New South Wales Supreme Court CITATION : Re United Medical Protection & ors (No.2) [2002] NSWSC 458 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 2545/02, 2543/02 HEARING DATE(S) : 23 May 2002 JUDGMENT DATE : 24 May 2002 2545/02 United Medical Protection Ltd (Applicant) Commonwealth of Australia (appearing by leave, though not a party) PARTIES : 2543/02 Australasian Medical Insurance Ltd (Applicant) Commonwealth of Australia (appearing by leave, though not a party) JUDGMENT OF : Austin J COUNSEL : Mr S Donaldson SC with Mr M J Dawson (Applicant) Mr J E Marshall (Commonwealth of Australia) SOLICITORS : Tress Cox & Maddox (Applicants) CATCHWORDS : CORPORATIONS - provisional liquidation - application by provisional liquidator to approve entry into an agreement the term of which may end more than three months after the agreement is entered into - application for directions with respect to payment of some unsecured creditors - interests of other unsecured creditors sought to be protected by 'letters of comfort' - further information to be provided - desirability of instructing counsel to represent interests of other unsecured creditors LEGISLATION CITED : Corporations Act 2001 (Cth) ss 477(2B), 479(3) DECISION : Application stood over to permit further information to be provided and counsel for other unsecured creditors to be briefed IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION AUSTIN J FRIDAY 24 MAY 2002 2545/02 IN THE MATTER OF UNITED MEDICAL PROTECTION LTD 2543/02 IN THE MATTER OF AUSTRALASIAN MEDICAL INSURANCE LTD JUDGMENT (revised 24 May 2002) 1 HIS HONOUR: Identical applications were made in these two matters late yesterday afternoon. In each case the provisional liquidator of the company, Mr Lombe, seeks an order under s 477 (2B) of the Corporations Act approving arrangements that he proposes to enter into with the Commonwealth, and a direction under s 479 (3) that he would be justified in entering into those arrangements. The Commonwealth has appeared before me by counsel, in effect as amicus curiae. 2 Under the proposed arrangements (referred to in Mr Lombe's affidavit as "the interim proposals") the Commonwealth will bind itself to provide certain kinds of financial support, and in reliance on that support Mr Lombe will pay claims in specified categories in a total amount estimated to be about $40 million. Mr Lombe and the Commonwealth are presently negotiating a formal deed which will record the Commonwealth's commitment, but because of the urgency of the matter, the Commonwealth has provided to Mr Lombe letters which it calls "letters of comfort" to the companies and Mr Lombe, which set out the interim proposals. Although the letters are referred to as "letters of comfort", it is plain that the Commonwealth intends to be legally bound by their terms. 3 The matter is urgent because the problems confronting the companies, and their provisional liquidation, have caused delays in the making of payments for the benefit of people who are in great need, including severely disabled children. 4 The Court must therefore deal with the applications as quickly as possible. However, the applications raise some important and difficult questions. Care must be taken to ensure that the implementation of the interim proposals does not cause harm to the creditors who will not receive immediate payment. Those other creditors will, for the most part, be claimants under medical indemnity insurance policies for the benefit of injured patients, whose needs may be just as worthy of support and sympathy as the needs of those to be paid immediately under the interim proposals. 5 I have therefore decided to publish this morning some interim observations, designed to identify some issues that are currently matters of concern for me. I hope that all of these issues can be overcome very quickly, in some cases by further evidence and in some cases by submissions. One of my central concerns is a degree of uncertainty about the meaning and extent of the Commonwealth's commitment under the interim proposals. I recognise that a "letter of comfort" commitment cannot, by its nature, cover every matter of detail, but I have some concerns which go to basic matters which, I think, ought to be addressed. One way of overcoming my concern might be, if the Commonwealth were prepared to do so, for a supplementary letter to be issued by the Minister. Another way would be for counsel for the Commonwealth to make a clarifying statement in court, provided it was clear that the Commonwealth would be legally bound by that statement. 6 I shall now outline the issues that are matters of concern for me. Point 1 7 Senator Patterson's letter to medical practitioners dated 1 May 2002 has been adopted by Senator Coonan's letter of comfort to the companies dated 22 May 2002, for the purpose of identifying the scope of the Commonwealth's liability under the letter of comfort. Senator Patterson's letter offers two "guarantees", relating to the period between 29 April and 30 June 2002 ("the Period"), namely: · to pay "any amount properly payable in respect of a claim in the [Period] under a current or past policy"; and · with respect to claims for events that occur within the Period, if the claim arises under a current policy or a policy that expires and is renewed during the Period. 8 The first category is ambiguous in the following way. The guarantee could relate to claims made within the Period, regardless of whether the events occurred within the Period or at some earlier time; or it could relate to cases where an amount becomes properly payable within the Period, regardless of whether the events occurred or the claim was made within the Period or at some earlier time. It seems to me probable that the second construction was intended, but the ambiguity should be removed by the Commonwealth. Point 2 9 The letter of comfort to the companies requires that each payment be approved by the Commonwealth in writing before it is made, and that Mr Lombe will provide a certificate in respect of each payment. Mr Lombe's affidavit (paragraph 8) explains how he sees that the interim proposals will operate. He does not expressly acknowledge the necessity to comply with these procedural requirements on the terms of which the Commonwealth's liability rests. He should do so, in a supplementary affidavit. Point 3 10 Mr Lombe's understanding of the way the interim proposals will operate (affidavit, paragraph 8) appears to go beyond the terms of the letter of comfort to the companies. The letter of comfort provides that the Commonwealth will make payments in two circumstances, namely · "in the event that the provisional liquidator can demonstrate that at any time there will be or was insufficient assets to meet those guaranteed payments in the future or in arrears"; and · "to the extent that the provisional liquidator has applied assets to meet the payments, and there is any shortfall". The references to "insufficient assets" and "shortfall" seem to require that there be a net deficiency of liabilities over assets before the Commonwealth's obligation is triggered. 11 Mr Lombe's understanding set out in paragraph 8 of his affidavit goes beyond the terms of the letter of comfort. For example, Mr Lombe appears to envisage that the Commonwealth will be obliged to make payments to the relevant company if at any time he can demonstrate, without showing a deficiency of liabilities over assets, that · money he has paid out to meet claims is required to carry on the businesses of the companies, or to assist with the restructure of the companies, or to fund the proper administration of the companies; or · he does not have sufficient funds to pay a claim having regard to what is needed to carry on the businesses of the companies, or to assist with the restructure of the companies, or to fund the proper administration of the companies. 12 It should be made clear that the Commonwealth agrees with Mr Lombe's understanding as set out in paragraph 8 of his affidavit, modified in the manner proposed in paragraph 2 above. Point 4 13 Essentially, the application is for the Court to approve some arrangements under which a provisional liquidator treats one group of unsecured creditors more favourably than other unsecured creditors, by paying them in full and early, in reliance on a third party (the Commonwealth) providing indemnities to protect other unsecured creditors and to protect the provisional liquidator. Before the Court makes orders approving the arrangements, it needs to consider the interests of the other unsecured creditors, and it is therefore necessary for the applicant to identify those other unsecured creditors by category. 14 Assuming the interpretation of Senator Patterson's letter is as set out under point 1 above, I assume that there are no unsecured creditors whose debts became payable prior to 29 April 2002. It appears from the financial statements that are in evidence, that the overwhelming majority of creditors are medical practitioners claiming under their insurance policies or claiming for discretionary assistance. Medical practitioners whose claims become payable during the Period will be protected by the interim proposals. Medical practitioners whose claims become payable after the expiry of the Period will not be protected (unless the facts giving rise to the claim occurred during the Period, in which case the second limb of the Commonwealth's commitment would become applicable). 15 A medical practitioner's claim may not become payable until after the expiration of the Period where i the events occurred and a claim was made before the beginning of the Period, but the case has not come to trial until after the expiration of the Period; ii the events occurred before the beginning of the Period and the claim is made during the Period; iii the events occurred during the Period and the claim is made during the Period; iv the events occurred during the Period and the claim is made after the expiration of the Period; v the events occurred and the claim is made after the expiration of the Period. I take it that categories iv and v both fall within this description of "IBNRs". The actuarial estimate of IBNRs upon the basis of which it may become necessary to make a provision in the financial statements is in excess of $450 million. Apart from these categories of "claimant creditors" (perhaps, in some cases, contingent or prospective creditors), there are presumably creditors whose claims relate to employment by the companies, or trade supplies to the companies. Perhaps there are also other categories. 16 Mr Lombe should provide a supplementary affidavit identifying, as best he can, the categories of other creditors, to a level of detail consistent with the above comments, and he should give the Court an estimate of the companies' liability with respect to each category as at some convenient time (say, 29 April or the point at which management accounts were last prepared). I would also appreciate submissions as to whether my understanding is correct. Point 5 17 In his affidavit (paragraph 15) Mr Lombe expresses his belief that the interim proposals are in the best interests of, inter alia, the creditors of the companies, because "other creditors will not be prejudiced by the interim proposal". For that to be so, the Commonwealth must agree that if it meets a shortfall in distributions to other creditors, it will not seek to prove as an unsecured creditor for that payment. 18 Consider the following example : (a) Under the interim proposals, AMIL pays a claim of $100 in respect of a claim by a medical practitioner, A, who has been sued for negligence by a patient. (b) AMIL subsequently goes into liquidation, with assets of $160 available to meet the claims of unsecured creditors. If A had not been paid, AMIL's assets would have been $260. (c) AMIL's unsecured creditors in its liquidation are B and C, who are each owed $100. If A had not been paid, he would also have been a creditor for $100. (d) The liquidator makes a distribution to unsecured creditors, so that B and C each receive $80, leaving a shortfall of $20 in each case. If A had not been paid, the distributions to A, B and C would have been $87 in each case. (e) Under the interim proposals, the Commonwealth pays AMIL $40 (disregarding interest, for simplicity), representing the shortfall of $20 for each of B and C. (f) The Commonwealth lodges a proof of debt in respect of its payment of $40. (g) The liquidator makes a supplementary distribution of the $40 to the unsecured creditors in respect of their remaining debts. B and C receive $10 each and the Commonwealth receives $20. (h) On these facts, B and C have each received distributions totalling $90, whereas they would each have received $87 if the interim proposal had not been implemented. On the other hand, A has received $100 under the interim proposals. (i) There is an ambiguity in the statement that "no creditor will be prejudiced". The question is whether the purpose of the interim proposals is to put the other creditors in a better position than they would have been in if no claimants had been paid, or to equate the position of the other creditors with the position of the claimants who have been paid. If the latter is the intention, it should be understood that the Commonwealth will not lodge a proof of debt in respect of its payment of the shortfall of $40. Point 6 19 Suppose that in the example just given, after Mr Lombe has paid $100 to A he demonstrates to the Commonwealth that he has insufficient funds, in the manner required by the interim proposals. The Commonwealth then pays AMIL $100 in respect of its payment of A's claim, and under the arrangements the Commonwealth then stands as an unsecured creditor in respect of that amount. Since the Commonwealth has replaced the funds of AMIL by this payment, its assets available to creditors in its winding up will be $260 rather than $160, and the unsecured creditors will be B, C and the Commonwealth for $100 each. Each of them will receive a distribution of $87. 20 It is not clear whether, in that event, the Commonwealth will have any liability to meet the shortfall of $13 each to B and C. It has already made a contribution by reimbursing the provisional liquidator for the payment of claims made before the commencement of winding up. Point 7 21 As far as I can see, if the matters referred to above are each cleared up satisfactorily, it will be possible for the Court to conclude that other creditors will not be prejudiced by the interim proposal and that in the circumstances, the interim proposals are in the best interests of the companies, their creditors and members. That being so, I would expect the court to make orders in the terms sought by Mr Lombe in his application. 22 However, these matters are of some complexity, and neither of the parties before me now represent the interests of the other creditors. So that I can be satisfied that the interests of other creditors have been independently considered, it seems to me desirable to give directions today that counsel experienced in matters of corporate insolvency be immediately retained to consider the interim proposals from the point of view of the other creditors, and to assist the Court by making submissions as to whether the interim proposals will adversely affect the interests of those other creditors. The cost of retaining counsel should be a cost of the provisional administration of the companies. Point 8 23 As I indicated during argument yesterday, the hardship being experienced by some of the patients of medical practitioners who have made claims is acute, and therefore this application must be dealt with as a matter of urgency. I expect that the matters of concern set out above can be addressed very quickly. Unless I am informed that it is impossible to do so, I shall expect all of these matters to be addressed by next Tuesday morning 28 May 2002, so that I can reconsider the matter on that day and (if everything is in order) make determinations accordingly. 24 I shall also grant liberty to Mr Lombe and the Commonwealth to make any joint application to me without notice, in case there is any difficulty with their responding to the matters outlined above, or they are ready to have the matter dealt with earlier than next Tuesday morning. ********** Last Modified: 05/28/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. 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