Hih Casuality and General Insurance (N.Z.) Limited (In Liquidation) HC Auckland CIV 2007-404-3775

[2008] NZHC 2299

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2007-404-3775

IN THE MATTER OF     s 284 of the Companies Act 1993

BETWEEN  HIH CASUALTY AND GENERAL INSURANCE (N.Z.) LIMITED (IN LIQUIDATION)

Plaintiff

ANDKERRYN MARK DOWNEY AND WILLIAM GUY BLACK AS LIQUIDATORS OF HIH CASUALTY AND GENERAL INSURANCE (N.Z.) LIMITED (IN LIQUIDATION) Defendant

Hearing:         29 February 2008

Appearances: M V Robinson for liquidators

M Ring QC as amicus curiae

Judgment:      30 April 2008 at 4 pm

JUDGMENT OF ASSOCIATE JUDGE ROBINSON

This judgment was delivered by the Ccurt on 30 April 2008 at 4 pm pursuant to rule 540(4) of the High Court rules.

RegistrarDeputyRegistrar

Solicitors:           Simpson Grierson, Private Bag 92518, Auckland

M Ring QC, PO Box 105521, Auckland

HIH CASUALTY AND GENERAL INSURANCE (N.Z.) LIMITED (IN LIQUIDATION) V KERRYN MARK DOWNEY AND WILLIAM GUY BLACK AS LIQUIDATORS OF HIH CASUALTY AND GENERAL INSURANCE (N.Z.) LIMITED (IN LIQUIDATION) HC AK CIV 2007-404-3775  30 April 2008

Introduction

[1]      The applicants are the liquidators of HIH Casualty and General Insurance (NZ) Ltd (In Liquidation) (C&G). They apply to this Court for directions as to the date for the calculation of interest on the amounts to be paid to creditors of C&G whose claims arise out of insurance policies with C&G. Under those policies C&G is liable to indemnify the creditors in respect of the losses specified in those policies.

[2]      The application for directions is brought under s 284(1)(a) Companies Act

1993. The authority to pay interest to creditors on debts admitted by the liquidators is conferred by s 311(2) Companies Act 1993.

Background

[3]      C&G  was  the  main  New  Zealand  trading  vehicle  of  the  HIH  Insurance Group, the ultimate holding company of which was an Australian company HIH Insurance Limited (In Liquidation). C&G was itself trading satisfactorily. The financial collapse of the HIH Group in Australia caused the liquidation of C&G. The liquidators of C&G were appointed interim liquidators on 6 June 2001 and were appointed liquidators on 19 July 2001.

[4]      At the date of its liquidation, C&G remained liable to policy holders in respect of a number of professional indemnity “PI” policies. These policies were written on a “claims made” basis. This means the insurer writing the policy for that particular year will only be liable in respect of claims notified during the currency of that policy regardless of when the event or circumstances giving rise to the event actually occurred. Due to their complex nature, some PI claims take several years to resolve. C&G also remained liable under some public liability “PL” policies. C&G remains liable to indemnify all insured under these policies in respect of claims arising during the currency of the policies but the loss was not notified until after the end of the policy period.

[5]      C&G is a solvent administration in that all its creditors have been paid in full. There  is  a  surplus  including  a  $35,000,000  reserve  set  aside  pursuant  to  the directions of this Court made on 17 December 2003.

[6]      Sixty-three of the creditors of C&G are policy holders where liability for payment did not occur until some time after the date of liquidation. They have all been paid in full, together with interest, on their respective claims from the date of liability until the date of payment.

[7]      The problem faced by the liquidators arises out of s 311(2) Companies Act

1993. That section provides: -

(2)If any surplus assets remain after the payment of all admitted claims, interest shall be paid at the prescribed rate on those claims from the date of commencement of the liquidation to the date on which each claim is paid, and if the amount of the surplus assets is insufficient to pay interest in full on all claims, payment shall abate rateably among all claims.

[8]      If the strict wording of the section applies, then the sixty-three creditors will be entitled not only to interest on money owed to them from the date of liability, but also interest from the date of the liquidation. This occurs notwithstanding that many of these creditors had no claim against C&G until some time after the date of liquidation.

[9]      If the policy holders are entitled to interest on the amounts paid to them under their policies from the date of liquidation, this results in an additional payment of

$625,151.44. Some policy holders would receive additional payments in excess of

$100,000.

Case for the liquidators

[10]     It is submitted on behalf of the liquidators, that such a result is anomalous because:

a)        The rationale for paying interest is to compensate claimants for the time they do not have the use of their money. The policy holders

concerned were not entitled to be paid any money until their claims were accepted and quantified which was sometime after the date of liquidation;

b)A policy holder would not ordinarily receive interest for a period prior to  the  date  when  his  or  her  claim  was  quantified  and  accepted. Payment of interest from the earlier date would operate as a windfall simply as a result of C&G’s liquidation.

[11]     Furthermore, by paying interest from the date of liquidation until the date when liability accrues under each individual policy, not only do the policy holders receive a windfall but such a windfall is at the expense of the shareholders of C&G and their creditors.

[12]     It was pointed out on behalf of the liquidators that prior to the enactment of the Companies Act 1993, there was no automatic right to interest on debts provable in a liquidation unless the right to interest was conferred by a statute, a contract or as a result of an order for interest to be paid on a judgment debt. The court had no power to award interest to simple contract creditors in a liquidation. See Re: Stewart

Timber & Hardware  (Whangarei) Ltd (In Liquidation) (1991) 5 NZLR CLC 67,137.

[13]     In support of the submission that s 311(2) should be read so as to limit interest payable to creditors to the date commencing on the date when liability is established, it was submitted that in the circumstances of this case, to apply the section on the basis that interest was to run from the date of liquidation would be to provide a windfall to the creditors concerned. This was clearly contrary to the intention of the legislature. The whole scheme of part 16 of the Companies Act 1993 dealing with liquidations is that liquidators are to realise the companies assets; pay

its creditors in accordance with the relevant statutory provisions; and return any surplus to the company’s shareholders.

[14]     It was also emphasised, that interest is the return or compensation for the use or retention of a sum of money belonging or owed to another see Riches v Westminster Bank Ltd  [1947] AC 390. It was further submitted that the statutory

purpose of s 311(2) is to compensate creditors in a solvent liquidation for the time that they are out of their money. In the ordinary course that would be from the date of liquidation. However in the unusual circumstances of this case, where the policy holders did not become creditors until a later date, it was submitted to be contrary to the purpose of s 311(2) to pay the policy holders, interest from the time of

liquidation until the date on which payment of their principle claim actually fell due.

Submissions by counsel appointed as amicus curiae

[15]     In support of his claim that the sixty-three creditors should be paid interest from the date of liquidation, counsel appointed as amicus curiae emphasised that such direction would be in accordance with the plain meaning of the words in s 311(2). It was emphasised that the wording of s 311(2) is unequivocal and there is no room for ambiguity. It was further emphasised that there is nothing in the text of s

311(2) which would justify any other conclusion.

[16]     It was further pointed out that had  Parliament  wished  to  restrict  interest payable on debts in liquidation to periods commencing from the date under which liability for payment of such debt arose then Parliament could easily have used words similar to those in s 189(1) Insolvency Act 1986 (UK) which states:

Any surplus remaining after the payment of the debts proved in the winding up shall, before being applied for any other purpose, be applied in paying interest on those debts in respect of the periods during which they have been outstanding since the company went into liquidation.

Decision

[17] The starting point in statutory interpretation is s 5(1) of the Interpretation Act

1999. That section states:

5 Ascertaining meaning of legislation

(1)the meaning of an enactment must be ascertained from its text and in the light of its purpose.

[18]     This section directs that the literal meaning of the words of a statute is not the end of the inquiry. Instead what is required is an examination of both text and purpose. Therefore, while the words of s 311(2) are indeed unambiguous, the text alone of the section is not the sole point of examination. As Fogarty J said in Talley v Fowler HC WN CIV 2005-485-117 18 July 2005 with regard to Counsel’s submissions for a literal interpretation.

[48]…His argument was old-fashioned in the sense that he was contending for a literal interpretation whether it advanced the purpose of the statute or not. Although he cited s 5 of the Interpretation Act 1999 he also relied on the traditional proposition that if the words of a statutory provision are plain and unambiguous the Court is bound to construe them in an ordinary sense. He argued that it is only if the language of a statute is ambiguous that the policy may be taken into account.

[49] The notion that the meaning of a statutory provision can be plain and unambiguous without having taken into account the purpose of the text is a dubious proposition considered linguistically. But in any event, if it was ever law, it is not now…

[51] Section 5 of the Interpretation Act does not enable the Court to run roughshod over the text of a provision. The text still must be capable of bearing the meaning justified by its purpose…

[19]     It is necessary therefore to determine the purpose of s 311(2). It is in the light of that purpose and from the text that the meaning of s 311(2) is to be ascertained.

[20]     A useful starting point is the purpose of the Companies Act and in particular part 16. The purpose of the Companies Act and part 16, as it relates to insolvency, is set out in the preamble. It is:

(e) To provide straightforward and fair procedures for realising and distributing the assets of insolvent companies

[21]     This,  in  itself,  does  not  provide  any  determinative  guidance,  but  does illustrate that Parliament intended that liquidation procedures be fair.

[22]     The history of the drafting of s 311(2) illustrates a similar intention. Before the passing of the Companies Act 1993 creditors to liquidated companies were not

automatically entitled to receive interest on their debts in the absence of either an argument to pay interest on authorisation by statute or a judgment awarding interest, see Re Stewart Timber & Hardware (Whangarei) Ltd (in liq) and Stewart Timber & Hardware Ltd (in liq) (1991) 5 NZCLC 67, 137.

[23]     To remedy this shortfall in the common law the Law Commission included in their draft Companies Bill in 1987 a new clause, section 238. This clause stated:

238. Ascertainment of amount of interest – If there is a surplus after payment in full of all admitted claims, interest on a claim accrues as from the date of the commencement of the liquidation at a rate not exceeding the prescribed rate.

The commentary on this section read:

At present, creditors are not entitled to interest on their claims after the commencement of winding up. Section 238 changes this and permits interest at a prescribed rate. This places creditors in an equivalent position to judgement creditors.

That section in the draft Companies Act became clause 274 of the Companies Bill, and evolved into what is now s 311(2) of the Companies Act 1993.

[24]     For present purposes the slight changes in the wording between the initial draft and the enacted section are not material. There is certainly nothing to assume that as the bill passed through Parliament, a different intent than that of the Law Commission was grafted onto the section. Consequently the intent behind the section is to place creditors in an equivalent position as judgment creditors.

[25]     Thus Parliament’s intent in enacting s 311(2) was to create fair procedures that place creditors in an equivalent position to judgment creditors by awarding them interest on their debts.

[26]     This coincides with the rationale behind the award of interest. This rationale was stated by Lord Wright in Riches v Westminster Bank Ltd [1947] AC 390, 400 as follows: -

The essence of interest is that it is a payment which becomes due because the creditor has not had his money at the due date. It may be regarded either as representing the profit he might have made if he had had the use of the money, or conversely the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation.

[27]     Therefore interest is essentially a form of compensation for the deprivation of profit from or use of money that is due to the creditor. There is nothing in the history or  wording of  s  311(2)  which  suggests that  by enacting the  section  Parliament intended to do anything other than continue this long standing policy. There is certainly nothing to suggest that the payment of interest under s 311(2) was intended to provide more than due compensation for the deprivation of money. Instead it is more likely that this is a circumstance whereby “the draftsman realised perfectly well that he was drawing this Act against the background of the law as it stood at the time”, R v Chief National Insurance Commissioner, ex parte Connor [1981] QB 758.

[28]     It follows therefore that an interpretation of s 311(2) which focused on the apparently plain and literal meaning of the words to the exclusion of all else would be at odds with what can be deduced regarding the intention of Parliament and the long  standing  policy  behind  the  award  of  interest.  There  must  be  an  implied limitation read into the subsection.

[29]     There is nothing improper with the Court reading implied limitations into the wording of a statute. As Cooke P in R v Salmond [1992] 3 NZLR 8, 13 said:

This Court has emphasised the importance of a practical and realistic interpretation of Acts of Parliament. In cases of ambiguity or hiatus they should be interpreted so as to be made to work. Gaps may be filled to cover problems not foreseen when the legislation was enacted, provided that the policy-making function is not usurped by the Courts.

[30]     And as Lord Denning in Magor and St Mellons Rural District Council v

Newport Corp [1951] 2 All ER 839, 841 said:

Wherever a statute comes up for consideration it must be remembered that it is not within human powers to foresee the manifold sets of facts which may

arise, and, even if it were, it is not possible to provide for them in terms free from all ambiguity. It would certainly save the Judges trouble if Acts of Parliament were drafted with divine prescience and perfect clarity. In the absence of it, when a defect appears a Judge cannot simply fold his hands and blame the draftsman. He must set to work on the constructive task of finding the intention of Parliament, and he must do this not only from the language of the statute, but also from a consideration of the mischief which it was passed to remedy, and then he must supplement the written words so as to give “force and life” to the intention of the legislature.

[31]     Of course, the interpretation of statutes by reading in implied limitations must be done with restraint. As Lord Diplock said in Jones v Wrotham Park Settled Estates Ltd [1980] AC 74, 105, qualifications can be read into a statute to avoid unworkability or absurdity or the frustration of Parliament’s purpose, but in doing so the following conditions must be met:

First,  it  [must  be]  possible  to  determine  from  a  consideration  of  the provisions of the Act read as a whole what the mischief was that it was the purpose of the Act to remedy; secondly it [must] be apparent that the draftsmen and Parliament had by inadvertence overlooked, and so omitted to deal with, an eventuality that required to be dealt with if the purpose of the Act was to be achieved, and thirdly it [must be] possible to  state  with certainty what were the additional words that would have been inserted by the draftsmen and approved by Parliament had their attention been drawn to the omission before the Bill passed into law.

[32]     Therefore, in this case, following from Lord Diplock’s criteria, the mischief that s 311(2) intends to remedy is allowing creditors to receive interest in a situation where they warrant it, but would not have otherwise received it. Secondly, it is abundantly clear that the draftsman overlooked the situation that presently concerns the Court. It simply strains belief to suggest that had a situation like the present been brought to the attention of the draftsman, they would have replied “yes, our clear intention is to provide a windfall”. Thirdly, it can be stated with certainty that the additional words that would have been inserted would have made it clear that interest on those debts occurring after liquidation commences was from the date of liability and not from the date of liquidation. Furthermore, in reading in such a limitation no violence is done to the section and the Court is not, in the words of Fogarty J, running roughshod over the text of the provision. On the contrary, by doing so the true intention of Parliament is achieved. The end result is fair and just, the creditors

are treated equally and it will not adversely affect any other party who seeks to acquire the appropriate amount of interest from this section in future.

[33]     For the above reasons therefore I conclude that s 311(2) must be read with the limitation. Thus in respect of those debts occurring after the date of liquidation, interest is the prescribed rate calculated from the date of liability and not the date of

liquidation.

Associate Judge Robinson