Bright as executor in the estate of Reid

[2012] NZHC 3476

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-7084 [2012] NZHC 3476

IN THE MATTER OF     s 66 of the Trustee Act 1956 and in the inherent jurisdiction of the Court

AND

IN THE MATTER OF     an application by COLIN WILLIAM BRIGHT and GEORGE MCCULLOCH JOHNSTON as executors of the estate of JEFFREY LLOYD REID, Deceased

BETWEEN  COLIN WILLIAM BRIGHT AND GEORGE MCCULLOCH JOHNSTON AS EXECUTORS OF THE ESTATE OF JEFFREY LLOYD REID

Applicants

Hearing:         On the papers

Counsel:         W M Patterson for applicants

Judgment:      29 November 2012

Reasons:        18 December 2012

REASONS FOR JUDGMENT OF LANG J

[on originating application for orders permitting distribution of estate]

This judgment was delivered by me on 18 December 2012 at 4 pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

COLIN WILLIAM BRIGHT AND GEORGE MCCULLOCH JOHNSTON AS EXECUTORS OF THE ESTATE OF JEFFREY LLOYD REID HC AK CIV-2012-404-7084 [29 November 2012]

[1]      The applicants in this proceeding are the executors of the estate of the late Jeffrey Lloyd Reid.   Mr Reid died at Auckland on or about 13 April 2009.   The applicants obtained a grant of probate out of this Court on 25 May 2009.

[2]      The applicants are now in a position to make a final distribution of the residue of Mr Reid’s estate.  In this proceeding they seek directions granting them leave to distribute the residuary estate without making any retention or provision in respect of potential liabilities that the estate might incur as a result of claims arising out of insurance and reinsurance arrangements underwritten by Mr Reid prior to his death.

[3]      On 29 November 2012, I made directions as sought.  I now give my reasons for doing so.

Background

[4]      Up  until  1998,  Mr  Reid  was  a  member  of  a  syndicate  that  underwrote insurance  and  reinsurance policies  issued  through the  Lloyd’s  Insurance Market (“Lloyd’s”). As a Lloyd’s “name”, Mr Reid stood to share in profits generated by his syndicate.  He was also responsible for his share of any losses the syndicate might incur as a result of claims made against insurance and reinsurance policies it had underwritten.

[5]      In Re Yorke (deceased)1, Lindsay J described the structure and nature of

Lloyd’s syndicates as follows:

From 1927 there was a central fund, a principal function of which has been to  assume  responsibility  for  claims  where  the  members  concerned  have failed to meet their liabilities. On becoming a name each individual signs a general undertaking to the effect that he and his personal representatives shall be bound by the rules of Lloyd’s. Each syndicate is, in a sense, an annual venture; it exists for a year of account but syndicates are accounted for under a three-year accounting system. A syndicate’s profit or loss is calculated only at the end of three years. However, at the end of any three years there are nowadays very likely still to be unsettled claims and the possibility of future ones.  In order to achieve finality in respect of any

1 Re Yorke (Deceased) (1997) All ER 907 at 911-912. This description was cited in full by the Supreme Court of New South Wales in Thompson v Gamble [2010] NSWSC 878 at [24] and Estate L H Hall [1999] NSWSC 1297 at [9].

accounting period of three years there is what is called ‘reinsurance to close’ (RITC). Members of a syndicate for a year which is to become a ‘closed year’ pay a premium to and assign their rights in relation to the ‘closed year’ to members of a syndicate for a later year who, in return, assume the liability of  the  members  for  the  ‘closed  year’ for  all  the  known  and  unknown liabilities attributable to the ‘closed year’. Until the year of account is closed by  way  of  RITC  it  remains  an  ‘open  year’,  but  once  closed  it  is  not reopened. By way of successive assignments by which syndicates for later years have year after year thus assumed responsibility for the risks of earlier years, any given syndicate which has become a reinsurer by way of RITC may find itself liable for late emerging or late-settled claims in respect of risks run many years before. In 1992, for example, there were still risks covered in respect of policies written before the 1939-45 war. The representative creditor, Mr G N Clarke, a past or present name, has the RITC for one of his years insured by a syndicate which included Mr Yorke; it is in that way in which he comes to be a possible future creditor of the estate.

If there is, in respect of a given year, a material degree of uncertainty about the appropriate figure to be fixed for its RITC, the syndicate’s accounts will remain open; the syndicate is then in ‘run-off’. The syndicate itself continues to pay claims and to debit its members until its present and future liabilities are felt to be sufficiently quantifiable to make a closure by RITC equitable as between  the  syndicate  for  the  closing  year  and  that  of  the  year  which proposes to take over the risk by becoming the reinsurer under the RITC.

Subject to the other reinsurance methods I shall mention, so long as any of his years remains open a name remains at risk of being required personally to pay in respect of policies, as does his estate. He may reinsure by taking out   a   personal   'stop-loss'   policy   and,   more   materially   to   present consideration, he may subscribe or have subscribed to an 'EPP', an estate protection plan. An EPP is designed to protect a name's estate against claims in respect of such of his years as are open at his death, namely such years as are open because their three years of account have not expired and years in respect of which RITC has not been achieved and which are therefore in

'run-off'. The indemnity afforded by the EPP will differ from case to case depending upon the terms of the policy, but EPPs have been found very

valuable as personal representatives of names who had had generally in the past felt able safely to distribute the estates in their charge knowing that

should there transpire to be some liability to policyholders in respect of open years they would have, from the EPP, a reliable total or specified indemnity. But at the material times the EPPs were themselves written at Lloyd's. The

reliability of recovery under EPPs has therefore itself been put in question.

A policyholder with a claim insured or reinsured at Lloyd's submits his claim to Lloyd's which then passes it on to the appropriate syndicate. The syndicate then meets it out of its reserves, including its RITC. If a syndicate has inadequate reserves to meet its claims before it is closed then its members will be required to inject cash by way of 'calls'. If a 'call' is not met, a syndicate's managing agent may sue the member or his estate for the 'call' plus interest or the central fund I mentioned earlier may discharge the debt on the member's behalf and, where appropriate, then sue the member or estate concerned.

A member ceases to be a member at his death. He does not participate in the syndicates   for   the   year   in   which   his   death   occurs.   His   personal

representatives, however, are bound by the general undertaking which the name made upon his joining Lloyd's. The general practice in the past has been that estates protected by an EPP have distributed without making any further provision in respect of open years but in cases where the estates have not had the protection of EPPs, the executors not uncommonly, I am told, have made retentions of the whole or part of their estates against the risks of liabilities in respect of open years.

[6]      In the early 1980s, Lloyd’s was unable to close many syndicate years of accounts due to  escalating asbestos, pollution and health claims.   In the period between 1988 and 1992 Lloyd’s syndicates also suffered large losses.   In order to meet this problem, Lloyd’s entered into a complex market restructuring under which it reinsured syndicates in respect of claims up to and including the 1992 year.  It did so  through  a  company  called  Equitas,  an  authorised  reinsurer  in  the  United

Kingdom.  Lindsay J described the process by which this was effected as follows:2

In the period 1988–1992 Lloyd's suffered enormous losses. There have been years of anxiety, uncertainty, difficulty and litigation leading, in late July

1996, to the circulation of the 'settlement offer document' giving details of the  'Lloyd's  reconstruction and renewal'. A reinsurance  group was to be

formed, Equitas, into which all liabilities for 1992 and earlier years were to be  reinsured.  By  late  August  1996  the  settlement  offer  had  become

unconditional and thereupon reinsurance of all Lloyd's 1992 and earlier non- life business was reinsured into Equitas for all names and the estates of

deceased names, whether or not they had accepted the settlement offer.

[7]      At inception, Equitas had £15 billion of assets from which to meet future claims arising out of events that occurred up to and including 1992.   Lloyd’s syndicates retained a contingent liability, however, in the event that Equitas was unable to meet valid claims arising during that period.

[8]      Lindsay J described the precise structure of the Equitas arrangement in the following passage:3

The mechanics of Equitas are such that the liability of the EPPs in relation to years up to 1992 have been compulsorily reinsured into Equitas. A 'finality bill' (so-called) has been sent to names and to the personal representatives of deceased names under which, upon payment of the sums specified, the years in question attain RITC through Equitas. The DTI has accepted that reinsurance into Equitas can be treated as an RITC and that upon payment of

2 Idem.

3 Above n 1 at 913. This passage was also cited by the Supreme Court of New South Wales in

Thompson v Gamble, above n 1 at [28] and Estate L H Hall, above n 1 at [10].

the relevant 'finality bill' the names and the executors concerned may cease to be members of Lloyd's.

Should Equitas fail, liability would revert to the relevant names. Policyholders, under the arrangements now made,  are unable to look to Lloyd's as they were in the past but rather would ultimately need to go directly against the particular names. Even should Equitas fail there are remedies or palliatives which may suffice to satisfy or head off the claims of policyholders before any individual name or any estate of a name might come to be sued. First, at the request of the DTI the Equitas arrangements contain a proportionate cover plan which would enable it to pay claims at a reduced rate rather than going into insolvent liquidation. So long as a policyholder feels he has been treated fairly in relation to all other claims, his recovery of a proportion only of his debt might suffice to head him off from pursuing the matter further. Secondly, Equitas would be able to propose a  scheme  under  s  425  of  the  Companies  Act  1985  under  which  a policyholder may have to be satisfied with less than a payment in full. In addition, some policyholders might have recourse to the deposits required by some regulatory authorities in other jurisdictions, which deposits might then be renewed by the then members of Lloyd's in order that Lloyd's could continue to do business in that jurisdiction, thus conferring on policyholders in such jurisdictions a possibility of recoupment out of deposits, possibly even beyond the extent of the deposit as it was at the time of failure. Beyond that there would be a strong commercial pressure upon Lloyd's, rather than to allow any Lloyd's policy to be dishonoured, for it to inject hitherto uncovenanted funds into Equitas to ensure that, even should Equitas at first have failed, its obligations would none the less be met. A policyholder still unsatisfied after the above measures had been exhausted and persistent in his wish to recover to the full might then embark on suits against the particular names within the particular syndicates covering his risk, a course fraught with difficulty on the part of the policyholder leading, to a persistent policyholder,  to  proceedings  which,  as  against  any  one  name,  when identified, would be likely to be only for a relatively small proportion of the policyholder's overall and thus far still unsatisfied claim.

[9]      Between 2006 and 2009, there were further developments in England and Europe.   During this period, Equitas reinsured the contingent liability of Lloyd’s names with an American company called National Indemnity Co Inc. (“National Indemnity”).  National Indemnity is a subsidiary of the Berkshire Hathaway group of companies.  This restructure was approved by Blackburne J on 7 July 2009.4    The restructure achieved finality for all Lloyd’s names by transferring their contingent legal liabilities under the original policies to a new subsidiary of Equitas.

[10]     The practical effect of the scheme approved by Blackburne J is to remove any contingent liability for Lloyd’s names under English law in respect of claims arising

4 In the Matter of the Names of Lloyd’s for the 1992 and Prior Years of Account represented by

Equitas Limited [2009] EWHC 1595 (Ch).

up to and including 1992.   This substantially reduces the risk that Lloyd’s names involved in pre-1993 syndicates will be the subject of claims in respect of events occurring up to and including 1992.5 The protection also extends to Lloyd’s names who reside in all jurisdictions of the European Economic Area (“EEA”). As a result, in  the  event  that  Equitas  was  to  become  insolvent,  no  policy  holder  with  an unsatisfied claim will be able to enforce that claim in any Court of the EEA against any Equitas name.

[11]     The protection provided by the restructuring does not, however, extend to Lloyd’s names who are resident in New Zealand.   As a consequence, Mr Reid’s estate retains a contingent liability in respect of claims arising up to and including

1992.  It is for this reason that the executors have to this point refrained from making a final distribution to the beneficiaries under his will.

The approach taken in England and Australia

[12]     The  executors  of  a  deceased  Lloyd’s  name  in  England  who  wished  to distribute the residue of that person’s estate could apply to the Chancery Division of the High Court for permission to distribute the estate notwithstanding the existence of contingent claims. This was first authorised by Lindsay J in Re Yorke.6

[13]     In Re Yorke, Lindsay J granted leave for the executors of the estate of a deceased Lloyd’s name to distribute the residuary estate without further retention or security to meet contingent claims.  Lindsay J analysed numerous cases dealing with the potential liability of executors in respect of contingent debts.  He stated the generally applicable law as follows:7

No case in the area decided in the last half century has been cited to me in the course of argument but the law and practice on the subject, so far as it can be derived from the cases, would seem to be as follows. First, a distribution made pursuant to a decree of the court affords a complete protection to the executor and the executor need not and indeed should not look, for example to a retention, for any protection beyond that. Secondly, it had long been the practice of the court to enable personal representatives to set  apart  ‘a  reasonable  sum  to  cover  any  liability  which  might  in  any

5 Thompson v Gamble, above n 1 at [33].

6 Re Yorke, above n 1.

7 At 921.

reasonable probability arise by reason of a future breach’ of covenants in a lease held by the deceased: Kindersley V-C in Dodson v Carpenter. These observations can comfortably co-exist if the case was that where an executor during his administration knew of no likelihood of any contingent debt maturing he could, by having an account taken into court of all known liabilities,  obtain  a  decree which  permitted  him to  distribute  to legatees without making any retention but which none the less gave him complete freedom from a devastavit (save in exceptional circumstances such, for example, as fraud, misrepresentation or concealment). Where that was done a creditor with a late maturing contingent debt would be able to recover, if at all, only against the legatees.

Conversely, if, during an administration some real possibility of some contingent debt maturing came to the executor’s notice, the executor could, either of his own volition or under the guidance of the court, retain a sum out of the estate against that risk or seek security direct from the prospective recipient  beneficiary.  If  there  was  a  retention  and  if  the  retention  was pursuant to a direction of the court, or if the security from the beneficiary was given under the direction of the court then, again, he would be protected against devastavit once the fund retained or the security so given was exhausted in application towards a risk against which it had been reserved. But if the executor failed to obtain the directions of the court in that he distributed with neither a retention, nor a security from a beneficiary, sanctioned by the court nor had obtained the sanction of the court upon the taking of an account and a decree then, in any such case, he remained at risk of personal liability.

Considerable importance was, it seems, attributed to the prior sanction of the court having been obtained to whatever course was then acted upon. That would explain why in Taylor v Taylor (1870) LR 10 Eq 477 Lord Romilly MR paid no attention in his judgment to the argument of Mr Jessel QC that the executors there (who, without obtaining any decree, had paid a legacy without making any retention against the possibility of a call on partly paid shares in the estate) had merely done that which, said Mr Jessel, had they sought the directions of the court, they would have been bound to do. Lord Romilly MR found the executors liable to the extent of the legacy paid. He does not give his reasons at any length but it was the case that the executors had neither obtained a decree for a distribution without a retention nor made a retention, still less a retention sanctioned by the court. In Re Blow [1914] 1

Ch 223 Cozens-Hardy MR assumed that an earlier distribution made without the authority of the court but which had the directions of the court been sought at the time, might well have then been given the sanction of the court, was none the less a devastavit. The cases provide no ground for a view, if the impugned executors had done only that which the court could have allowed at the time, that they should be later afforded the protection they would have had earlier if the acts had been so sanctioned.

In no case cited where the protection of the executors from risk against the maturing of a contingent liability into a present and payable one had been in issue has it been held that it was wrong of the executors to take the matter to court for its directions or was it held that to have done so had been so unnecessary that the executors should bear the costs of the application themselves. ...

...

... I hold that the authorities show that the sanction of the court can properly be given, even to cases where the provision for future creditors is not assuredly and in all possible events complete.

[14]     Lindsay  J  concluded  that  executors  are  not  completely protected  if  they distribute the assets of an estate, and are then faced with a claim arising out of the involvement of the deceased in a Lloyd’s syndicate.  For that reason, he was satisfied that an application to the Court was appropriate, and that the approval of the Court to the distribution of the estate could provide a measure of protection to executors.

[15]     The issue came before the New South Wales Supreme Court in 1999 in Estate L H Hall.8     In that case, Austin J held that the substantive law and procedural mechanisms  for granting approval  for executors’ distributions  were the same in Australia as those identified by Lindsay J in Re Yorke.

[16]     In Hall, the executors were in a position to complete the administration of the estate and distribute it to the beneficiaries. However, they did not wish to do so without the permission of the Court, due to the existence of potential contingency claims against the estate arising from the deceased’s underwriting activities. The executors believed that the interests of any claimant had been secured as a result of the Lloyd’s restructuring, but were hesitant to act without the Court’s authority.

[17]     Austin J made an order that the executors could distribute the estate of the deceased without making any retention or further provision with respect to any contract of insurance or reinsurance underwritten by the deceased in the course of his business  as  an  underwriting  member  of  Lloyd’s.    His  Honour  considered  the

possibility of a further claim against the estate to be remote, and held that it should

8 Estate L H Hall¸ above n 1.

not  prevent  the  executors  from  distributing  the  whole  of  the  estate  to  the beneficiaries entitled to receive it.

[18]     Austin  J  identified  several  cases  that  were  consistent  with  Lindsay  J’s reasoning and conclusions in Re Yorke.9     In Pinnock v Hull,10 for example, Molesworth J said it had become established that executors will be protected when they distribute assets under the direction of the court if they give the court all the information they possess as to the potential liabilities of the estate.  In Re GB Nathan

& Co Pty Ltd (in liq),11 McLelland J noted that, generally speaking, if the court gave

a direction to an official administrator who had fully and fairly disclosed the material facts to the court, the official administrator could act in accordance with the direction without incurring any personal liability to any of the persons in whose interests the administration was being conducted. However, McLelland J said that such protection would not affect the rights of creditors and beneficiaries as between themselves.

[19]     Applying the principles confirmed in Re Yorke, Austin J said that executors who sought directions from the Court must provide evidence confirming that:

(a)      no syndicate in which the deceased participated had been left outside the Equitas arrangements;

(b)the reinsurance arrangement so far as it affected the deceased was still in force;

(c)      the two Equitas companies that had been granted authorisation still had the benefit of that authorisation, and there was no basis for apprehending it would be withdrawn.

[20]     More recently, the New South Wales Supreme Court took a similar stance in

Thompson v Gamble.12     In that case, the executors of a deceased Lloyd’s name

applied  for  directions  permitting  them  to  distribute  the  residuary  estate  of  the

9 Re Grose (1949) SASR 55; Pinnock v Hull (1876) 2 VLR (E) 18; Chisholm v Gilcrest (1902) 2 SR (NSW) Eq 84; and Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674.

10 Pinnock v Hull, ibid.

11 Re GB Nathan & Co Pty Ltd (in liq), above n 9.

12 Thompson v Gamble, above n 1.

deceased “without making any retention, or provision in respect of any contract of insurance, or reinsurance, underwritten by the deceased in the course of his business as an underwriting member of Lloyd’s of London”.

[21]     Slattery J referred with approval to the three factors identified in Hall.13     In making the orders sought, he said:14

There is, of course, a remote possibility that, if the overall reinsurance arrangements fail, in consequence of some as yet unrevealed catastrophe that a further claim may be made against the estate. I respectfully agree with Lindsay J’s assessments in 1997, and Austin J’s assessments in 1999, on the basis of the events since that time, that such a possibility is remote. It is clearly now, 10 years after Austin J’s assessment in 1999, even more remote. It should not prevent the trustees from distributing the whole of the estate to the beneficiaries who are entitled to receive it. And in those circumstances, it is  reasonable  for  the  trustees  to  seek  the  protection  of  the  advice  and direction of this Court similar to that given by Lindsay and Austin JJ.

[22]     Counsel for the executors in the present case is not aware of any case in New Zealand, however, in which the executors of a deceased Lloyd’s name have sought the approval of the Court to distribute the residuary estate  without making any retention for possible claims.

Steps taken by the executors

[23]     The executors have taken several steps to ensure that the prospect of any contingent claim arising is remote.  First, they have obtained confirmation that Mr Reid’s syndicate remains subject to reinsurance by Equitas.   Secondly, they have obtained updated financial reports in respect of Equitas.   These show that Equitas remains in a healthy financial position.   Thirdly, they have obtained confirmation that they are not exposed to any liability in respect of claims arising after 1992 because  Lloyd’s  business  in  respect  of  that  period  has  now  been  closed  by reinsurance to close.

[24]     In addition, the executors have obtained an indemnity from the beneficiaries to whom the residuary estate is to be distributed.  This includes an undertaking from

13 Ibid, at [30].

14 Ibid, at [47].

all beneficiaries that they will refund the amounts distributed to them in the event that a claim is made against the estate.

[25]     Finally, the executors have re-advertised for any claims against the estate and none have been received.

Decision

[26]     I consider the courts in this country should follow the approach taken in Re Yorke, Hall and Thompson v Gamble. The prospect of any future claims in respect of the period leading up to and including 1992 is now extremely remote.  As noted in Thompson v Gamble, the passage of time since 1992 means that such claims are now inherently unlikely.  Secondly, it would require Equitas and National Insurance to be unable to meet those claims.   This, too, appears an unlikely prospect given the current financial position of Equitas.

[27]     Thirdly, a claim against Mr Reid’s estate would only occur in the event that the claimant was prepared to pursue those who originally underwrote the policy under  which  the  claim  is  being  brought.    Lloyd’s  Member  Services  Ltd  has confirmed  that,  in  most  cases  where  substantial  policies  were  underwritten  at Lloyd’s, the policies were divided into different layers with parts of each layer underwritten  by many  different  syndicates,  as  well  as  by the  company  market. Individual members generally only held a very small share in each syndicate. Furthermore, each syndicate was likely to only have a small share of the total risk. As a consequence, individual members are likely to be liable in respect of a very small proportion of any claim.

[28]     In addition, the executors have protected themselves so far as possible in the present case by obtaining the indemnity from the beneficiaries and advertising without result for further creditors.

[29]     I therefore consider it appropriate to make the orders the executors seek.

Result

[30]     For these reasons I have granted leave to the executors to distribute Mr Reid’s residuary estate without making any retention or provision in respect of any contingent liability the estate might have as a result of Mr Reid’s activities as a Lloyd’s name.

[31]   I am grateful to counsel for the applicant for the detailed and helpful memorandum filed in support of the application.

Lang J

Solicitors:

Patterson Hopkins, Auckland