McGrath & Anor re HIH Insurance Limited [2008] NSWSC 9

New South Wales Supreme Court

CITATION : McGrath & Anor re HIH Insurance Limited [2008] NSWSC 9

HEARING DATE(S) : 01/12/07

JUDGMENT DATE : 30 January 2008

JURISDICTION : Equity Division Corporations List

JUDGMENT OF : Barrett J

DECISION : Direction to be given to liquidators

CATCHWORDS : CORPORATIONS - winding up - insurance companies - application of insurance proceeds in winding up pursuant to Corporations Act 2001, s 562A - where reinsurance contract became subject to negotiated termination - whether sum paid on termination within s 562A(1)(b)

LEGISLATION CITED : Corporations Act 2001 (Cth), ss 479(3), 562A

CATEGORY : Principal judgment

CASES CITED : Chan v Cresdon Pty Ltd [1989] HCA 63; (1989) 168 CLR 242

PARTIES : Anthony Gregory McGrath and Christopher John Honey as Liquidators of HIH Insurance Limited

FILE NUMBER(S) : SC 1799/01

COUNSEL : Mr F Gleeson SC - Applicants

SOLICITORS : Blake Dawson - Applicants

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

BARRETT J

WEDNESDAY, 30 JANUARY 2008

1799/01 ANTHONY GREGORY McGRATH & ANOR RE HIH INSURANCE LIMITED JUDGMENT 1 The applicants are the liquidators of HIH Insurance Limited ("HIH"), a company subject to winding up by the court. In that capacity, they apply under s 479(3) of the Corporations Act 2001 (Cth) for a direction of the court in the following terms: "A Direction that Anthony Gregory McGrath and Christopher John Honey, as Liquidators of the Company, would be justified in distributing the proceeds received by the Company under the Cancellation of Reinsurance Agreement dated 27 June 2001 between the Company and Swiss Reinsurance Company (ARBN 007 479 941), together with interest received thereon on the basis that section 562A of the Corporations Act 2001 is not applicable to such proceeds (together with interest received thereon), to FAI General Insurance Company Limited (In Liquidation and Subject to a Scheme of Arrangement) (' FAI ') and HIH Casualty & General Insurance Company Limited (In Liquidation and Subject to a Scheme of Arrangement) (' HIH C&G ') in the following proportions: FAI - 67.884% HIH C&G - 32.116%." 2 Two issues are thus raised in relation to the proceeds received under the particular agreement of 27 June 2001 (together with interest): first, whether s 562A of the Corporations Act applies to those proceeds; and, second, whether funds should, as to the whole, be divided between FAI and HIH C&G in the proportions stated. 3 The proceeds in question amount to $214,939,110.06. Those proceeds have, since receipt by HIH, been retained in a separate account. Interest of some $118 million has accrued. 4 The agreement dated 27 June 2001 is an agreement between Swiss Reinsurance Company ("Swiss Re") and HIH. The agreement was made some three months after the commencement of the winding up of HIH. The then provisional liquidators of HIH committed HIH to the agreement after receiving an appropriate direction from the court. The agreement contained recitals. It is appropriate to quote recitals A to D: "A. Swiss Re as reinsurer and HIH as reinsured for and on behalf of the HIH Group entered into the Agreement, which was made exclusively between Swiss Re and HIH, and under which no other party (except a permitted assignee) is entitled to claim any rights or benefits. B. HIH believes that it is or may be entitled to make a claim under the Agreement. C. HIH wishes to enter into an agreement for the cancellation of the Agreement which settles any claims, including all existing and potential future claims, which HIH may be entitled to make for the payment of a benefit under the Agreement, including any claim HIH can presently bring under the Agreement, together with any right of commutation under the Agreement. D. Swiss Re and HIH agree to cancel the Agreement on the terms set out below." 5 These recitals must be read in the light of the following definitions: "'Agreement' means the multi-year aggregate excess of loss agreement effective from 1 July 1999 entered by Swiss Re as reinsurer and HIH as reinsured. 'HIH Group' means HIH and its insurance operating subsidiaries including but not limited to: HIH Casualty and General Insurance Limited (Australian Operation), HIH Casualty and General Insurance Limited (Non-Australian Operation), C.E. Heath Limited, CIC Insurance Limited, Cotesworth Capital Limited, Colonial Mutual General Insurance Company Limited, FAI General Insurance Limited, HIH America Compensation & Liability Insurance Company, and World Marine General Insurance Company Ltd." 6 The operative provisions (a) required Swiss Re to transfer to HIH "the assets listed in Schedule A annexed to the Agreement, the value of which as at 21 June 2001 was A$220,280,009.73" – subject, however, to retention by Swiss Re of "A$6,056,000 as fee or remuneration from amounts previously paid to it by or on behalf of HIH"; (b) provided that "[t]he Agreement is cancelled, effective from the last date of execution of the 27 June 2001 agreement by a party to it; (c) contained an acknowledgment by HIH that, "other than payments pursuant to this agreement, it is not entitled to any payment pursuant to the Agreement for existing or future claims or in respect of any right of commutation or otherwise; and (d) included machinery provisions. 7 HIH acknowledged in the document that it did not itself have any beneficial entitlement to the proceeds of the agreement. 8 The nature and effect of the "Agreement", as defined by the agreement of 21 June 2001, are explained in the affidavit of Mr Honey, one of the applicant liquidators, sworn on 29 November 2007: "12. On 21 January 2000, HIH, for and on behalf of its insurance operating subsidiaries ('HIH Group'), signed a reinsurance slip with Swiss Reinsurance Company ('Swiss Re'). HIH and Swiss Re also signed a Heads of Agreement dated 21 January 2000, and a total return swap agreement ('Swap Agreement'). The slip provided for what was described in it as a multi year aggregate excess of loss reinsurance contract which was effective for a 5 year period from 1 July 1999 to 30 June 2004 ('Reinsurance Contract') …