Reinsurance Australia Corporation Limited v HIH Casualty and General Insurance Ltd (in liquidation)

[2003] FCA 618

FEDERAL COURT OF AUSTRALIA

Reinsurance Australia Corporation Limited v HIH Casualty and General Insurance Ltd (in liquidation) [2003] FCA 618

REINSURANCE AUSTRALIA CORPORATION LIMITED (ACN 061 215 601) & MONEGASQUE DE REASSURANCES S.A.M. v HIH CASUALTY AND GENERAL INSURANCE (IN LIQUIDATION) (ACN 47 008 482 291), AIG EUROPE (UK) LTD AND NEW HAMPSHIRE INSURANCE COMPANY, HEATH GROUP LIMITED (FORMERLY CE HEALTH PLC), HEATH INSURANCE BROKING LTD FORMERLY CE HEATH (INSURANCE BROKING) LTD AND HEATH NORTH AMERICA AND SPECIAL RISKS LTD, ICE MEDIA LIMITED AND PREMIER MEDIA LIMITED & J P MORGAN CHASE BANK (FORMERLY KNOWN AS THE CHASE MANHATTAN BANK, FORMERLY KNOWN AS CHEMICAL SECURITIES INC)
N 827 of 2002

JACOBSON J
19 JUNE 2003
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 827 of 2002

BETWEEN:

REINSURANCE AUSTRALIA CORPORATION LIMITED ACN 061 215 601
FIRST APPLICANT

MONEGASQUE DE REASSURANCES S.A.M.
SECOND APPLICANT

AND:

HIH CASUALTY AND GENERAL INSURANCE (IN LIQUIDATION) ACN 47 008 482 291
FIRST RESPONDENT

AIG EUROPE (UK) LTD and NEW HAMPSHIRE INSURANCE COMPANY
SECOND RESPONDENTS

HEATH GROUP LIMITED (formerly CE HEATH plc), HEATH INSURANCE BROKING LTD formerly C.E. HEATH (INSURANCE BROKING) LTD and HEATH NORTH AMERICA AND SPECIAL RISKS LTD
THIRD RESPONDENTS

ICE MEDIA LIMITED and PREMIER MEDIA LIMITED
FOURTH RESPONDENTS

JP MORGAN CHASE BANK (formerly known as THE CHASE MANHATTAN BANK, formerly known as CHEMICAL SECURITIES INC)
FIFTH RESPONDENT

JUDGE:

JACOBSON J

DATE OF ORDER:

19 JUNE 2003

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:

1. leave to issue the subpeonas to KPMG and KPMG Actuaries Pty Limited are refused
2. notices to produce filed by the third and fifth respondents set aside.
3. applicant to pay the costs of the third and fifth respondents of the motions referred to in [3] of the reasons for judgment.

THE COURTS DIRECTS THAT:

4.any further affidavits are to be filed by 12 noon on 23 June 2003. 

5.short written submissions are to be posted on eCourt by 9 am on 24 June 2003.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 827 of 2002

BETWEEN:

REINSURANCE AUSTRALIA CORPORATION LIMITED ACN 061 215 601
FIRST APPLICANT

MONEGASQUE DE REASSURANCES S.A.M.
SECOND APPLICANT

AND:

HIH CASUALTY AND GENERAL INSURANCE (IN LIQUIDATION) ACN 47 008 482 291
FIRST RESPONDENT

AIG EUROPE (UK) LTD and NEW HAMPSHIRE INSURANCE COMPANY
SECOND RESPONDENTS

HEATH GROUP LIMITED (formerly CE HEATH plc), HEATH INSURANCE BROKING LTD formerly C.E. HEATH (INSURANCE BROKING) LTD and HEATH NORTH AMERICA AND SPECIAL RISKS LTD
THIRD RESPONDENTS

ICE MEDIA LIMITED and PREMIER MEDIA LIMITED
FOURTH RESPONDENTS

JP MORGAN CHASE BANK (formerly known as THE CHASE MANHATTAN BANK, formerly known as CHEMICAL SECURITIES INC)
FIFTH RESPONDENT

JUDGE:	JACOBSON J
DATE:	19 JUNE 2003
PLACE:	SYDNEY

REASONS FOR JUDGMENT

1. An issue has arisen as to whether Heath and Chase should be permitted to go behind ReAc’s published accounts by issuing subpoenas and notices to produce calling for the production of financial documents and related material which they seek to support applications for security for costs.

2. There are extant motions for security by all the respondents but I have deferred listing them for hearing pending determination of the question of whether the subpoenas and notices to produce should be issued.

3. Chase seeks leave to issue subpoenas to ReAc’s auditors, Messrs KPMG and its actuaries.  ReAc moves to set aside the notices to produce addressed to it.

4. Although Dr Bell, counsel for ReAc, submits the subpoenas and notices to produce are oppressive, he does not contend that they are too wide or uncertain or unfairly burdensome in accordance with the principles stated in the authorities; see eg. Southern Pacific HotelServices Inc v Southern Pacific Hotel Corporation Ltd [1984] 1 NSWLR 710.

5. Rather, the gravamen of ReAc’s opposition to the subpoenas and notices to produce is that they constitute a “fishing expedition” within the meaning of the well-established authorities in this area.

6. ReAc points to the fact that it is a listed public company whose accounts have been audited by KPMG.  The consolidated accounts for the year ended 31 December 2002 disclose that ReAc and its controlled entities had net assets of $3m including $18m in cash.

7. The asset position is arrived at after reserving $190m for outstanding claims.  The outstanding claims are stated in the accounts to be established to at least “a 75% confidence level” in accordance with the new standards imposed by APRA in 2002.

8. In summary, ReAc submits that in order for Heath and Chase to go behind the financial statements, it is necessary for them to point to some reasonable basis for contending that the accounts do not disclose the true financial position.  In ReAc’s submission, anything short of this would constitute impermissible fishing.

9. The short answer to this proposition is that it is contrary to the principle stated by a Full Court (Heerey, Branson & Merkel JJ) in Bailey v Beagle Management Pty Limited (2001) 105 FCR 136. There is no rule that a party who issues a subpoena or a notice to produce for documents in support of a security for costs application must support it by evidence which gives rise to a reasonable apprehension that the corporation will be unable to pay the costs if it is unsuccessful in the proceedings; see Bailey at [22].

10. As the Full Court said in Bailey at [24], if a security for costs application is properly brought, there is no occasion for imposing on the trial judge any criterion other than that the judge be satisfied that the documents are specified with reasonable particularity and are properly being sought to advance the case of the applicant for security.

11. There is nothing to suggest that the application for security is not properly brought.  It was not suggested that the documents are not specified with sufficient particularity.  I am satisfied that they are being sought for a proper purpose.

12. The notices and subpoenas do not constitute fishing.  They seek financial records and documents which are referred to in the accounts or which provide the basis for assumptions which underlie the accounts.

13. Ordinarily, it would follow that I would grant leave to issue the subpoenas to KPMG and KPMG Actuaries Pty Limited and decline to set aside the notices to produce.  However, here it seems to me that Heath and Chase do not need the documents called for by the subpoenas and the notices in order for me to determine the question of security. 

14. This is because the evidence in the present application discloses that ReAc is in a managed run-off which commenced in February 2000.  At that time, ReAc announced that it had incurred significant losses and was no longer in compliance with the minimum solvency requirements of the Insurance Act 1973 (Cth).

15. ReAc’s accounts record that, as a result of its failure to meet the solvency requirements and also as a result of its “diminished capital base”, the directors decided to cease all underwriting activities and place the company into run-off.

16. Thus, ReAc has ceased to carry on business, except perhaps for the purposes of liquidation or, possibly, recommencing business after the run-off is completed at which time it would appear necessary for there to be a capital reconstruction.

17. The question which will arise in the application for security for costs will be whether there is credible testimony that there is reason to believe that ReAc will be unable to meet the costs order if it is unsuccessful; see Corporations Act 2001 (Cth), s 1335.

18. It will therefore be necessary for me to form an opinion as to what ReAc’s financial position will be at the time of judgment; see Idoport Pty Limited v National Australia Bank Ltd [2001] NSWSC 744 at [58] per Einstein J. On present estimates, final judgment in these proceedings will be delivered at the end of 2004 or perhaps early 2005.

19. Two matters emerge from this application which are relevant to the determination of the question of whether there is reason to believe that ReAc will not be in a position to meet a costs order.  The first is, as I have already stated, that ReAc is not carrying on business.  Its accounts indicate that it has a small amount of premium revenue but, as a company in run-off, it is not writing new business and has no source of new premium income. 

20. Second, ReAc’s financial position at the end of 2004 or early 2005 will depend entirely upon the success of the run-off.  The notes to the accounts state something which must be obvious in any event, namely that this is quite uncertain.

21. The uncertainty of the outcome arises from the ordinary contingencies of actual claims experience and from the usual uncertainties associated with litigation.  The notes to the accounts reveal that ReAc is engaged in three arbitrations and six legal actions, the results of which are acknowledged to be “inherently uncertain”.

22. I have not yet been asked to determine the question of whether security for costs should be ordered and I have therefore not come to a final view. But my preliminary view on the basis of what appears in ReAc’s accounts is that I would make an order for security under s 1335 of the Corporations Act 2001 (Cth).

23. It seems to me, prima facie, that it is no answer to say that the accounts show that ReAc has net assets of $37m including $18m in cash or that the loss reserves have been established on the basis of actuarial opinions which equate to “a 75% confidence level”. 

24. ReAc’s balance sheet merely records the asset position on one day, ie 31 December 2002.  It is not to the point that there are no post balance date events up to the date of signoff.

25. What the accounts disclose is that the asset position is dependent upon the opinions of the directors, which are themselves based upon opinions of lawyers and actuaries, as to what provision it is appropriate to make for outstanding claims.

26. In my view, it does not impugn the opinions of the directors or the various professionals to say that these are all opinions on which it is likely that different minds could hold different views, all of them quite reasonable ones. 

27. It does not seem to me that the actuary’s opinion that the likely outcome equates to a 75% confidence level provides an answer because the actuary’s opinion itself is dependent upon matters which the accounts quite properly acknowledge to be inherently uncertain.

28. In any event, the opinions of directors and the views of lawyers and actuaries will not answer the question of whether there will be cash available to meet a costs order in about 18 months time if ReAc is unsuccessful.

29. If the application for security proceeds upon the basis proposed by Heath and Chase with evidence from actuaries as to the likely financial position of ReAc in late 2004 or early 2005, the security for costs hearing will be a commercial cause in itself.  The outcome of that application will depend upon the competing views of experts as to the appropriate level of provision which should be made for outstanding claims against ReAc.  In my view, a reasonable time estimate for the hearing would be not less than one week. 

30. But it seems to me that such a hearing would be concerned with issues which cannot go to the heart of the question.  The trigger for the exercise of the Court’s discretion to order security is “credible testimony” that there is reason to believe that ReAc will be unable to meet a costs order.  In my view that question cannot be answered satisfactorily by competing expert evidence as to matters which are themselves uncertain.

31. For these reasons, it seems to me that it is unnecessary in this case to go behind the accounts to determine the question of whether I should order security.

32. I therefore propose to determine the security for costs application solely upon the basis of ReAc’s 2002 accounts.  

33. I have given some thought to the question of the amount of security for costs.  I indicated at the last directions hearing that I would leave that question to be determined by a Registrar, possibly with the assistance of an expert.  But, on further consideration, I have come to the preliminary view that it is unnecessary to take that step. 

34. The reason I have come to this view is that it seems to me that it will be unnecessary to explore the minutiae of the claims.  It is well established that in ordering security for costs the Court does not give a complete and certain indemnity; see Brundza v Robbie & Co (No 2) (1952) 88 CLR 171 at 175.

35. Moreover, in exercising its discretion it is only possible for the Court to take a “broad brush” approach in all the circumstances of the case; see Allstate Life Insurance Co v ANZBanking Group Ltd (1995) 134 ALR 187 at 199-201 per Lindgren J.

36. All of these matters can be agitated on 24 June 2002 when the matter is next before me.  I have reserved that day for an extended directions hearing and it seems to me to be appropriate for the security for costs question be determined on that day.

37. Any further affidavits are to be filed by 12 noon on 23 June 2003.  Short written submissions are to be posted on eCourt by 9 am on 24 June 2003.

I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.

Associate:

Date:               19 June 2003

Counsel for the Applicants:	Dr A S Bell
Solicitor for the Applicants:	Phillips Fox
Counsel for the First Respondent:	Mr M Speakman & Mr A Harpur
Solicitor for the First Respondent:	Blake Dawson Waldron
Counsel for the Second Respondents:	Mr M W Thompson
Solicitor for the Second Respondents:	Herbert Geer & Rundle Lawyers
Counsel for the Third Respondents:	Mr G K J Rich
Solicitor for the Third Respondents:	Clayton Utz
Counsel for the Fourth Respondents:	No appearance
Solicitor for the Fourth Respondents:	No appearance
Counsel for the Fifth Respondent:	Mr F Kunc
Solicitor for the Fifth Respondent:	Allens Arthur Robinson
Date of Hearing:	30 May 2003 & 4 June 2003
Date of Judgment:	19 June 2003