURANCE COMPANY LTD

JUDGMENT

1 On 17 December 2003, I heard applications by Mr McGrath and Mr Macintosh in their capacity as liquidators of each of HIH insurance Limited, HIH Underwriting and Agency Services Limited, HIH Casualty & General Insurance Limited, FAI General Insurance Company Limited, CIC Insurance Company Limited and FAI Insurance Limited. In each case, the liquidators sought the approval of the court under each of s.477(2A) and s.477(2B) of the Corporations Act 2001 (Cth) in relation to aspects of proposed deeds styled “cancellation deed” and “deed of indemnity”, plus directions under s.479(3). Subsequently, leave was granted to amend the original applications by adding a corresponding claim in respect of an amending or supplemental deed dated 16 February 2004. I heard further brief submissions on 17 February 2004.

2 The liquidators were represented on the hearing of the application on 17 December 2003 by Mr S J Gageler SC. Leave was given for Mr Enright, solicitor, to make submissions on behalf of the Commissioner of the State of California Department of Insurance without joinder of the Commissioner as a party. Those submissions supported the grant of the relief sought by the liquidators. Mr Buchanan, solicitor, appeared for the liquidators on 17 February 2004 and Mr Enright again appeared for the Commissioner.

3 The cancellation deed, the deed of indemnity and the supplementary deed have already been entered into. The first is dated 12 November 2003, the second 1 December 2003 and the third 16 February 2004. There is, however, in each case a suspensory provision declaring that the deed is of no force or effect unless and until the Supreme Court of New South Wales “has approved the terms of this deed in relation to each of” the parties in liquidation to which I have referred or, if the approval of the court is not obtained in respect of any of those parties, “the relevant party has waived in writing this condition”. It was made clear in the course of submissions that the approvals envisaged by this clause are approvals under ss.477(2A) and 477(2B), although this is not explicitly stated. I am nevertheless satisfied that, whatever may be the effect and operation of the suspensory condition among the parties to the deed, its existence is sufficient to justify the conclusion that, pending its satisfaction or waiver, the act of agreement with which each section is concerned should be regarded as not having occurred: see Re HIH Casualty & General Insurance Co Ltd [2002] NSWSC 1036; Re FAI Traders Insurance Co Pty Ltd [2002] NSWSC 1080.

4 The parties to the cancellation deed, in addition to the six Australian companies in liquidation, are four non-Australian companies in the HIH Group (including that administered by Mr Enright’s client) , all of which are in liquidation or provisional liquidation, three non-HIH companies operating in the reinsurance industry (Hannover Rueckversichervings-Aktiengesellschaft, Hannover Reinsurance (Ireland) Limited) and a company called Treaty Services Pty Limited “in its capacity as trustee of the Loss Portfolio Trust”.

5 The cancellation deed relates to pre-existing contracts that are ostensibly or, at least, nominally reinsurance contracts. Each such contract was made between one of the reinsurers to which I have referred and HIH Underwriting and Agency Services Limited (“HUAS”), the latter company being the trustee of a trust for the benefit of HIH Group operating insurers. The trust is distinct from the Loss Portfolio Trust under which Treaty Services Pty Limited hold certain moneys on trust for the reinsurers and HUAS. The cancellation deed contains recitals which it is acknowledged that certain payments were made by HIH Group companies to the reinsurers and Treaty Services and that “it may be arguable that HUAS is or may be entitled to make a claim under the Agreement”. It is then recited:

“J. The parties wish to enter into this deed to settle between them, in the manner and to the extent provided for in this deed, any claims, including all existing and potential future claims, which any of them may be entitled to make arising out of or in connection with any of the Agreements, including any claim any of them can presently bring under any of the Agreements, and to settle and extinguish any right of commutation under any of the Agreements.”

6 The operative provisions of the cancellation deed cancel the pre-existing contracts as of the date on which the deed’s conditions precedent are satisfied. Mutual releases follow. Provision is then made for a payment of $22,050,000 (plus an interest component) by one of the reinsurers to HIH America or as it directs; and for a payment of $63,407,216.01 (plus an interest component) and the delivery of certain marketable securities, in each case by Treaty Services Pty Limited to certain of the HIH Group companies in liquidation in stated proportions. The Reinsurance Benefit Trust is also terminated. By the supplemental deed, the payment obligation is made to extend to a balancing item to ensure that no residue is left with Hannover Re Ireland.

7 The cancellation deed has not been conceived entirely in isolation. Each of the pre-existing contracts contemplated the possibility that it may be commuted or terminated by mutual agreement. There is in each case a specification, in general terms, of the basis on which any such consensual commutation will take effect. Matters are, however, somewhat complicated by a number of informal agreements and side letters that came into existence over a number of years. These collateral arrangements are examined in some depth in Part III of a joint opinion dated 20 June 2002 given to the liquidators by Mr Gageler SC and Mr M R Speakman of counsel. That section covers no less than 34 pages.

8 The joint opinion concludes that the so-called reinsurance contracts were, in reality, “a means by which funds of companies within the HIH Group were, for a fee, to be placed into a managed fund to be returned with interest after October 2009”, noting that that conclusion had previously been expressed by both Arthur Andersen and Trowbridge Consulting. The joint opinion says that, despite the nomenclature of “reinsurance”, there is “simply no transfer of risk”. The joint opinion goes on to state that HUAS, as trustee, holds the commutation rights and any proceeds of them on trust for the participating HIH Group companies in proportion to their contributions.

9 The deed of indemnity is a deed between Treaty Services Pty Limited, HUAS, HIH Casualty and General Insurance Limited and FAI General Insurance Company Limited. By that deed, the parties other than Treaty Services agree to indemnify Treaty Services against any tax liability that could have been recouped by it out of funds held by it, being funds that are to be distributed in accordance with the cancellation deed.

10 Against this background, I turn to the claims made by the liquidators of each of the six Australian companies. They are, as I have said, claims based on ss.477(2A), 477(2B) and 479(3) of the Corporations Act.

11 Section 477(2A) is concerned with a liquidator’s power to “compromise a debt to the company”. It says that a liquidator must not “compromise a debt to the company”, in the absence of court approval, if “the amount claimed by the company” is more than $20,000. Section 477(2B) says, in a similar way, that a liquidator must not enter into an agreement on the company’s behalf, in the absence of court approval, if obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance more than three months after the agreement is entered into. The application based on s.477(2A) is advanced in relation to the cancellation deed. The application based on s.447(2B) is advanced in relation to both the cancellation deed and the deed of indemnity, as is the application for directions under s.479(3).

12 Case law emphasises that s.477(2A) applies only in relation to a “debt” strictly so called. In some cases where the claim in question has not been a “debt” as such, courts have declined to grant approval under the section because such approval is unnecessary: see, for example, Re Luxtrend Pty Ltd [1997] 2 QdR 86; Re Tietyens Investments Pty Ltd (1999) 31 ACSR 1. In other cases, it appears that a strict approach of that kind has not been taken: see, for example, Re Oliver Davey (Pacific) Pty Ltd [1999] VSC 241. I have no doubt that, if the relevant claim is unquestionably not a “debt” as such, the correct approach is to dismiss any application under s.477(2A) as unnecessary. But that approach should be taken only in a clear-cut case. This is because s.477(2A) goes to the existence of a liquidator’s power. Each of s.477(1) and 477(2) begins with the words “Subject to this section”, so that a power conferred by one of those provisions (including the power to compromise debts and claims conferred by s.477(1)(d)) simply does not arise, in a case dealt with by s.477(2A) or s.477(2B), unless court approval is given. It should follow, in my view, that the course of dismissing a s.477(2A) application on the basis that the particular claim is not, strictly speaking, a “debt” should be followed only in the clearest of cases.

13 In the present case, the true nature of the so-called reinsurance contracts is the subject of close and detailed analysis in the joint opinion. That opinion makes it clear that certain aspects of the apparent transactions were not, in reality, as they seemed to be and that the true contractual intent is to be gathered, in part at least, from sources outside the formal documents. Such uncertainties of characterisation are, in my view, sufficient to warrant a view that the contractual rights arising from the agreements and their adjuncts are sufficiently likely to entail (or include) “debts” that the court should proceed on the basis the liquidators prefer, namely, that their power to compromise, by resort to the commutation mechanisms, should be put beyond doubt by s.477(2A) approval, assuming that it is otherwise appropriate to grant that approval.

14 Section 477(2B) is concerned with the period within which contractual obligations are to be discharged by performance. In the case of the cancellation deed, there is provision for a sequence of implementation steps which may take more than three months. There are also dispute resolution and other machinery provisions which, if invoked, may not be fully performed within the three month period. In the case of the deed of indemnity, the agreement to indemnify is not limited in time. The liquidators power to make the agreements embodied in both deeds therefore depends on the grant of approval under s.477(2B).

15 This brings me to the approach that the court is to take in deciding whether to grant approval under s.477(2A) or s.477(2B). Although the two provisions deal with different aspects of a liquidator’s powers, both are concerned to ensure that the court exercises some oversight of the liquidator’s actions and, in effect, confers or completes the necessary power only where it sees that a case for exercise of the power in the particular circumstances has been sufficiently shown. The court’s assessment must be made in light of the purposes for which liquidators’ powers exist. One overriding purpose is to serve “the interests of those concerned in the winding up – here the creditors” (Re Spedley Securities Ltd (1992) 9 ACSR 83 per Giles J); the other is to do whatever needs to be done “for the proper realisation of the assets of the company” or to assist its winding up (Re G A Listing & Maintenance Pty Ltd (1994) 15 ACSR 308 per Young J). The court does not concern itself with the commercial desirability of the transaction. As Giles J said in the Spedley Securities case (above):

“The court pays regard to the commercial judgment of the liquidator. That is not to say that it rubber stamps whatever is put forward by the liquidator but, as is made clear in Re Mineral Securities (Australia) Ltd [1973] 2 NSWLR 207 at 231–2, the court is necessarily confined in attempting to second guess a liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct.”

Although this was said in relation to s.477(2A), I consider the statement to be equally applicable to s.477(2B). As Austin J observed in Re United Medical Protection Ltd [2003] NSWSC 237, the considerations arising under both provisions are “much the same”, although I would add that s.477(2B) focuses particular attention on the need to ensure that contractual provisions as to timing do not cut across the general expectation that winding up will proceed in as expeditious a fashion as circumstances allow: Re G A Listing & Maintenance Pty Ltd (above), Re CIC Insurance Ltd (2001) 38 ACSR 181.

16 Mr McGrath, one of the liquidators, has given evidence relevant to the matters just outlined. I quote from his affidavit of 16 December 2003, referring to the cancellation arrangements:

“7. In my view, this cancellation is clearly in the interests of the creditors of the Australian HIH Companies because:
(a) those companies which are entitled to share in the proceeds of the reinsurance arrangements receive a payment now which is equal to the present value of the greatest amount which could potentially be claimed in future;
(b) any risks, in particular credit risks, associated with leaving the reinsurance in place until all claims can be made during and after 2009, are avoided; and
(c) the administration of the estates of each of the Australian HIH Companies is not delayed because of potential future recoveries under these reinsurance arrangements.
8. On 2 July 2003 the Committees of Inspection of HIH C&G, CIC and FAIG resolved that the Australian Liquidators be authorised to enter into an agreement with the Reinsurers, HIH America and other HIH group companies to cancel the reinsurance arrangements on the basis that premium and accrued investment income be returned to the relevant HIH companies in proportion to contributions paid into the fund At the time of this resolution it was noted that the Australian Liquidators would approach this honourable Court for approval. The precise form of the Cancellation Deed was not available to the committees at the time of the resolution and as such the precise form was not approved.”

17 In relation to the division of the proceeds among the several HIH Group companies, Mr McGrath refers to the joint opinion and the conclusion that participation should be according to the respective contributions made. He also refers to work done by the liquidators’ staff in reviewing accounting records to identify payments actually made by the several companies. In relation to the deed of indemnity, Mr McGrath’s evidence is to the effect that it represents a price necessary to be paid and that a senior manager in KPMG’s tax advisory practice has expressed the opinion that no relevant tax liability should be incurred, although there is “a very small risk that the Australian Taxation Office will take a different view”.

18 Applying the formulation of Giles J, I am satisfied that there is no lack of good faith, no error in law or principle and no real or substantial grounds for doubting the prudence of the liquidators’ conduct in relation to the cancellation deed and deed of indemnity proposals. The liquidators have brought the matter before the court and given an account of all relevant matters which justifies the grant of approval under ss.477(2A) and 477(2B) as sought. In saying this, I take account of the liquidators’ expectation, expressed to the court on other applications, that it will take several years to complete these winding ups.

19 I turn now to the application for directions under s.479(3). It is to be emphasised again here that it is not the function of the court to pass an opinion on the liquidators’ commercial judgment. Generally speaking, such directions are appropriate only where there is some doubt or difficulty going beyond the question of what is commercially desirable. Goldberg J put the matter thus in Re Ansett Australia Ltd (2002) 115 FCR 409:

“There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, the decision. It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised. It is insufficient to attract an order giving directions that the liquidator or administrator has a feeling of apprehension or unease about the business decision made and wants reassurance. There must be some issue which arises in relation to the decision. A court should not give its imprimatur to a business decision simply to alleviate a liquidator’s or administrator’s unease. There must be an issue calling for the exercise of legal judgment.”

20 In this case, there is “an issue calling for the exercise of legal judgment”. It is, in essence, the issue of relying on and giving effect to the joint opinion which has played a central role in the shaping of the commutation transaction. In such a case, the court is not called upon to conduct a detailed review and analysis of the joint opinion but will test it generally for cogency. Such a testing in this case leads to the conclusion that there is no apparent reason to question the methodology employed in the joint opinion and that the conclusions stated are both cogent and consistent with the application of the methodology to the facts before counsel. The directions sought under s.479(3) should therefore be given.

21 The court makes the following orders and gives the following directions in each of proceedings 1799/2001, 1815/2001, 1810/2001, 1808/2001, 1806/2001 and 1805/2001, with the reference to “the Company” being understood as a reference to the company the subject of the winding up order made in the particular proceeding:

1. Order, pursuant to s.477(2A) of the Corporations Act 2001, that the following be approved, namely, the making by the applicants, Anthony Gregory McGrath and Alexander Robert Mackay Macintosh, as Liquidators of and on behalf of the Company, of a deed which is in or substantially to the effect of the form which is Exhibit AGM-1 referred to in the affidavit of Anthony Gregory McGrath sworn 16 December 2003 and filed in proceeding 1799/2001 and a supplemental deed in the form of Exhibit MCB1 referred to in the affidavit of Mark Charles Buchanan sworn 16 February 2004 and filed in that proceeding.

2. Order, pursuant to s.477(2B) of the Corporations Act 2001, that the following be approved, namely, the making by the applicants, Anthony Gregory McGrath and Alexander Robert Mackay Macintosh, as Liquidators of and on behalf of the Company, of a deed which is in or substantially to the effect of the form which is Exhibit AGM-1 referred to in the said affidavit of Anthony Gregory McGrath and a supplemental deed in the form of Exhibit MCB1 referred to in the said affidavit of Mark Charles Buchanan.

3. Order, pursuant to s.477(2B) of the Corporations Act 2001, that the following be approved, namely, the making by the applicants, Anthony Gregory McGrath and Alexander Robert Mackay Macintosh, as Liquidators of and on behalf of the Company, of a deed which is in or substantially to the effect of the form which is Exhibit AGM-14 referred to in the said affidavit of Anthony Gregory McGrath.

4. Direct, pursuant to s.479(3) of the Corporations Act 2001, that the applicants, Anthony Gregory McGrath and Alexander Robert Mackay Macintosh, as Liquidators of and on behalf of the Company, are justified in entering into the deed, a copy of which is in or substantially to the effect of the form which is Exhibit AGM-1 referred to in the said affidavit of Anthony Gregory McGrath and a supplemental deed in the form of Exhibit MCB1 referred to in the said affidavit of Mark Charles Buchanan.

5. Direct, pursuant to s.479(3) of the Corporations Act 2001, that the applicants, Anthony Gregory McGrath and Alexander Robert Mackay Macintosh, as Liquidators of and on behalf of the Company are justified in entering into the deed, a copy of which is in or substantially to the effect of the form which is Exhibit AGM-14 referred to in the said affidavit of Anthony Gregory McGrath.

22 In proceeding 1799/2001, it is also ordered that Mr McGrath’s affidavit sworn on 16 December 2003 and filed in that proceeding and the joint opinion of counsel which is Exhibit AGM3 to that affidavit be kept in the court file in a sealed envelope marked “Confidential – Not to be opened without the leave of a judge and after 48 hours notice to Blake Dawson Waldron”. This order is sought (and is appropriate) because of the confidential nature of the content of those documents.

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Last Modified: 02/19/2004