New South Wales Supreme Court CITATION : Re United Medical Protection & ors (No.5) [2002] NSWSC 545 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 2545/02, 2543/02 HEARING DATE(S) : 11 June 2002 JUDGMENT DATE : 18 June 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 Mr J T Gleeson SC with Mr R A Dick (Applicant) COUNSEL : Mr A J Meagher SC with Mr J E Marshall (Commonwealth of Australia) Mr S G Finch SC with Mr F Gleeson (amicus curiae) SOLICITORS : Freehills (Applicant) Australian Government Solicitor (Commonwealth of Australia) CATCHWORDS : CORPORATIONS - provisional liquidation - powers - whether approval should be given and directions made for provisional liquidator to enter into further arrangements with Commonwealth CASES CITED : Bell v Amberday Pty Ltd (2001) 39 ACSR 25 Re United Medical Protection Ltd (No 4) [2002] NSWSC 516 DECISION : Orders and directions made in respect of Stage 2 arrangements IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION AUSTIN J TUESDAY 18 JUNE 2002 2545/02 IN THE MATTER OF UNITED MEDICAL PROTECTION LTD (NO.5) 2543/02 IN THE MATTER OF AUSTRALASIAN MEDICAL INSURANCE LTD (NO.5) JUDGMENT 1 HIS HONOUR: On the morning of 11 June 2002 I published reasons for judgment (Re United Medical Protection Ltd (No 4) [2002] NSWSC 516) with respect to urgent applications by Mr Lombe, the provisional liquidator of United Medical Protection Ltd (in provisional liquidation) ("UMP") and Australasian Medical Insurance Ltd (in provisional liquidation) ("AMIL"), for approval to enter into "Stage 2" arrangements with the Commonwealth of Australia, and for consequential directions. I identified various matters upon which I required further information or clarification, and adjourned the applications until 4.30pm on the same day so that those matters could be addressed. 2 On the resumption of the hearing of the applications that afternoon, Mr Lombe and the Commonwealth addressed the matters that I had raised, and so I made orders approving Mr Lombe as provisional liquidator entering into the arrangements with the Commonwealth and making directions that he would be justified in acting to implement the arrangements in various ways. I now publish my reasons with respect to that decision. For convenience, I shall refer to my judgment in Re United Medical Protection Ltd (No 4) as "Judgment No 4". 3 In paragraph 73 of Judgment No 4, I considered paragraph 10 of the Commonwealth's draft letter of comfort, by which the provisional liquidator would agree not to renew memberships of UMP or policies issued by AMIL in respect of members who ordinarily practice outside Australia. I said that Mr Lombe should supply a supplementary affidavit outlining the measures he had taken and would take to ensure that this requirement would be satisfied. 4 By his affidavit made on 11 June 2002 and filed in court at the resumption of the hearing that afternoon, Mr Lombe said that he did not propose to cause AMIL to renew insurance policies presently issued to members of UMP who, at the date of renewal of their policies, ordinarily practice outside Australia. He said he would give those members at least 14 days prior notice of non-renewal of their policies and of his refusal to renew their memberships, pursuant to s 58 of the Insurance Contracts Act 1984 (Cth) and clause 17 of the Constitution of UMP. He explained that UMP's database of members identifies members who ordinarily practice outside Australia, and that UMP's staff were accordingly extracting information from the database so as to send letters to each of those members in time to give them 14 days notice. 5 One of the orders I made on 3 May 2002, when I appointed Mr Lombe as provisional liquidator of the UMP companies, was an order giving him all of the powers of UMP's Board under its Constitution. Those powers extended beyond the powers conferred on the Board under the "statutory contract" constituted by the corporate constitution and the Corporations Act, to powers under a "special contract" relating to the arrangements (set forth in the Constitution of UMP) for the provision of insurance and assistance and the making of calls. At the initial hearing of Mr Lombe's applications for Stage 2, his counsel submitted that although the Court had jurisdiction to give him all of those powers, including powers under the special contract, I should vary my previous order so as to limit Mr Lombe's powers to some specified powers immediately needed by him. 6 In paragraph 91 of Judgment No 4 I concluded, after reviewing the relevant case law and arguments, that although I was prepared to receive further submissions, I was not inclined to vary my previous order. At the resumed hearing on the evening of 11 June 2002, counsel for Mr Lombe informed me that he had no further submissions to make on that matter. Consequently I have not made any variation to the order of 3 May 2002 giving Mr Lombe as provisional liquidator the powers of the Board of UMP under its Constitution. 7 In paragraph 97 of Judgment No 4 I said that although I was prepared to give directions to Mr Lombe as sought in his applications, I did not think the Court should become involved in specifying the manner of implementation to the detail set out in Mr Lombe's affidavits, to which draft letters to members were exhibited. It was, in my view, a matter for Mr Lombe just how he communicated with the members of UMP. Therefore the directions I gave to Mr Lombe were directions that he would be justified in taking certain listed steps, but they did not extend to his doing so in the particular manner specified in his affidavit. I also gave the directions, as sought by Mr Lombe, that he would be justified in refusing to provide discretionary assistance to members of UMP under its Constitution, except in circumstances where the provision of discretionary assistance would be the subject of an indemnity from the Commonwealth in accordance with the Stage 2 agreement. 8 In paragraph 42 of Judgment No 4, I dealt with the binding effect of the letter of comfort for Stage 2. I directed the Commonwealth to make written submissions identifying the legal basis for the Minister's power to bind the Commonwealth of Australia contractually to the terms of such a letter, those submissions to be a suitable form to be annexed to the Court's reasons for judgment dealing with the present applications. At the resumption of the hearing on the evening of 11 June 2002 the Commonwealth handed up a submission dated 11 June 2002 by the Australian Government Solicitor, setting out the reasons for the Commonwealth's view that the Minister had the authority to bind it under the letter of comfort. Those reasons are attached to the present judgment. 9 In my view it is not appropriate to make any finding as to the Minister's authority, having regard to the nature of the case before me and the constitution of the proceedings. Before me are ex parte applications by the provisional liquidator, where the Commonwealth has appeared by leave without becoming a party, and the interests of the unsecured creditors not affected by the arrangements are represented by counsel. No-one before me has any interest in contending that the Minister has no such authority, and no submission to that effect has been put to me. It is enough for the purposes of this case that I should note that the representatives of the Commonwealth have declared in open court that the Government intends the Commonwealth to be bound by the letter of comfort, as modified in the manner I shall explain, and to consider whether there is a reasonable basis for the view that the Minister has such authority. Having reviewed the Australian Government Solicitor's letter, my opinion is that it sets out a reasonable basis for that view. In treating the matter in this way, I do not mean to suggest that I have any reservations about the reasoning set out in the Australian Government Solicitor's letter. 10 In paragraph 46 of Judgment No 4 I confessed that I had struggled with the drafting of the letter of comfort for Stage 2. I decided that the best way of dealing with my doubts about the meaning of the Commonwealth's offer would be to set out what I considered to be the effects of various provisions of the letter, on the basis that if my construction of the letter did not reflect the Commonwealth's intention in any way, I would expect counsel for the Commonwealth to draw my attention to my misunderstandings. I pointed out that my approval of the provisional liquidator entering into the arrangements set out in the letter, if I were to give it, would be on the basis of my understanding of the meaning of the letter. Even so, there were some specific matters upon which I required clarification. 11 Counsel for Mr Lombe tendered a letter to his instructing solicitor from the Australian Government Solicitor, endorsed with the signature of Mr Lombe and the instructing solicitor and dated 11 June 2002 ("the AGS Letter"). The AGS Letter was written on the understanding that it would be so tendered. In the letter the Australian Government Solicitor worked through the issues of construction of the letter of comfort raised by Judgment No 4. Paragraph 5 of the letter stated that where no comment was made it could be assumed that my construction of the letter of comfort was the construction intended by the Commonwealth. 12 Having considered the AGS Letter, I was satisfied that my doubts had been sufficiently addressed to warrant the making of orders. The agreement which my orders authorised Mr Lombe to enter into was the agreement constituted by the Minister's letter of comfort modified by the AGS Letter. I shall explain the clarification which led me to reach those conclusions. 13 Paragraph 36 of Judgment No 4 explained a concern about the Government commitment with respect to claims for events occurring in the period from 29 April to 30 June 2002. The Government's commitment, announced in a media release by the Minister for Health and Ageing on 1 May 2002, was expressed to apply to claims arising "under a current policy or policy that expires and is renewed" during that period. The members of UMP whose memberships and policies fell due for renewal during that period were not able to negotiate renewal but instead, then memberships and policies were automatically "renewed" by virtue of the respective operations of clause 17 of UMP's Constitution and s 58 of the Insurance Contract Act. Paragraph 8 of the AGS Letter states the Commonwealth's position that the members whose memberships and policies have been "automatically renewed" during that period fall within the scope of the Government's commitment. 14 Paragraph 37 of Judgment No 4 sought clarification that the members whose memberships and policies expired at the end of 30 June 2002 would have the benefit of the same Government commitment. Paragraph 9 of the AGS Letter states the Commonwealth's position that a member whose memberships and policies fall due for renewal at the end of 30 June 2002 will have the benefit of the commitment made on 1 May 2002 in respect of events occurring in the period 29 April 2002 to 30 June 2002, regardless of whether they take up the provisional liquidator's offers to renew their policies to 31 December 2002. 15 In paragraphs 49-51 of Judgment No 4, I analysed the proposed arrangements in terms of the unfair preference provisions of the Corporations Act. That analysis would be accurate enough as regards the Stage 1 arrangements (which involved only the approval of arrangements for the making of payments), but as regards the Stage 2 arrangements, the analysis is affected by s 556 (1) (a), as the AGS Letter points out. According to that subsection, the debts having first ranking claim to priority amongst all other unsecured debts include the expenses properly incurred by a relevant authority such as a provisional liquidator, in carrying on the company's business. To the extent, therefore, that payments made by the provisional liquidator to meet claims made under policies written under the Stage 2 arrangements are debts arising from expenses properly incurred in carrying on the company's business, s 556 authorises priority payment and there is no unfair preference for the purposes of Part 5.7B. Nor, to that extent, would it be unlawful or ineffective for a subsequent liquidator to use the company's assets to make full payment of those claims (cf paragraph 64 of Judgment No 4; note Bell v Amberday Pty Ltd (2001) 39 ACSR 25). 16 In paragraphs 52-57 of Judgment No 4, I raised a number of issues of construction arising out of the intended operation of the indemnity in clause 1 of the letter of comfort. According to the AGS Letter, the indemnity in paragraph 1 of the letter of comfort is to be revised so that the indemnity applies: "in the event that UMP and/or AMIL are/is wound up and there are insufficient assets of the company in liquidation to pay each creditor of the company in liquidation 100 cents in the dollar". 17 In my view, that provision clarifies the drafting sufficiently, although I have to say that I regard the use of "and/or" as an undesirable drafting technique because it tends to promote rather than remove ambiguity. 18 According to the AGS letter, the Commonwealth indemnifies the company in liquidation in respect of the "net loss" suffered by that company, and the calculation of "net loss" is to be performed by reference to the individual position of the company in liquidation, rather than on a "consolidated basis". 19 Paragraphs 58-66 of Judgment No 4 raised a number of additional issues in respect of the conditions upon which the obligations in paragraph 2 of the letter of comfort are intended to operate. The AGS letter offers the following clarifications: (a) the precondition to the operation of paragraph 2 is the same as for paragraph 1 of the letter of comfort, as clarified by the AGS Letter; (b) the indemnity set out in paragraph 2 (a) of the letter of comfort is to be read as if the words "provisional liquidator's" were added before the word "expenses" and as if the words "other than New Business" were added before the words "additional to the expenses"; (c) consequentially the provisional liquidator's expenses to which paragraph 2 (a) of the letter of comfort refers do not include Properly Payable amounts, nor amounts payable in respect of any other claims. 20 Seen in this way, the undertaking contained in paragraph 2 (a) of the letter of comfort is a very narrow undertaking, and the more important undertaking is the indemnity in paragraph 1. 21 In answer to a query raised in paragraph 56 of Judgment No 4, the AGS Letter says that "net loss" is not to be calculated at the time a winding up order is made, but instead the calculation is to pick up the net loss of the New Business once it has been run off. I take it that the net loss is calculated over a period which may extend beyond the year. The arrangements assume that the liquidator will continue to run off the New Business if a winding-up order is made. However, if a winding-up order is made before 31 December 2002, the arrangements assume that the liquidator will not continue to write New Business or at least will not do so without consulting the Commonwealth and approaching the Court. 22 I regard the clarifications to and variations of the letter of comfort made in the AGS Letter as addressing, adequately for the present purposes, the issues that I raised in Judgment No 4. I therefore decided on the evening of 11 June 2002 that it was appropriate to make an order approving the provisional liquidator entering into the Stage 2 arrangements constituted by the letter of comfort and the AGS Letter, and to make consequential directions. Australian Government Solicitor Authority for Minister Coonan to bind the Commonwealth under Letter of Comfort 11 June 2002 3 Canberra Office Commercial 50 Blackall Street, Barton ACT 2600 • Telephone (02) 6253 7000 • DX5678 • www.ags.gov.au Offices in Canberra, Sydney, Melbourne, Brisbane, Perth, Adelaide, Hobart, Darwin Our ref: 02030549 11 June 2002 SUBMISSION ON BEHALF OF THE COMMONWEALTH IN RESPONSE TO PARAGRAPH 42 OF THE JUDGMENT OF AUSTIN J DATED 11 JUNE 2002 Authority for Minister Coonan to bind the Commonwealth under Letter of Comfort 1. We refer to para 42 of the judgment of Austin J dated 11 June 2002 in which His Honour directs that the Commonwealth make written submissions identifying the legal basis for the Minister's power to bind the Commonwealth contractually in accordance with the terms of the letter of comfort dated 7 June 2002. 2. The Commonwealth's constitutional power to enter into a legally enforceable letter of comfort of the kind given on behalf of the Commonwealth by the Minister for Revenue and Assistant Treasurer to the provisional liquidator and to United Medical Protection Ltd (ACN 077 283 884) (UMP) and Australasian Medical Insurance Ltd (ACN 003 707 471) (AMIL) on 7 June 2002 is derived from s.61 of the Constitution. Section 61 provides, in effect, that the executive power of the Commonwealth is vested in the Governor-General as the Queen's representative and 'extends to the execution and maintenance of this Constitution, and of the laws of the Commonwealth'. The Commonwealth's power to contract is coextensive with its legislative power (including the implied nationhood power). In other words, the Commonwealth can enter into a contract dealing with a subject matter that could be the subject of Commonwealth legislation. 3. The Commonwealth has constitutional authority to legislate in relation to the subject matter of the legally enforceable letter of comfort. The relevant constitutional powers include the insurance power in s.51(xiv) of the Constitution. It follows that the Commonwealth is constitutionally able to enter into a contract dealing with the subject matter of the legally enforceable letter of comfort. Furthermore, as a matter of constitutional power, it is not necessary that the Commonwealth Parliament have appropriated the funds necessary to meet the Commonwealth's obligations under the contract in order for the Commonwealth to have constitutional authority to enter into the contract (NSW v Bardolph (1934) 52 CLR 455 - Bardolph's Case). 4. The constitutional authority to enter into contracts is vested in the Governor-General as the head of the executive and also in ministers appointed under s.64 of the Constitution acting within their areas of ministerial responsibility. The Treasurer, the Hon Peter Costello MP, the Minister for Revenue and Assistant Treasurer, Senator the Hon Helen Coonan and the Parliamentary Secretary to the Treasurer, Senator the Hon Ian Campbell, has each been appointed as a Minister of State under s.64 of the Constitution to administer the Department of the Treasury. In constitutional terms this covers the matters and legislation for which that Department is responsible. By virtue of the Administrative Arrangements Order made by the Governor-General on 26 November 2001 (as amended) the matters and legislation administered by the Department of the Treasury include 'Corporate and securities law', 'corporate insolvency', the Insurance Act 1973, the Insurance (Agents and Brokers) Act 1984 and the Insurance Contracts Act 1984. 5. In our view, it follows that the Minister for Revenue and Assistant Treasurer had constitutional power to enter into the legally enforceable letter of comfort of 7 June 2002. 6. We note that the Commonwealth's financial management and accountability regime for which provision is made in the Financial Management and Accountability Act 1997 and the Financial Management and Accountability Regulations 1997 (the FMA Regulations) and related legislation sets out statutory requirements in relation to the approval of spending proposals and the entering into contracts on behalf of the Commonwealth. As far as we are aware, all relevant statutory requirements in relation to the giving of the legally enforceable letter of comfort have been complied with. In particular, given that there was no appropriation to support a spending proposal for the proposed letter of comfort, an approval was sought from the Minister for Finance and Administration (the Finance Minister) under reg.10 of the FMA Regulations. That approval was granted by the Finance Minister on 6 June 2002. 7. In summary, the Minister for Revenue and Assistant Treasurer had the constitutional and other legal authority to bind the Commonwealth to the terms of the letter of comfort of 7 June 2002. Mr Henry Burmester QC was consulted in the preparation of this submission. Yours sincerely Anne Kelly Senior Executive Lawyer Australian Government Solicitor Tel: (02) 6253 7004 Fax: (02) 6253 7316 E-mail: anne.kelly@ags.gov.au ********** Last Modified: 07/09/2002 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. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.