Supreme Court New South Wales Medium Neutral Citation: In the matter of HIH Casualty & General Insurance Ltd (in liquidation and subject to schemes of arrangement) [2014] NSWSC 1741 Hearing dates: In chambers Decision date: 04 December 2014 Jurisdiction: Equity Division - Corporations List Before: Black J Decision: Orders made under Corporations Act 2001 (Cth) s 562A(4). Catchwords: CORPORATIONS - Winding up - Insolvency - Proceeds of contract of reinsurance - Application for orders under Corporations Act 2001 (Cth) s 562A(4) - Whether "just and equitable" to make orders sought. Legislation Cited: - Corporations Act 2001 (Cth) ss 555, 556, 562A, 562A, 562A(1), 562A(1)(a), 562A(1)(b), 562A(2), 562A(3), 562A(4), 562A(5), 562A(5)(d) - Evidence Act 1995 (NSW) s 91(1) Cases Cited: - Amaca Pty Ltd v McGrath (as liquidators of HIH Underwriting & Insurance (Australia) Pty Ltd [2011] NSWSC 90; (2011) 82 ACSR 281 - Amaca Pty Ltd v McGrath [2012] NSWSC 176; (2012) 87 ACSR 625 - AssetInsure Pty Ltd v New Cap Reinsurance Corporation Ltd (in liq) [2006] HCA 13; (2006) 225 CLR 331 - HIH Casualty & General Insurance Ltd v Building Insurers' Guarantee Corporation [2003] NSWSC 1083; (2003) 202 ALR 610 - Re HIH Casualty & General Insurance Ltd [2005] NSWSC 240; (2005) 190 FLR 398 - Re HIH Casualty & General Insurance Ltd (in liq) and subject to scheme of arrangement [2013] NSWSC 741; (2013) 95 ACSR 1 - Re HIH Underwriting Insurance (Australia) Pty Ltd (in liq and subject to a scheme of arrangement) [2014] NSWSC 484; (2014) 100 ACSR 147 - Sydney Water Corporation v McGrath [2014] NSWCA 197; (2014) 101 ACSR 123 Category: Interlocutory applications Parties: Amaca Pty Ltd (under NSW administered winding up) (First Plaintiff) Amaba Pty Ltd (under NSW administered winding up) (Second Plaintiff) ABN 60 Pty Ltd (under NSW administered winding up) (Third Plaintiff) Messrs A G McGrath & C J Honey as liquidators of the HIH Group of companies (First Defendant) HIH Underwriting & Insurance (Australia) Pty Ltd (in liquidation and subject to a scheme of arrangement (Second Defendant) Representation: Solicitors: Henry Davis York (Plaintiffs) Ashurst (Defendants) File Number(s): 2012/277122 Judgment 1The Plaintiffs were companies formerly within the James Hardie Group and have previously brought several applications under s 562A(4) of the Corporations Act 2001 (Cth) in respect of reinsurance recoveries received by companies within the HIH Group. An initial application concerned insurance and reinsurance arrangements for policy years 1981/82 and 1982/83 and was allowed by Barrett J (as his Honour then was) in Amaca Pty Ltd v McGrath (as liquidators of HIH Underwriting & Insurance (Australia) Pty Ltd [2011] NSWSC 90; (2011) 82 ACSR 281 ("Amaca 1"). A further application, concerning policy years 1989/90 to 1992/93 ("mid-Clator" years) was allowed by me in Amaca Pty Ltd v McGrath [2012] NSWSC 176; (2012) 87 ACSR 625 ("Amaca 2"). Another application was made in respect of the period, also the subject of this application, known as the "end-Clator" period and was allowed by me in [2012] NSWSC 1523 ("Amaca 3"). I also allowed an application to similar effect in respect of further reinsurance recoveries received by HIH Casualty & General Insurance Ltd (in liq and subject to scheme of arrangement) ("HIH C&G") in respect of three of the same policy years, but in relation to different reinsurers, on 20 December 2013 ([2013] NSWSC 2014). 2The Plaintiffs now bring a further application in relation to additional reinsurance receipts received by HIH C&G from Portman Insurance Ltd ("Portman Insurance") relating to the policy years 1993/94 - 1995/96 and AXA Insurance UK relating to the policy year 1996/97. The relevant reinsurance recoveries have been received by a payment under a commutation between HIH C&G and those reinsurers dated 26 November 2010, to which the Plaintiffs were also party, involving a specified settlement sum ("Commutation"). Part of that Commutation related to the "mid-Clator years" and has been addressed by orders made in Amaca 2. Another part of the Commutation related to the years 1980/81 - 1982/83 and has been the subject of orders made by the Court on 2 May 2014 in other proceedings. The Defendants consent to the orders sought by the Plaintiffs and the parties have requested that those orders be made in chambers without the need for a further hearing. 3The application is supported by an affidavit of Ms Narreda Grimley sworn 30 October 2014. Ms Grimley, who has sworn affidavits in respect of a number of previous applications, is the General Manager of Asbestos Injuries Compensation Fund Ltd ("AICF") and was previously the Chief Operating Officer of that entity. Ms Grimley refers to previous judgments delivered in respect of the end-Clator proceedings and to the fact that, in December 2010, the Commutation Agreement was entered into by HIH C&G and several reinsurers, and a copy of that agreement is annexed to Ms Grimley's affidavit. Ms Grimley also refers to an earlier affidavit sworn 15 August 2012, in the end-Clator proceedings, in which she gave evidence as to the contracts of reinsurance by which HIH C&G had reinsured its asbestos liability cover to the James Hardie Group for the end-Clator policy years, which included the participation of a predecessor of Portman Insurance for policy years 1993/94 - 1995/96 and the participation of a predecessor of AXA Insurance UK for the 1996/97 policy year. Ms Grimley also refers to evidence previously led in the proceedings as to the proportions of the reinsurance written by the predecessors of Portman Insurance and of AXA Insurance UK. 4I have referred to the operation of s 562A of the Corporations Act in several other judgments in these proceedings, drawing upon the observations as to the scope of that section by the High Court of Australia in AssetInsure Pty Ltd v New Cap Reinsurance Corporation Ltd (in liq) [2006] HCA 13; (2006) 225 CLR 331 and on the detailed consideration of the section by Barrett J in Re HIH Casualty & General Insurance Ltd [2005] NSWSC 240; (2005) 190 FLR 398. It will not be necessary to repeat that analysis in detail here. Section 562A(1) of the Corporations Act provides that that 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." This section overrides both s 555 and s 556 of the Corporations Act by directing that the specified assets be applied towards the claims with which it is concerned: HIH Casualty & General Insurance Ltd v Building Insurers' Guarantee Corporation [2003] NSWSC 1083; (2003) 202 ALR 610 at [70]; Amaca 1 at [9], [70]. 5The requirements of s 562A(1)(a) of the Corporations Act are satisfied in this application for the reasons set out in my earlier judgments in respect of dealings between the Plaintiffs, HIH C&G and the reinsurers in the same policy years. I have previously held that the first requirement in s 562A(1)(b) of the Corporations Act, that an amount "in respect of that liability" is received by the insurer, is satisfied in respect of a settlement by commutation of past and future or contingent liabilities and I proceed on that basis in this application: Amaca 2 at [7]; Amaca 3 at [7]. The structure of the Commutation Agreement makes clear that the payments received by HIH C&G and the subject of this application were received from Portman Insurance and AXA Insurance UK in respect of HIH C&G's actual or contingent liability to the Plaintiffs. I have also previously held that the second requirement under s 562A(1)(b) of the Corporations Act, that an amount is received by the insurer under the contract of reinsurance, can be satisfied where payments are made in commutation of rights under the contract of reinsurance (Amaca 3 at [8]) and I also proceed on that basis. 6As I noted in Amaca 2 and Amaca 3, the usual position is that a liquidator must distribute reinsurance proceeds among the insured creditors in the manner specified in s 562A(2) - (3) of the Corporations Act. However, the Court may make an order providing for a different allocation of reinsurance proceeds under s 562A(4) of the Corporations Act which relevantly provides that: "(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." That section allows the Court to displace the operation of s 562A(2)-(3) of the Corporations Act and, by order, substitute a manner of application of the amount of reinsurance proceeds that is different from that which would have otherwise have applied under the displaced provisions, being a manner of application of those proceeds that the Court "considers just and equitable in the circumstances". I have reviewed the scope of the "just and equitable" criterion in that section in Amaca 2 at [13] - [15] and need not repeat that review here. 7Several matters that the Court may take into account in considering whether to make an order under s 562A(4) are specified, in an inclusive manner in s 562A(5), as follows: "(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." 8It seems to me that it is just and equitable to make an order under s 562A(4) of the Corporations Act in respect of these reinsurance arrangements, as it was similarly just and equitable to make such an order in respect of the other reinsurance arrangements applying in the end-Clator years which I addressed in Amaca 3. The Plaintiffs have established the historical pattern of dealings between James Hardie, HIH C&G and the reinsurers in the end-Clator years in the evidence led in the earlier applications in these proceedings and in this application. As I noted in Amaca 3 at [13], evidence of a decision, or a finding of fact, in another Australian proceeding is not admissible in this proceeding to prove the existence of the fact that was in issue in that proceeding, by reason of s 91(1) of the Evidence Act 1995 (NSW). However, the Court can have regard to the factual matters established by uncontested evidence in the earlier proceedings, and noted in the earlier judgments, where the corresponding evidence was led in these proceedings. 9That evidence establishes that the relevant reinsurance contracts were obtained by HIH C&G in respect of the cover sought by the James Hardie Group and the Plaintiffs and that, for the purposes of s 562A(5) of the Corporations Act, it is possible to identify particular contracts of insurance as being the contracts in respect of which the contracts of reinsurance were entered into. I summarised that evidence, on which the Plaintiffs again rely in this application, in Amaca 3 at [14] - [16]. HIH C&G entered into those reinsurance contracts for the purpose of providing cover for the Plaintiffs which it would not have been able to provide without that reinsurance and in circumstances where the reinsurers could not insure the Plaintiffs directly. There is evidence, which I also reviewed in Amaca 3, that the insurance provided by HIH C&G depended on the provision of that reinsurance cover and that HIH C&G did not accept primary liability on the policy. As I also noted in Amaca 3, the James Hardie Group and its broker actively assisted HIH C&G to obtain the relevant reinsurance cover and were aware, through their broker, that substantially the whole of the risk nominally undertaken by HIH C&G had in fact been placed in the London market by facultative reinsurance contracts obtained for that purpose. 10It seems to me that the Plaintiffs would be "severely prejudiced", for the purposes of s 562A(5)(d) of the Corporations Act, if s 562A(2) - (3) applied in this case, for the reasons noted by Barrett J in Amaca 1 which I followed in Amaca 2 and, in respect of the end-Clator period, in Amaca 3. In particular, the Plaintiffs would be prejudiced if they did not receive the direct benefit of the reinsurance monies for which they had bargained, where they would not have contracted for cover from HIH C&G without that reinsurance. As I noted in Amaca 3, the conclusion that it is just and equitable to make the orders sought is supported by the fact that the adverse impact of those orders on other insurance creditors of HIH C&G is widely diversified and the detriment suffered by any particular creditor is limited, whereas the prejudice to the Plaintiffs of being deprived of the proceeds of the reinsurance for which they bargained would be significant. The position in respect of this application is identical to that in Amaca 3, since the present policies are a subset of those which I considered in that case. 11It seems to me that the decision of Nicholas J, dealing with different reinsurance arrangements between different parties, in Re HIH Casualty & General Insurance Ltd (in liq) and subject to scheme of arrangement [2013] NSWSC 741; (2013) 95 ACSR 1, and affirmed on appeal as Sydney Water Corporation v McGrath [2014] NSWSC 197; (2014) 101 ACSR 123, does not require a different result. That decision applied the same principles as the judgments to which I have referred above to different arrangements, and reflects his Honour's finding that the particular reinsurance arrangements in issue in that case were not such as to warrant such an order; see also the discussion of that decision in Re HIH Underwriting Insurance (Australia) Pty Ltd (in liq and subject to a scheme of arrangement) [2014] NSWSC 484; (2014) 100 ACSR 147 at [36] - [37]. 12Accordingly, I am satisfied that orders should be made in the form agreed between the parties, as follows and I make those orders: For policy years commencing 31 March 1993, 31 March 1994, 31 March 1995 and 31 March 1996: 1 Pursuant to s 562A(4) of the Corporations Act 2001 (Cth) ("the Act"), sub-sections 562A(2) and 562A(3) of the Act do not apply to: (a) $850,237 received from Portman Insurance Ltd (owned by AXA) ("the 1993 to 1995 AXA Receipt"); (b) $285,035 received from AXA Insurance UK ("the 1996 AXA Receipt") and the 1993 to 1995 AXA Receipt and the 1996 AXA Receipt (collectively "the 1993 to 1996 AXA Receipts") must instead be applied by the First Defendants by: (c) deducting expenses and incidental to getting in the 1993 to 1996 AXA Receipts, being 2.5% of the receipts; and (d) paying the balance of the 1993 to 1996 AXA Receipts, being $1,106,890.20, less any dividends (or distributions) already paid by the Defendants in respect of the claims agreed and which are the subject of the receipts, to the First Plaintiff. 2. No order as to costs. I otherwise stand over the matter to 12 December 2014, when other associated applications are listed before the Court. ********** 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: 19 December 2014