FEDERAL COURT OF AUSTRALIA Australian Prudential Regulation Authority v ACN 000 007 492 (in Liq) [2011] FCA 353 Citation: Australian Prudential Regulation Authority v ACN 000 007 492 (in Liq) [2011] FCA 353 Parties: AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY v ACN 000 007 492 (IN LIQUIDATION) File number: NSD 574 of 2010 Judge: PERRAM J Date of judgment: 13 April 2011 Catchwords: INSURANCE – General insurer – winding up order – application for order giving effect to course of action in judicial manager's report – s 62ZI Insurance Act 1973 (Cth) – recommendation to wind up – order made under s 62ZJ Insurance Act 1973 (Cth) – Corporations Act 2001 (Cth) to govern winding up Legislation: Corporations Act 2001 (Cth) ss 9, 459A, 459P, 513A, 588FE, Ch 5, Prt 5.6, Prt 5.7B Financial Sector Legislation Amendment (Prudential Refinements and Other Measures) Act 2010 (Cth) Sch 2, item 6 Insurance Act 1973 (Cth) ss 3, 62L, 62M, 62ZI, 62ZJ, 62ZP, 62ZZC Cases cited: Australian Prudential Regulation Authority v ACN 000 007 492 (Under Judicial Management) (Subject to a Deed of Company Arrangement) [2010] FCA 912 cited Insurance Commissioner v Associated Dominions Assurance Society Pty Ltd (1953) 89 CLR 78 cited Kartinyeri v Commonwealth (1998) 195 CLR 337 cited Smith as Judicial Manager of Australian Family Assurance Limited v Australian Family Assurance Limited [2009] FCA 1449 cited F A R Bennion Bennion on Statutory Interpretation (5th Ed, 2008) Date of hearing: 25 October 2010 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 19 Solicitor for the Plaintiff: Mr L Weate for APRA Counsel for the Defendant: Mr N J Owens Solicitor for the Defendant: Blake Dawson IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 574 of 2010 BETWEEN: AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY Plaintiff AND: ACN 000 007 492 (IN LIQUIDATION) Defendant JUDGE: PERRAM J DATE OF ORDER: 25 October 2010 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The first respondent be wound up. 2. Murray Smith of McGrathNicol be, and is hereby appointed as, the liquidator of the first respondent pursuant to s 472 of the Corporations Act 2001 (Cth). THE COURT DIRECTS: 3. Pursuant to s 62S(1)(a) of the Insurance Act 1973 (Cth), the applicant receive the sum of $115,739.83 for his remuneration and allowances in connection with his role as judicial manager of the first respondent for the period 18 June 2010 to 1 October 2010. 4. Pursuant to s 62S(1)(b) of the Insurance Act 1973 (Cth), the first respondent pay the remuneration and allowances of the applicant as referred to in paragraph 3 (as well as the costs and expenses of this proceeding). 5. Other than order 4, there be no order as to the costs of this proceeding. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 574 of 2010 BETWEEN: AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY Plaintiff AND: ACN 000 007 492 (IN LIQUIDATION) Defendant JUDGE: PERRAM J DATE OF ORDER: 13 APRIL 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Order 1 of the orders made on 25 October 2010 be varied to read "The first respondent be wound up under s 459P of the Corporations Act 2001." Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 574 of 2010 BETWEEN: AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY Plaintiff AND: ACN 000 007 492 (IN LIQUIDATION) Defendant JUDGE: PERRAM J DATE: 13 APRIL 2011 PLACE: SYDNEY REASONS FOR JUDGMENT 1 The question in this case is whether the defendant insurer should be wound up. It was placed under judicial management on 18 June 2010: Australian Prudential Regulation Authority v ACN 000 007 492 (Under Judicial Management) (Subject to a Deed of Company Arrangement) [2010] FCA 912. Section 62ZI(1) of the Insurance Act 1973 (Cth) (the "Insurance Act") required the judicial manager to file a report with the Federal Court "[a]s soon as possible after starting to manage a general insurer". The report was required to recommend from the list of possible courses of action set out in s 62ZI(2) the course the judicial manager considered most advantageous to the general interests of policyholders. The possible courses of action listed in s 62ZI(2) are: (a) to transfer the business of the general insurer to another general insurer under Division 3A of Part III (whether the policies issued by the general insurer continue for the original sums insured, with the addition of bonuses that attach to the policies, or for reduced amounts); (aa) to transfer the business, or part of the business, of the company to another company under section 25 of the Financial Sector (Business Transfer and Group Restructure) Act 1999; (b) to allow the general insurer to carry on its business after a period of judicial management (whether the policies issued by the general insurer continue for the original sums insured, with the addition of bonuses that attach to the policies, or for reduced amounts); (c) to do one or more of the acts described in subsection 62Z(1) (which is about various measures to recapitalise the general insurer), if that subsection applies to the general insurer; (d) to wind up the general insurer; (e) to take such other course of action as the judicial manager considers desirable, which may, for example, be a course of action that includes either or both of the following: (i) altering the constitution, rules or other arrangements for governance of the general insurer, if it is registered under the Corporations Act 2001, to enable or facilitate the performance of the judicial manager's functions and duties, the exercise of the judicial manager's powers or a course of action described in paragraph (a), (b), (c) or (d); (ii) one or more of the courses of action described in paragraphs (a), (b), (c) and (d). 2 In compliance with the duty to file his report the judicial manager, on 29 September 2010, did so. The report was thorough and detailed. The judicial manager concluded that the insurer was insolvent on both a balance sheet and cashflow basis. The affairs of the insurer were of some complexity but the judicial manager assessed its balance sheet on three different scenarios: base, optimistic and pessimistic. The differences between these scenarios largely turned on different outcomes in two separate claims on the insurer arising out of the crash of a Cessna 206 aircraft on 20 October 1999 together with a separate issue about the valuation of the insurer's liability to capital gains tax on the sale of certain properties. On the pessimistic scenario the insurer had a balance sheet deficit of $2,264,693. Even on the optimistic scenario, that the two claims arising from the Cessna accident were withdrawn and the capital gains tax liability brought to account for the modest sum of $50,000, the insurer still had a balance sheet deficit of $379,732. 3 On a cashflow basis the position was just as bad. Out of available cash of $950,855 the insurer was presented with immediate claims in excess of that amount. Unsurprisingly, in those circumstances the judicial manager recommended that the insurer be wound up. He noted that it had been in run-off since 2002 and that, in a sense, winding up was the natural end point of that process. 4 On 21 October 2010 the judicial manager moved this Court for orders to wind up the insurer, to appoint him as its liquidator, to approve his remuneration as judicial manager of $115,739.83 and to direct the insurer to pay the judicial manager's remuneration and allowances. That application came before me for hearing on 25 October 2010 and at that time I made orders to that affect. These are my reasons for taking that course. 5 Only two substantive issues arise. The first is whether this is a case for winding up or some other remedy. In Insurance Commissioner v Associated Dominions Assurance Society Pty Ltd (1953) 89 CLR 78 at 91 Fullager J explained the general relationship between judicial management and winding up in these terms: … If any one of those grounds is established, the making of either of the orders authorized by s 59 is still a matter of discretion. No rule should, or can, be laid down. The case must depend on all the circumstances. But, so far as grounds (a) and (b) in s 55 are concerned – and these are the most important for the purposes of the present case – it may be said that, generally speaking, if there appears to be no reasonable prospect of the position being remedied and the company's business being placed in the near future on a sound basis, a winding-up order should be made. If it appears likely to be a case of mere temporary embarrassment, no order should be made. If the position is in doubt, and the Court thinks that, although a serious position is disclosed, further investigation and experiment would be desirable – perhaps that the company ought to be given a chance to see what it can do – then an order for judicial management of the company may well be thought appropriate. (emphasis added) 6 His Honour was there speaking of the situation where the Court is confronted with the initial choice between appointing a judicial manager or a liquidator. In the present case the issue is slightly different and is concerned with whether a judicial management should be transformed into a winding up. That, of course, occurs as part of an order made following on the receipt by this Court of the judicial manager's report. That power is informed by the requirement of s 62ZJ(1)(b) that the course to be adopted should be the one which the Court "considers in the circumstances to be most advantageous to the general interest of the policyholders of the general insurer concerned, while promoting financial system stability in Australia". In the present case the affairs of this insurer are sufficiently modest that one can safely proceed on the assumption that any orders made will have no systemic effects. The language of s 62ZJ shows, however, that the discretion which arises on the implementation of any particular reconstruction proposal may proceed by reference to broader considerations than those which arise on the appointment of a judicial manager in the first place. The power of initial appointment is conferred by ss 62L and 62M and, unlike s 62ZJ(1)(b), neither makes systemic stability a mandatory consideration. 7 In the present case, the continuation of the insurer's business is clearly not in the interests of any party and certainly not in those of the policyholders. That is a sufficient reason to justify the making of a winding up order. I do not need to decide, therefore, whether the power of the Minister, which arises on the making of a winding up order by this Court, to declare that the Financial Claims Scheme erected by Part VC of the Insurance Act applies to the insurer in question, provides an independent reason for reaching the same conclusion. My present thinking is that unless there were evidence that the Minister intended to declare the application of the scheme to the particular insurer on the making of a winding up order (or for that matter, on the making of an order for judicial management) then it would not be relevant to the discretion. In this case, and probably in most cases, this question is unlikely to be of great practical moment. 8 Granted that it is appropriate to order that the insurer be wound up it is then necessary to determine whether the winding up is to occur under the auspices of the Insurance Act or the Corporations Act 2001 (Cth) (the "Corporations Act"). It is clear that the Corporations Act applies to general insurers. For example, Division 2 of Part VB of the Insurance Act is headed "Extra Provisions relating to external administration of general insurers" and its first provision, s 62ZP, provides that it applies "in addition to Chapter 5 of the Corporations Act 2001". Chapter 5, of course, deals with various forms of external administration such as receivership, administration and winding up. On no view, then, is the Insurance Act a code for the corporate regulation of companies which happen to be general insurers. 9 The present difficulty appears to arise from the terms of s 62ZJ(1) and s 62ZI(2)(d). The former provision empowers the Federal Court to make orders giving affect to proposals contained in the judicial manager's report and the latter explicitly includes in the range of potential proposals which might be put forward for the Court's consideration the making of a winding up order. Apart from those provisions there is no explicit statement in the Insurance Act empowering the Court to make a winding up order following receipt of a judicial manager's report. 10 In Smith as Judicial Manager of Australian Family Assurance Limited v Australian Family Assurance Limited [2009] FCA 1449 Lindgren J was of the view that a winding up order made by the Court as part of the process consequent upon receipt of a judicial manager's report was an order made under the Insurance Act but that it was "perhaps … implicit that the Corporations Act's winding up regime applies" (at [27]). As the Insurance Act then stood I can readily see how his Honour arrived at that conclusion and, with respect, it is one with which I agree. It does, however, give rise to practical problems in operation. An example of one of these is afforded by Part 5.7B of the Corporations Act. A number of its provisions deal with voidable transactions. There will be such a transaction if, at least, it occurred within a specified period of a date known as the "relation-back day": s 588FE. That day is defined in s 9 to be the day upon which a winding up is taken to have begun "because of Division 1A of Part 5.6" but that division relevantly only refers to a winding up under ss 233, 459A, 459B and 461 of the Corporations Act: s 513A. Consequently, it would appear – if matters rested there – that there is no relation-back day for a winding up under the Insurance Act. 11 Following Lindgren J's decision in Smith, however, the Insurance Act was amended by Schedule 2 of the Financial Sector Legislation Amendment (Prudential Refinements and Other Measures) Act 2010 (Cth) (the "Amending Act"). The relevant items of Sch 2 commenced on 27 July 2010. Item 6 inserted into the definition provision of the Insurance Act – s 3(1) – a definition, formerly lacking, of "wind up" as meaning "in relation to a company … [to] wind up the company in accordance with the Corporations Act 2001". There are now also other textual indications that a winding up ordered following a judicial management is a winding up under the Corporations Act. For example, the power of the Minister to declare that the Financial Claims Scheme is applicable to a particular insurer arises by force of s 62ZZC(1)(a)(ii) only if "an external administrator for the general insurer has been appointed under Chapter 5 of the Corporations Act 2001" (this provision was also inserted on 27 July 2010 by the Amending Act). If it were correct, therefore, that a winding up ordered in the present circumstances is governed by the Insurance Act rather than the Corporations Act this would have the effect, because of s 62ZZC(1)(c)(ii), that the policy holders of such an insurer would not be able to access the scheme, since the insurer would not have been wound up under the Corporations Act. These two matters are sufficient to make clear that the new definition of "wind up" causes a winding up of the present kind to occur under the Corporations Act. 12 That, however, is not the end of the matter. The Corporations Act makes no provision for the winding up of a company in insolvency following an order by the Federal Court giving effect to a judicial manager's report. The various ways in which a corporation may be wound up in insolvency are set out in Chapter 5 of the Corporations Act but they do not include the situation which presently arises. Section 459A provides: 459A Order that insolvent company be wound up in insolvency On an application under section 459P, the Court may order that an insolvent company be wound up in insolvency. 13 Section 459P of the Corporations Act provides: 459P Who may apply for order under section 459A (1) Any one or more of the following may apply to the Court for a company to be wound up in insolvency: (a) the company; (b) a creditor (even if the creditor is a secured creditor or is only a contingent or prospective creditor); (c) a contributory; (d) a director; (e) a liquidator or provisional liquidator of the company; (f) ASIC; (g) a prescribed agency. (2) An application by any of the following, or by persons including any of the following, may only be made with the leave of the Court: (a) a person who is a creditor only because of a contingent or prospective debt; (b) a contributory; (c) a director; (d) ASIC. (3) The Court may give leave if satisfied that there is a prima facie case that the company is insolvent, but not otherwise. (4) The Court may give leave subject to conditions. (5) Except as permitted by this section, a person cannot apply for a company to be wound up in insolvency. 14 These provisions cannot be directly reconciled with the requirement of the Insurance Act that the winding up occur under the Corporations Act. The contradiction arises this way: section 62ZI(6)(b) requires the judicial manager to apply to the Federal Court for an order to give effect to a recommendation in his report. Necessarily, therefore, the applicant for any winding up order will be the judicial manager. If a winding up is contemplated by the judicial manager's report, s 62ZI(6)(b) requires the judicial manager to apply for that order and plainly the Court has power to accede to that application. But s 459P(5) expressly prohibits a winding up application by any person not appearing in the list in s 459P(1) or (2) and the judicial manager does not appear in either. It follows that s 62ZI(6)(b) requires what s 459P(5) prohibits. 15 How should this be resolved? Following the addition of the new definition of "wind up" in the present form of the Insurance Act, that Act explicitly contemplates that the winding up will occur under the Corporations Act even though that Act expressly prohibits the required applicant (the judicial manager) from making the application. It is true that the Amendment Act makes no express amendments to the Corporations Act. This is not, therefore, an example of the practice of indirect express amendment: cf Kartinyeri v Commonwealth (1998) 195 CLR 337 at 353 [9] per Brennan CJ and McHugh J. Rather, it is an instance of what F A R Bennion calls "implied amendment": Bennion on Statutory Interpretation (5th Ed, 2008), p 293. This occurs, according to Mr Bennion, if: … a later enactment does not expressly amend (whether textually or indirectly) an earlier enactment which it has power to override, but the provisions of the later enactment are inconsistent with those of the earlier, the later by implication amends the earlier so far as is necessary to remove the inconsistency between them. 16 Here the definition of "wind up" in s 3 of the Insurance Act combined with ss 62ZJ(1) and 62ZI(2)(d) result in the winding up order made under s 62ZJ(1) being under the Corporations Act. Since this cannot occur because of the express requirement of s 459P(5) of the Corporations Act this prohibition must be implicitly lifted. The only way that this can take place if two implied amendments to the Corporations Act are recognised. First, s 459A of the Corporations Act must be read as if it said: On an application under s 459P or under s 62ZJ(1) of the Insurance Act 1973 the Court may order that an insolvent company be wound up in insolvency. (emphasis added) 17 Secondly, s 459P(1) must be taken to have been amended so that the list of authorised applicants includes a judicial manager under the Insurance Act. 18 Once that is appreciated, it follows that the winding up is one which is in insolvency and which occurs under s 459A of the Corporations Act on the application of the judicial manager. As might naturally be expected this means, as was evidently intended by Parliament in amending the definition of "wind up", that the provisions of the Corporations Act dealing with voidable transactions and the like will apply. 19 It was for those reasons that I concluded that a winding up of the insurer was appropriate. Because of the judicial manager's considerable knowledge of the insurer it was also appropriate to appoint him as the liquidator. The fees and expenses incurred by him thus far – $115,739.83 – were reasonable in the circumstances. It was in those circumstances that I made the orders that I did on 25 October 2010. The order I made on that day did not indicate under which provision the insurer was to be wound up. I will vary Order 1 of 25 October 2010 so that it reads "The first respondent be wound up under s 459A of the Corporations Act 2001." I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram. Associate: Dated: 13 April 2011