Supreme Court New South Wales Medium Neutral Citation: Amaca Pty Ltd & Ors v McGrath & Anor as liquidators of HIH Underwriting and Insurance (Australia) Pty Ltd [2011] NSWSC 90 Hearing dates: 10 February 2011 Decision date: 02 March 2011 Before: Barrett J Decision: Short minutes to be brought in Catchwords: CORPORATIONS - winding up - insolvency - insolvent insurer - claims by insured in respect of liability for bodily injury - insurer holds reinsurance in respect of relevant risks - claim by insured for order that amounts received by the liquidators under reinsurance be applied to its claims to the exclusion of those of other insurance creditors - claim in respect of both reinsurance amounts already received and those yet to be received - statutory criteria considered - none essential except court's opinion that departure from ordinarily applicable statutory scheme is "just and equitable" - connections between particular insurance and facultative reinsurance examined - circumstances in which reinsurance obtained examined - relief to be granted in respect of amounts already received - no power to make order in respect of future receipts Legislation Cited: Corporations Act 2001 (Cth), ss 411, 555, 556, 562A James Hardie Former Subsidiaries (Winding up and Administration) Act 2005 Third Parties (Rights Against Insurers) Act 1930 (UK) Cases Cited: Assetinsure Pty Ltd v New Cap Reinsurance Corporation Ltd [2004] NSWCA 225; [2004) 61 NSWLR 451 Assetinsure Pty Ltd v New Cap Reinsurance Corporation Ltd [2006] HCA13; (2006) 225 CLR 331 Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd [2004] NSWSC 273 HIH Casualty and General Insurance Ltd v Building Insurers' Guarantee Corporation [2003] NSWSC 1083; (2003) 202 ALR 610 New Cap Reinsurance Corporation Ltd v Faraday Underwriting Ltd [2003] NSWSC 842; (2003) 177 FLR 52 Re Dominion Insurance Co of Australia Ltd [1980] 1 NSWLR 271 Re HIH Casualty and General Insurance Ltd [2005] NSWSC 240; (2005) 190 FLR 398 Re Palmdale Insurance Ltd (in liq) (No 3) [1986] VR 43 Re Saltergate Insurance Co Ltd (No 2) [1984] 3 NSWLR 389 Texts Cited: Australian Law Reform Commission General Insolvency Report (Harmer Report), paras 763, 764 Category: Principal judgment Parties: Amaca Pty Limited - First Plaintiff Amaba Pty Limited - Second Plaintiff ABN 60 Pty Ltd - Third Plaintiff Anthony Gregory McGrath and Christopher John Honey as liquidators of HIH Underwriting and Insurance (Australia) Pty Ltd - First Defendants HIH Underwriting and Insurance (Australia) Pty Ltd - Second Defendant Representation: Counsel: Mr J C Sheahan SC/Ms KA Rees - Plaintiffs Mr F Gleeson SC/Mr R M Foreman - Defendants Solicitors: Henry Davis York - Plaintiffs Blake Dawson - Defendants File Number(s): 2010/247943 Judgment The questions in this case 1There are two questions in this case. The first is whether the court should exercise a statutory power it clearly has to change the manner of application of certain moneys that have been received by the liquidators of HIH Underwriting and Insurance (Australia) Pty Ltd and are available to be applied in the insolvent winding up of that company. The second question is whether the statutory power is exercisable prospectively, so that the court can change the manner in which moneys yet to be received by the liquidators are to be applied if and when received. 2Only if the second question is answered in the affirmative will it be necessary to address the further question whether the power should be exercised in relation to future receipts of the relevant kind. The parties and the positions they take 3The plaintiffs are Amaca Pty Ltd (formerly James Hardie & Coy Pty Ltd), Amaba Pty Ltd (formerly Hardie-Ferodo Pty Ltd) and ABN 60 Pty Ltd. The last mentioned company was formed in 1920 and adopted the name "James Hardie Asbestos Ltd" in 1951. The name was changed to "James Hardie Industries Ltd" in 1979. The three companies were, at material times, members of the James Hardie Group. ABN 60 Pty Ltd was the group holding company. 4The second defendant is HIH Underwriting and Insurance (Australia) Pty Ltd (formerly C E Heath Underwriting and Insurance (Australia) Pty Ltd). At the time of events that it will be necessary to examine, the second defendant was an affiliate of C E Heath Underwriting Agencies Australia Pty Ltd and both were subsidiaries of C E Heath plc of the United Kingdom. It will be convenient to refer to the second defendant as "HeathUI", to C E Heath Underwriting Agencies Australia Pty Ltd as "Heath Australia" and to C E Heath plc as "Heath London". 5The plaintiffs say that, in the insolvent winding up of HeathUI, its liquidators (the first defendants) should be permitted and required to apply certain moneys exclusively towards claims of the plaintiffs cognisable in the winding up, so that no part of those moneys is available towards the claims of other creditors entitled to participate under the winding up. This contention is advanced in relation to both certain funds already in the liquidators' hands and other funds they expect to receive in the future. 6The liquidators' attitude to the plaintiffs' claim is that they neither consent to nor oppose the grant of the relief sought in relation to the moneys already received and that they oppose the application as it relates to moneys to be received in the future. The basis for the opposition is a contention that the relevant power of the court to alter the manner of application of assets by a liquidator is not sufficient to authorise an order affecting moneys yet to be received. 7I am satisfied that, although (as will be seen when the statutory power is examined) the contest is one essentially between the plaintiffs and the other insurance creditors of HeathUI and no representative of those other creditors is a party, the liquidators have adequately exposed and canvassed the arguments against the making of all the orders the plaintiffs seek. Section 562A of the Corporations Act 8The jurisdiction the court is asked to exercise is that created by s 562A(4) of the Corporations Act 2001 (Cth). Section 562A as a whole is in these terms: "(1) This section applies where: (a) a company is insured, under a contract of reinsurance entered into before the relevant date, against liability to pay amounts in respect of a relevant contract of insurance or relevant contracts of insurance; and (b) an amount in respect of that liability has been or is received by the company or the liquidator under the contract of reinsurance. (2) Subject to subsection (4), if the amount received, after deducting expenses of or incidental to getting in that amount, equals or exceeds the total of all the amounts that are payable by the company under relevant contracts of insurance, the liquidator must, out of the amount received and in priority to all payments in respect of the debts mentioned in section 556, pay the amounts that are so payable under those contracts of insurance. (3) Subject to subsection (4), if subsection (2) does not apply, the liquidator must, out of the amount received and in priority to all payments in respect of the debts mentioned in section 556, pay to each person to whom an amount is payable by the company under a relevant contract of insurance an amount calculated in accordance with the formula: Particular amount owed X Reinsurance payment Total amount owed where: 'particular amount owed' means the amount payable to the person under the relevant contract of insurance. 'reinsurance payment' means the amount received under the contract of reinsurance, less any expenses of or incidental to getting in that amount. 'total amount owed' means the total of all the amounts payable by the company under relevant contracts of insurance. (4) The Court may, on application by a person to whom an amount is payable under a relevant contract of insurance, make an order to the effect that subsections (2) and (3) do not apply to the amount received under the contract of reinsurance and that that amount must, instead, be applied by the liquidator in the manner specified in the order, being a manner that the Court considers just and equitable in the circumstances. (5) The matters that the Court may take into account in considering whether to make an order under subsection (4) include, but are not limited to: (a) whether it is possible to identify particular relevant contracts of insurance as being the contracts in respect of which the contract of reinsurance was entered into; and (b) whether it is possible to identify persons who can be said to have paid extra in order to have particular relevant contracts of insurance protected by reinsurance; and (c) whether particular relevant contracts of insurance include statements to the effect that the contracts are to be protected by reinsurance; and (d) whether a person to whom an amount is payable under a relevant contract of insurance would be severely prejudiced if subsections (2) and (3) applied to the amount received under the contract of reinsurance. (6) If receipt of a payment under this section only partially discharges a liability of the company to a person, nothing in this section affects the rights of the person in respect of the balance of the liability. (7) This section has effect despite any agreement to the contrary. (8) In this section: ' relevant contract of insurance ' means a contract of insurance entered into by the company, as insurer, before the relevant date." 9Section 562A co-exists with s 555 and s 556. Section 555 lays down the general rule that unsecured debts and claims proved in the winding up rank equally and, in case of insufficiency of assts, must be paid proportionately. Section 556 then says that certain categories of unsecured debts are to be paid "in priority to all other unsecured debts and claims" and specifies the order in which the categories are to take priority among themselves. Each section is expressed in terms that make its specification liable to be overridden by other statutory provisions. Section 556 overrides s 555. And s 562A overrides both s 555 and s 556. The interaction of the provisions was explained in HIH Casualty and General Insurance Ltd v Building Insurers' Guarantee Corporation [2003] NSWSC 1083; (2003) 202 ALR 610 at [70]: "The combined effect of ss.555 and 556 is that, in a winding up governed by the Corporations Act , unsecured debts and claims identified in s.556 are to be paid, in the order stated, in priority to all other unsecured debts and claims and, subject to that priority (and to the effect of any other provisions of the Corporations Act ), debts and claims proved in a winding up are to rank equally and, if the property of the company is insufficient to meet all debts and claims, they are to be paid proportionately. Section 562A, dealing specifically with contracts of reinsurance held by a company in the course of winding up in respect of insurances written by that company, requires the liquidator to make certain payments to certain persons out of the proceeds of the reinsurance and to do so in priority to all payments in respect of debts mentioned in s.556." 10Where a liquidator has in his or her hands an amount of the kind referred to in s 562A(1)(b), that amount will be dealt with separately from the balance of the funds under the liquidator's control. In the normal course of events, the amount will not be applied in accordance with s 555 and s 556, at least in the first instance, and will instead be dealt with as directed by either s 562A(2) or s 562A(3), depending on whether the amount exceeds the "total" referred to in s 562A(2). Under s 562A(4), however, the court has power to displace both s 562A(2) and s 562A(3) (or, more accurately, whichever of them applies of its own force in the particular circumstances) and, by its order, to substitute some method of application of the amount different from that which would otherwise have been applied in accordance with the displaced provision. 11The general principle reflected by s 562A is that, in the insolvent winding up of an insurer, reinsurance proceeds obtained by the liquidator under reinsurances pre-dating the winding up are to be applied towards claims arising from the insurer's liabilities under contracts of insurance written by it before the commencement of the winding up; and that those proceeds are not available to be applied towards debts of other kinds unless and until the claims arising from insurance contracts have been satisfied in full. A particular feature of the section is that the class of claims entitled to priority enjoyment of reinsurance proceeds is made up of all claims arising from insurance contracts, without reference to any link between those insurance contracts and the reinsurance by which the reinsurance proceeds are produced. Thus, for example, if reinsurance is held in respect of risks under fire insurance policies, creditors having claims under fidelity insurance policies quite distinct from the class of policies that gave rise to the reinsurance will share in the benefit of the priority application of the reinsurance proceeds directed by s 562A(2) or s 562A(3). 12In the present case, it is not disputed that certain amounts already received by the liquidators of HeathUI are of the kind with which s 562A is concerned. It is to those amounts that the first part of the plaintiffs' application relates (see paragraph [1] above). They say that the court should make an order under s 562A(4) having the effect that the liquidators are to apply the amounts in question exclusively towards satisfaction of debts or claims of the plaintiffs cognisable in the winding up. 13It is common ground that, in the absence of any s 562A(4) order, it will be s 562A(3) rather than s 562A(2) that applies to the amounts in question. The order, if made, will therefore eliminate the entitlements under s 562A(3) of "each person to whom an amount is payable by the company under a relevant contract of insurance" and substitute an entitlement of the plaintiffs alone - each of which, it is acknowledged, is a "person to whom an amount is payable by the company under a relevant contract of insurance". The effect of the order will be to allocate the relevant benefit to some members of the entitled class and to eliminate the entitlements of the remainder of the class. The background to the enactment of s 562A 14I should, at this point, say something about the genesis and history of s 562A. 15The purpose and effect of the Third Parties (Rights Against Insurers) Act 1930 (UK) were that, if an insured carrying insurance cover against liability to another person became insolvent, that other person became entitled to the insolvent insured's rights against the insurer and could thereby maintain direct the claim upon the insurer that the insolvent insured could otherwise have brought. The insurance proceeds were thereby kept out of the fund of assets available to the insured's creditors generally. 16Versions of this English provision introduced into Australia were held to apply to contracts of reinsurance held by insurers in the same way as it applied to contracts of insurance held by any company exposed to the risk of third party claims: Re Dominion Insurance Co of Australia Ltd [1980] 1 NSWLR 271; Re Saltergate Insurance Co Ltd (No 2) [1984] 3 NSWLR 389; Re Palmdale Insurance Ltd (in liq) (No 3) [1986] VR 43. But, as was explained by the Australian Law Reform Commission in its General Insolvency Report (Harmer Report), problems arose in applying the section to reinsurance cases. These included difficulties in identifying third party claimants entitled to the benefit of particular reinsurance and the perceived inequity of persons whose contracts of insurance happened to be backed by reinsurance being the only persons able to benefit. 17At paragraph 764 of its report, t he Law Reform Commission made a recommendation as follows ("s 447" was the provision of corporations legislation then in force that allowed direct access by a third party to the insurance carried by an insolvent company): " Recommendation . The Commission recommends that unless the court orders otherwise, s447 should not apply to a contract of reinsurance. The matters that the court should take into account in deciding whether to make an order include the circumstances under which the contract of reinsurance was entered into, including any contract arrangement or understanding between the insured and the company that the company reinsure the risk and any prejudice likely to be suffered by the insured if an order is not made." 18That recommendation came after the Commission had expressed the following view (at paragraph 763): " The Commission's view . The Commission agrees that contracts of reinsurance are for the most part fundamentally different from contracts of insurance and that the application of s 447 to reinsurance contracts may lead to inequities. It appears unfair to allow an insured a special priority if the particular insurance policy is backed in some way by reinsurance whereas an insured with a policy not backed by reinsurance ranks with other unsecured creditors. There may however be situations where reinsurance is specifically taken out at the request of an insured even though this may not be a condition of the insurance contract. In such situations it is appropriate for the insured to get the benefit of the application of s 447. Generally, however, the Commission is of the view that s 447 should not apply to contracts of reinsurance." 19Section 562A, it may be noted, does not implement the recommendation of the Law Reform Commission - indeed, as was observed in Assetinsure Pty Ltd v New Cap Reinsurance Corporation Ltd [2006] HCA13; (2006) 225 CLR 331 (at [83]) by Kirby J and Hayne J (with the concurrence of Gleeson CJ, Heydon J and Crennan J on this aspect), s 562A represents "a rejection of the applicable recommendations made by the Harmer Report". 20The section as enacted works on the broad basis I have already described, that is, that proceeds of reinsurance carried by the company in liquidation should be applied, in the first instance, towards satisfaction of the company's insurance liabilities as a whole and regardless of the existence or non-existence of any connection between the source of a particular insurance liability and the subject matter of the reinsurance by which the proceeds are produced (the suggestion by Kirby J and Hayne J in Assetinsure Pty Ltd v New Cap Reinsurance Corporation Ltd , also at [83], that reinsurance receipts are to be applied in satisfaction of the insolvent insurer's liabilities under the contracts of insurance "that were reinsured" is, in my respectful opinion, per incuriam the s 562A(8) definition of "relevant insurance contract"). 21In one respect, however, s 562A does reflect, at least to some extent, the position taken by the Law Reform Commission. The section identifies, in s 562A(5), as matters that the court may take into account upon a s 562A(4) application, certain of the matters referred to by the Commission at paragraph 764. 22The fact remains that, by and large, the Commission's observations are of very little assistance in construing s 562A as enacted and now in force. The present circumstances of the plaintiffs 23The plaintiffs formerly carried on (or, in the case of ABN 60 Pty Ltd, was the holding company of companies that carried on) businesses of a kind that, in due course, gave rise to tort and other claims by persons who suffered bodily injury through exposure to asbestos. Each was, at the time, a member of the James Hardie Group but is now wholly owned by Asbestos Injuries Compensation Fund Ltd ("AICF") and subject to insolvent external administration under the James Hardie Former Subsidiaries (Winding up and Administration) Act 2005, a New South Wales enactment. 24Under that form of external administration, each plaintiff is preserved in an operational state sufficient to enable it to receive and deal with claims by persons asserting causes of action referable to asbestos-induced illness and, in connection with established liabilities arising from those claims, to obtain funding from specific sources. The sources include insurances covering periods of active asbestos related business and contributions by co-defendants in asbestos litigation. In addition, provision is made for periodic contributions by James Hardie Industries SE, an Irish company listed on the Australian Securities Exchange, and its affiliates (which I shall call "the new Hardie Group") according to a particular formula contained in a funding agreement of 2006. That formula takes into account the new Hardie Group's cash flows. It produced the result that, in the four years to 1 July 2010, contributions were made in the second and fourth years but not in the first and third. 25Provision also exists for funding to be obtained through loan facilities made available to AICF by the Commonwealth and New South Wales Governments. Loans were recently provided after reduced contributions by the new Hardie Group left AICF with insufficient funds to meet all expected compensation claims in full. 26The financial capacity of the plaintiffs to meet liabilities to asbestos victims, as and when those liabilities are established, thus depends on obtaining insurance proceeds and the proceeds of orders against co-defendants, obtaining contributions by the new Hardie Group (which, in turn, depends on, first, a contribution amount becoming payable for a particular year according to the formula in the 2006 agreement and, second, performance of the obligation to make the payment) and obtaining loan moneys from the public purse. The plaintiffs' insurance arrangements 27The plaintiffs carried insurance against liability for asbestos injury for the policy year 1981/82 (31 March 1981 to 31 March 1982) and the policy year 1982/83 (31 March 1982 to 31 March 1983). The insurance was arranged by Heath Australia, the affiliate of HeathUI by which similar services had been provided in earlier years from about 1979. 28Under its binder arrangements with Lloyd's syndicates as they existed in the early 1980s, Heath Australia could only write up to $1 million primary layer and $3 million in excess of the primary layer. Mr Waites, an officer of Heath Australia from 1974 to 1992, gave evidence of Heath Australia's business having outgrown the binder so that it could not itself carry risks that customers including the plaintiffs wished it to carry. Alternative strategies had to be developed. 29As Mr Waites explains, Heath Australia began to place much of the business of its Australian clients in the London market. In some cases, Heath London, at Heath Australia's request, placed the business in London in such a way that the relevant off-shore insurer insured the Australian client direct. In other cases, the off-shore insurer was in a position to offer reinsurance only and Heath London placed the risk as facultative reinsurance of HeathUI, so that HeathUI took on the risk as against the client but simultaneously obtained reinsurance in respect of it. It is Mr Wailes evidence that, from 1980, HeathUI "fronted for any portion of insurance which was facultatively reinsured". In these cases, therefore, the London reinsurer assumed the risk taken on by HeathUI as against the Australian client. Heath Australia did not charge a premium in these cases thus involving HeathUI (nor did HeathUI itself) but Heath Australia obtained a commission on placement of the risk. 30The plaintiffs were, in those years, actively involved in the process of obtaining insurance in the London market. Its representatives and its brokers met frequently with Heath Australia in Melbourne and travelled periodically to London to meet underwriters. 31It is necessary to consider the facts relating to the two particular years. The 1981/82 policy year 32This was the first year for which Heath Australia was asked to place the entire James Hardie insurance account. It was, by local standards, a very substantial account. 33Because of the limited ability of the Heath Australian entities to underwrite and the particular features of the James Hardie account (its large size and asbestos exposure), James Hardie's broker, Minet (Mr Langlands), did not expect that the Heath Australia entities would themselves be able to write any of the policy and that they would arrange the whole cover through Heath London and the London market. 34Mr Langlands understood that Heath Australia would take a commission on the premium paid by James Hardie insureds for insurance arranged in the London market. 35Mr Honey, one of the liquidators of HeathUI , confirms from his review of business records that Heath Australia remitted the premiums paid by Minet to Heath London, less a 7.5% commission that was retained by Heath Australia for acting as an intermediary between James Hardie and the insurers and reinsurers with whom risk was placed in London. From this evidence, it appears that HeathUI, as the nominal and direct insurer, did not itself receive or retain any premium and that the true nature of the arrangement was that Heath Australia received a commission for placing insurance in London, which commission came out of premiums received by the London market participants. 36Mr Langlands informed Mr Close of James Hardie that Heath Australia was arranging cover for James Hardie in the London market. O n 31 March 1981, Heath London sought instructions from Heath Australia as follows: "Please confirm we can use facultative reinsurance behind [HeathUI] if necessary.." 37Mr Waites of Heath Australia authorised Heath London to place proportions of the risk as facultative reinsurance of HeathUI if that was necessary to secure a 100% placement of the James Hardie Group's insurance. This involved HeathUI fronting the risk without carrying any of the insurance risk itself, with Heath Australia obtaining a commission on placement. 38On 1 April 1981, Heath London sent telexes to numerous London underwriters in viting them to participate in the James Hardie account. Heath London gave underwriters the option: "If required, close as reinsurance of [HeathUI] . . ." 39One recipient of the offer replied that it did not wish to participate, adding: "In fact, we do not write facultative liability." 40By 6 May 1981, Heath London had achieved 100% placement of the James Hardie insurance, and wrote to Heath Australia: "As mentioned our te[lex] 31/3 was necessary close certain proportion of placement as reinsurance of [HeathUI] - will advise exact percentages soonest ." 41Mr Waites says that the treaties of many reinsurers participating in the account did not enable them to write direct lines of insurance, but only to cover the same risk as facultative reinsurance. This was why certain portions of the excess layers were effected as reinsurance, rather than as direct insurance. It appears, therefore, that several London underwriters took up the invitation in Heath London's telex of 1 April 1981 to "close as reinsurance of [HeathUI]". No separate policy wording was issued for the reinsurance policies. 42While the James Hardie companies did not request reinsurance of HeathUI policies, their broker, Minet, was aware that some of the James Hardie cover was placed as reinsurance of HeathUI. The limitations of the Heath Australia and HeathUI local in surance treaties were widely known in the market. 43Mr Langlands gave the following evidence: "I expected all of the insurers to be London or overseas based insurers arranged by [Heath London]. I didn't expect [Heath Australia] to be an insurer on any part of the policy, although I was aware that it was common for [Heath Australia] to front for another insurer, such as a London insurer. As such, if I had seen [Heath Australia's] name on a policy slip, then I would have assumed that it was solely acting as a fronting source for London insurers / overseas insurers." 44Whether the James Hardie Group's insurance was placed directly or as facultative reinsurance of HeathUI did not affect the price of the policies - how the insurance was placed was entirely dependent on the treaty restrictions of the reinsurer in the London market. 45For the 1981/82 year, the James Hardie Group's insurance consisted of a primary layer and five excess layers. HeathUI bore no part of the primary layer, 13.33% of the first excess layer of $2 million, 14.78% of the second excess layer of $8 million in excess of $2 million, 19.5% of the third excess layer of $25 million in excess of $10 million, 15.6% of the fourth excess layer in excess of $25 and 8.09% of the fifth excess layer of $50 million in excess of $50 million. The whole of HeathUI's exposure - that is, its specified percentage share of each excess layer - was reinsured by a number of foreign reinsurers. HeathUI thus did not bear alone (that is, without the backing of specific reinsurance) any part of the risk insured by it. 46According to the liquidators' inquiries, two of the reinsurers went into liquidation many years ago. 47The plaintiffs have existing and unsatisfied claims against HeathUI in respect of the 1981/82 policy which was reinsured under facultative reinsurance in the London market. Cover under the primary and first and second excess layers has been exhausted. Cover under the third excess layer ($15 million in excess of $10 million) is currently being utilised: the plaintiffs submit approved claims to the relevant underwriters on a quarterly basis through claims agents. Because asbestos claims against the plaintiffs are expected to be of the order of $1.5 billion, the fourth excess layer is expected to be exhausted over time and the fifth excess layer is expected to be substantially if not fully exhausted some time after 2030. 48The liquidators have received the following moneys from reinsurers Baloise, Hannover and Gerling in respect of claims submitted by the plaintiffs and accepted by HeathUI relating to the 1981/82 policy: Baloise: $94,910.85 Hannover: $351,794.58 Gerling: $1,662,379.58 49The cost of getting in the reinsurance proceeds is agreed to be 2.5% of the gross recoveries. 1982/83 policy year 50The circumstances in relation to the 1982/83 policy year were in substance the same as those of the previous year. According to Mr Waites of Heath Australia: "Some underwriters' treaties enabled them to participate in a direct placement. Other underwriters, however, were only able to participate as reinsurers. Where a direct insurance placement was not possible due to a lack of capacity in the market, CE Heath London placed the remaining portions of the James Hardie Group's insurance account as facultative reinsurance of [HeathUI] in the 1982/83 year of account, just as it had done in the 1981/82 policy year." 51No separate policy wording was issued for the reinsurance policies. 52Again, while the James Hardie Group did not expressly request reinsurance of HeathUI's policies, their broker, Minet, was aware that some of the policies were placed as reinsurance of HeathUI: the limitations of Heath Australia and HeathUI's local insurance treaties were widely known in the insurance market. 53Whether the James Hardie Group's insurance was placed directly or as facultative reinsurance of HeathUI did not affect the price of the policies. The manner of placing the insurance was entirely dependent on the treaty restrictions of the reinsurers in the London market. 54The premium and commission arrangements for 1982/83 were in substance the same as for the previous year. 55The insurance for the 1982/83 policy year was again arranged in layers. HeathUI again carried no part of the first $1 million and only a small part of each subsequent layer (11.7% of the first excess layer of $2 million, 12.09% of the second excess layer of $3 million in excess of $2 million, 10.4% of the third excess layer of $5 million in excess of $5 million and 15.01 % of the fourth excess layer of $15 million in excess of $10 million). As in the previous year, HeathUI's exposure (being its specified percentage of the excess layers) was reinsured by a number of overseas reinsurers and HeathUI did not bear alone (that is, without the protection of specific reinsurance) any part of the exposure. 56The plaintiffs have existing and unsatisfied claims against HeathUI in respect of the 1982/83 policies reinsured in the London market. Cover under the primary layer and each of the first, second and third excess layers has been exhausted. Cover under the fourth excess layer ($15 million in excess of $10 million) is currently being utilised. The plaintiffs submit approved claims to the relevant underwriters on a quarterly basis through the relevant claims agents Given the anticipated level of asbestos claims of $1.5 billion against the plaintiffs, the fifth excess layer is expected to be exhausted over time and the sixth excess layer to be substantially if not fully exhausted some time after 2030. 57The liquidators have collected the following moneys from reinsurers in respect of claims the plaintiffs' accepted claims under the 1963 /83 policy: Baloise: $86,773.79 Hannover: $210,644.59 Gerling: $982,930.02 58Again, the liquidators' costs of obtaining the insurance moneys has been agreed at 2.5% of the gross recoveries. Claims procedures 59The plaintiffs have not as yet submitted proofs of debt to HeathUI's liquidators for claims under the insurances provided by HeathUI. The "Estimation Period" under a scheme of arrangement binding on HeathUI and its creditors under s 411 of the Corporations Act has not yet expired. 60Most damages claims made by injured persons against the plaintiffs are negotiated and settled, although some proceed to judgment. When such an outcome emerges, the resultant liability of the plaintiffs is included in a bordereau of claims submitted to the London market for approval and payment. This process is adopted four times a year. The plaintiffs also submit approved claims bordereaux to HeathUI on a quarterly basis. Once the claims have been approved in the London market and checked by HeathUI, those against HeathUI are admitted as "Acknowledged Creditor Claims" under the scheme of arrangement. 61Once a particular claim attains "Acknowledged Creditor Claim" status under the scheme of arrangement, HeathUI makes the associated claim upon the reinsurers under its reinsurance. 62The reinsurance amounts received to date by the liquidators and to which the first part of the application now before me relates have arisen from this claims procedure. It is envisaged by the liquidators that they may in future receive reinsurance proceeds not only through the claims procedure but also as a result of agreed commutation of reinsurance contracts. The second part of the present application relates, potentially at least, the such commutation amounts as well as amounts arising from the claims procedures as outlined. The application in relation to the two particular years 63The plaintiffs seek orders as follows, based on the facts concerning the 1981/82 policy year: (a) an order pursuant to s 562A(4) that s 562A(2) and s 562A(3) do not apply to any of the three amounts received by the liquidators of HeathUI as referred to at paragraph [48] above; (b) an order under s 562A(4) that the liquidators of HeathUI apply each of the three amounts so received by, first, deducting expenses of and incidental to getting in the amount (being 2.5% of the amount) and, second, paying the balance of the amount to the plaintiffs. 64A corresponding claim is made in relation to the 1982/83 year by reference to the sums mentioned at paragraph [57] above. The approach to be taken by the court 65Section 562A(4) itself says that the court may authorise and require a manner of application different from that dictated by s 562A(2) or s 562A(3) only if it considers that different manner to be "just and equitable in the circumstances". Section 562A(5) then sets out four matters that the court "may take into account" in deciding whether to make a s 562A(4) order, making it clear both that the specified matters need not be taken into account and that matters not mentioned may be taken into account, provided, of course, that they are relevant to an assessment of what is "just and equitable in the circumstances". 66The "just and equitable" criterion requires the court to proceed in a way to which I referred in Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd [2004] NSWSC 273 at [45]-[47]: "[45] The phrase 'just and equitable' is commonly used in legislative drafting: see, for example, Corporations Act 2001 (Cth), s 461(1)(k), Family Law Act 1975 (Cth), s 75(2); Motor Accidents Act 1988, s 74(3); Property (Relationships) Act 1984, s 20(1); Conveyancing Act 1919, s 66M. Numerous cases have considered the significance of the phrase. The conclusions drawn are reflected in the words borrowed by Lord Shaw of Dunfermline in Loch v John Blackwood Limited [1924] AC 783 at 791 from Neville J in Re Bleriot Manufacturing Aircraft Co (1916) 32 TLR 253 at 255: 'The words 'just and equitable' are words of the widest significance and do not limit the jurisdiction of the Court to any case. It is a question of fact, and each case must depend on its own circumstances.' A court directed by statute to proceed according to what is "just and equitable" is given a wide discretion. There is, as Owen J observed in Thomas v MacKay Investments Pty Ltd (1996) 22 ACSR 29 4 at 302, "no necessary limit on the generality of the words". They are "to be applied in their ordinary meaning as calling for the exercise of judgment in the conventional way." [46] In Stephenson v State Bank of New South Wales (1996) 39 NSWLR 101 Sheller JA, in considering s 66M of the Conveyancing Act 1919, said (at 113): 'The determination of what is just and equitable in the circumstances is not a matter of unfettered individual opinion, nor does it involve a discretion of an arbitrary kind; see Cominos v Cominos (1972) 127 CLR 588 at 599. As Kitto J observed in R v The Commonwealth Industrial Court; Ex parte the Amalgamated Engineering Union, Australian Section (1960) 103 CLR 368 at 383, the criteria are of a nature with which Courts are familiar. In Talga v MBC International Limited (1976) 133 CLR 622 at 634 Stephen, Mason and Jacobs JJ dealing with the issue raised for the Court by the Banking Act 1974 of whether it was just and equitable that a transaction should be treated as valid, said: "... The court will have before it an existing transaction replete with all its surrounding facts and circumstances and in their light will determine what is just and equitable. In doing so it will certainly be exercising a wide discretion that this is a commonplace of the curial process; the court will be bound to act judicially, exercising its discretion by reference only to such considerations affecting the transaction as, on an examination of the legislation, may be seen to be material to the decision which it is called on to make. Irrelevant matters, matters such as the plaintiffs instanced in the course of argument, which have no rational connection with the policy of the regulations but would be expressive only of the personal predilections of the Court cannot be allowed by it to play any part in its decision." Campbell J endorsed this approach in Sullman v Sullman [2002] NSWSC 169, applying it to his consideration of what was "just and equitable" in relation to s 20 of the Property (Relationships) Act 1984. [47] Cominos v Cominos (1972) 127 CLR 588 was a case in which the High Court was asked to consider the constitutional validity of s 86 of the Matrimonial Causes Act 1959 (Cth), which granted the court power to order the settlement of property in the manner it considered "just and equitable". Gibbs J said at 599: "It is true that in determining an application under s 86 the court, after deciding such questions of fact and law as have arisen, is called upon to make a discretionary judgment. The discretion, although wide, must, as was said by Windeyer J in Sanders v Sanders (1967) 116 CLR 366, at pp 379-380, 'be exercised according to accepted principle, for what is just and equitable in this jurisdiction is not a matter of unfettered individual opinion'. It is not discretion of an arbitrary kind. The standard imported by the familiar words 'just and equitable' is 'by no means foreign to the judicial function' (cf Steele v Defence Forces Retirement Benefits Board (1955) 92 CLR 177, at p 188 nor is it 'so indefinite as to be insusceptible of strictly judicial application' (cf Reg v Commonwealth Industrial Court; Ex parte The Amalgamated Engineering Union, Australian Section (1960) 103 CLR 368, at p 383). It is also true that s 86 enables the court to create new rights and impose new duties and not merely to enforce legal rights already existing, but the fact that a court is authorized to create or alter rights and not merely to declare and give effect to pre-existing rights does not necessarily show that the powers conferred are not judicial powers: Peacock v Newtown Marrickville and General Co-operative Building Society No 4 Ltd (1943) 67 CLR 25 at pp 35, 46 and 54-55.' 67Section 562A(4) of the Corporations Act must therefore be seen as conferring a discretion that, while wide, can only be exercised judicially in the light of the whole of the circumstances surrounding the relevant subject matter. Lord Wilberforce explained this exercise in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at p.379: "It [the phrase 'just and equitable'] does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way." 68In the present context, the relevant "legal rights" are those arising from s 562A(2) or s 562A(3) - broadly speaking, first, the rights of all creditors entitled to participate under the winding up in respect of debts arising from insurance contracts written by the company before winding up to participate, to the exclusion of other creditors, in the enjoyment of reinsurance proceeds received by the liquidator (until either 100 cents in the dollar has been paid on those debts or the proceeds have been exhausted) and, second, the right of each such favoured creditor to participate in that way pari passu with each other such favoured creditor. Given the law reform materials to which I have referred (see paragraph [17] and [18] above), it may be inferred that the legislature deliberately rejected any notion of automatic flow-through of reinsurance proceeds to only those creditors with debts arising from the insurances which, as it were, were backed by the particular reinsurance; and that likely difficulties of matching reinsurance contracts held with insurance contracts written played a significant part in the adoption of that course. 69Elements of the evidence are relevant to the matters raised by s 562A(5)(a) and s 562A(5)(b). I shall return to these. As to s 652A(5)(c), I was not taken to evidence that would suggest that the HeathUI contracts of insurance made reference to those contracts being "protected by reinsurance". 70Section 562A(5)(d) directs attention, in the present case, to the question whether any person insured by HeathUI under an insurance contract entered into before winding up commenced "would be severely prejudiced" if, in accordance with s 562A(2) or s 562A(3), all persons so insured by HeathUI shared rateably in the net reinsurance proceeds received by the liquidators from Baloise, Hannover and Gerling. This makes it necessary to consider the position of not only the plaintiffs but also the position of the other insurance creditors of HeathUI. 71There are, at this point, fourteen insurance creditors of HeathUI, including the plaintiffs. Their claims amount to some $58.267 million. Of these claims, a total of $21.333 million has been agreed by the liquidators and the balance of $36.933 million is not yet agreed. The plaintiffs account for $36.971 million of the total of $58.971 million, $4.658 million of the agreed amount of $21.333 million and $32.312 million of the $36.933 million not agreed. 72Mr Honey estimates that, if all insurance creditors participate rateably in the reinsurance proceeds now in question (that is, there is no preferred treatment for the plaintiffs), those creditors will receive approximately 20 to 25 cents in the dollar in respect of their insurance debts, whereas if the plaintiffs' application is successful, the other insurance creditors are likely to receive approximately 15 to 20 cents in the dollar. These calculations have been made according to the "broad pooling" approach regarded as applicable to s 562A in both New Cap Reinsurance Corporation Ltd v Faraday Underwriting Ltd [2003] NSWSC 842; (2003) 177 FLR 52 and Re HIH Casualty and General Insurance Ltd [2005] NSWSC 240; (2005) 190 FLR 398. The correctness of the approach did not arise for consideration at subsequent of the stages of the New Cap litigation: Assetinsure Pty Ltd v New Cap Reinsurance Corporation Ltd [2004] NSWCA 225; (2004) 61 NSWLR 451 and, in the High Court, Assetinsure Pty Ltd v New Cap Reinsurance Corporation Ltd (above). 73The only relevant persons who might conceivably be "severely prejudiced" by the application of reinsurance proceeds rateably among all insurance creditors in accordance with s 562A(2) or s 562A(3) are the plaintiffs. Prejudice will arguably accrue to insurance creditors other than the plaintiffs only if the scheme of s 562(2) and s 562(3) is departed from by way of an order of the kind now sought; but s 562A(5)(d) is concerned with prejudice flowing from the unaltered operation of s 562A(2) and s 562A(3), not prejudice flowing from alteration pursuant to s 562A(4) of the effects that they would otherwise produce. 74Section 562A(5)(d) uses the words "severely prejudiced". An electronic search of the AUSTLII database suggests that these words do not appear elsewhere in the Corporations Act or, for that matter, in any other enactment of an Australian legislature. I approach the provision on the simple footing that it is concerned with "prejudice" (or disadvantage) that is "severe", that is, harsh or unpleasantly extreme, so that the question is whether the plaintiffs will be disadvantaged in a way that is harsh or unpleasantly extreme if s 562A(3) applies in unmodified form. Assessment 75In the present case, there is no difficulty, as regards the 1981/82 and 1982/83 years, in matching insurance contracts under which HeathUI granted cover to the plaintiffs with the reinsurance contracts written in favour of HeathUI by the three relevant reinsurers, Baloise, Hannover and Gerling. HeathUI entered into those and associated facultative reinsurance contracts for the clear and express purpose of providing for the plaintiffs cover that HeathUI was itself unable to provide without the assistance of reinsurers and in circumstances where the reinsurers could not insure the plaintiffs direct. In addition, the premiums paid to by the plaintiffs were passed through to the reinsurers, less a commission retained by Heath Australia. It is, I think, clear from the evidence that HeathUI derived no premium so that it is in substance correct to say, in words used by counsel for the plaintiff, that HeathUI ""was paid nothing for doing nothing". 76In terms of s 562A(5)(a), it is plainly possible to identify the insurance held by the plaintiffs from HeathUI as precisely that in respect of which reinsurance contracts were entered into with Baloise, Hannover and Gerling in relation to the 1981/82 and 1982/83 years. As to the s 562A(5)(b) matter, the payments made by the plaintiffs in respect of the insurance provided by HeathUI for those years were applied in whole to pay insurers and reinsurers in the London market, after deduction of Heath Australia's 7.5% commission. There is, as I have said, no evidence relevant to the s 562A(5)(c) matter. It remains to consider the question of "severe prejudice" raised by s 562A(5)(d). 77The reinsurance backing was arranged by HeathUI with the full knowledge of the plaintiffs' broker and under arrangements that that broker expressly or by implication approved. As has been noted, the James Hardie Group and its broker were active in assisting Heath Australia to obtain cover in the London market 78It is, in my opinion, clear that, in relation to each of the 1981/82 and 1982/83 years, the plaintiffs' dealings with Heath Australia and HeathUI were such as to authorise or require them to provide insurance cover that the plaintiffs knew that HeathUI could not itself carry unaided. The plaintiffs must be taken to have been aware, through their broker, that the whole of the risk nominally taken by HeathUI would be laid off in the London market by means of facultative reinsurance contracts specifically sought and obtained for the purpose. Those reinsurance contracts did not cover a class or category of exposure to which HeathUI became subject because of a number of policies written for different insureds either without reference to reinsurance or with the possibility of some generic reinsurance in mind (or, indeed, with generic reinsurance having already been obtained without reference to the several policies). The reinsurance was the means by which the reinsurers provided, through HeathUI, the insurance the plaintiffs required. The reinsurance was obtained for the express purpose of fulfilling the plaintiffs' needs. 79On that basis, the reinsurance proceeds derived by HeathUI ought properly be regarded as part of what HeathUI, as insurer, was committed to provide to the plaintiffs upon and by reason of their sustaining the relevant loss. 80It will therefore be a cause of prejudice to the plaintiffs if they do not receive the direct benefit of the reinsurance moneys for which they bargained with HeathUI. That company was, to the plaintiffs' knowledge, of insufficient substance and stature to carry the risk itself. The plaintiff chose to deal with HeathUI notwithstanding its knowledge of the company's limited capacity - but only when the limitation had been offset by reinsurance. 81It is suggested in submissions made on behalf of the liquidators that it is material to the question of prejudice to the plaintiffs that their current financial capacity is such that, without external help, they do not expect to be able to pay their creditors (being asbestos claimants) from the year ending on 30 June 2011 and for a number of years thereafter. This is the effect of the evidence of Mr Booth, the chief executive officer of AICF: "Give the AICF's financial position and the expected level of asbestos claims which will be made against it in this and coming years, I regard it as vital to obtain the benefit of any additional funds which may be available to [the plaintiffs] from all sources, including all potential insurance and reinsurance recoveries." 82Mr Booth's statement does not, in terms, address the question of prejudice to the plaintiffs if s 562A(3) is left to take its course without the intervention of the s 562A(4) orders the plaintiffs seek. He is, rather, concerned - and understandably concerned - with the socially important matter of the availability of money to meet the claims of persons with rights to be compensated in respect of illness contracted through exposure to asbestos. The fact that the due working out of the s 562A scheme, without modification pursuant to s 562A(4), may mean that there is less money for those persons than if the s 562A(4) order is made as sought (so that more will then have to be sought from other quarters), although very important in a general sense, is irrelevant to the question of prejudice with which s 562A(5)(d) is concerned. 83Counsel for the liquidators made the related point that enhancement of the plaintiffs' receipts in the winding up of HeathUI through any s 562A(4) order will merely mean that there is reduced demand on the other sources of AICF funding, that is, contributions by the new Hardie Group under the 2006 funding agreement and loans from government. In that way, it is said, the ultimate beneficiary of the s 562A(4) orders, if made, will be the new Hardie Group. But this too, to my mind, is irrelevant to the questions of prejudice with which s 562A(5)(d) is concerned. 84On the question of prejudice to the plaintiffs, it seems to me that the only relevant consideration is that the true arrangement with HeathUI was that it would provide for the plaintiffs the benefit of the specific cover obtained in the London market through reinsurance which, to the plaintiffs' knowledge, offset the whole of HeathUI's own theoretical exposure as insurer; and that, if s 562A(3) takes its course unaffected by a s 562A(4) order of the kind the plaintiffs seek, the plaintiffs will be denied that intended benefit. I do not know whether it would be correct to regard that prejudice as "severe", but there is no need for me to attempt to answer that question since a finding on the "severely prejudiced" question posed by s 562A(5)(b) is not essential. 85Given the clear and strong link between the insurance cover made available by HeathUI and the specific reinsurance obtained by HeathUI, the financial arrangements regarding premium and the true nature of the arrangement as described in the immediately preceding paragraph, the special circumstances of this case are, in my opinion, such as to make it just and equitable that the ordinary course envisaged by s 562A(2) and 562A(3) be departed from in respect of each of the 1981/82 and 1982/83 policy years in such a way that the net reinsurance proceeds received from Baloise, Hannover and Gerling are applied towards the debts owing to the plaintiffs under insurance contracts held at commencement of the winding up, to the exclusion of debts owing to other creditors under insurance contracts then held, except to the extent, if any, that any balance of the net reinsurance proceeds remains after 100 cents in the dollar has been paid in respect of those debts owing to the plaintiffs (on the figures as I understand them, the possibility that there will be any such balance is non-existent and academic). Decision on the first part of the application 86The court will therefore grant relief of the kind the plaintiffs seek in relation to sums actually received under reinsurance for the two policy years in question - subject to two matters. First, there should be a single order, not two separate orders as contemplated by the application: see paragraph [63] above. The single order should both displace s 562A(2) and s 562A(3) and specify the alternative method of application the court is directing. This is consistent with s 562A(4) which refers to a single order. Second, there is a need for clarification as to which of the plaintiffs actually have relevant insurance claims that have been recognised in the winding up in accordance with the scheme of arrangement. It seems likely that ABN 60 Pty Ltd, although the principal insured named in the policies, did not incur any liability to which the HeathUI insurance was responsive and that the claimants under the winding up and scheme are Amaca Pty Ltd and Amaba Pty Ltd only. There is also a question whether there needs to be some appropriate apportionment between those two companies. The second part of the application 87The answer to the question whether the court may make a s 562A(4) order in respect of an amount not yet received under a contract of reinsurance depends entirely on the correct construction of the legislation. 88In contending for a positive answer, the plaintiffs place emphasis on the words "has been or is received" in s 562A(1)(b). This, the plaintiffs say, shows that the section as a whole is concerned not only with amounts already received but also with amounts yet to be received - otherwise it would have been sufficient to refer to an amount that "has been received" and to omit the words "or is". 89I do not think that the question can be disposed of in that way. The power under s 562A(4) is a power to order that s 562A(2) and s 562A(3) "do not apply to the amount received under the contract of reinsurance" and to cause the amount to be applied in some other way. Such an order displaces the s 562A(2) or s 562A(3) requirement as to payments to be made by the liquidator "out of the amount received" under the reinsurance contract and imposes some other requirement. Under s 562A(4) itself, the order can only be made if the court forms an opinion that the alternative manner of application of "the amount received under the contract of reinsurance" is "just and equitable in the circumstances". 90In deciding whether an order affecting a particular "amount received under the contract of reinsurance" should be made, the court must thus focus on the amount itself, the circumstances prevailing at the time the court is asked to make the order and what, in those circumstances, is "just and equitable" with respect to the application or disposition of the amount. The inquiry is, of its nature, directed to an existing and established factual situation involving the "amount received". A necessary factor in the decision as to what is just and equitable - and an element of the "circumstances" to be taken into account - may be, in some cases, the quantum of the amount. 91I am not persuaded that, as a matter of construction, it is open to the court to make an order under s 562A(4) otherwise than in relation to an amount already received and presently caught by whichever of s 562A(2) and s 562A(3) operates unless displaced pursuant to such an order. The purpose of s 562A(4) is to allow departure from the s 562A(2) or s 562A(3) regime in respect of a particular sum according to circumstances for the time being prevailing. To attempt to apply s 562A(4) to future receipts which, if they are forthcoming at all, will emerge in circumstances that cannot presently be known would be to remove the inquiry from the specific factual surroundings to which the section directs attention. 92The words "has been or is received" in s 562A(1)(b) are followed by "by the company or the liquidator". As the plaintiffs acknowledged in submissions, the distinction between "has been" and "is" may be one that is concerned to accommodate both receipts by the company before the advent of winding up and receipts by the liquidator or the company in liquidation. On this basis, both "has been" and "is" have work to do. 93I am of the opinion that the court has no power to make the order the plaintiffs seek as to payments to be received in the future. 94The relief sought in that respect will not be granted. Conclusion 95The parties should bring in short minutes of orders to give effect to paragraphs [86] and [94] above. If there is any difficulty in formulating orders, the matter may be mentioned in court. 96The short minutes should also reflect any agreed position on costs. If there is no agreement on costs, I shall hear submissions at a time to be fixed. ********** 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. Decision last updated: 02 March 2011