Re Hih Insurance Group Limited and Ors [2001] NSWSC 308 (23 April 2001)

Last Updated: 31 May 2001

NEW SOUTH WALES SUPREME COURT

CITATION: Re HIH Insurance Group Limited & Ors [2001] NSWSC 308

CURRENT JURISDICTION: Equity

FILE NUMBER(S): 1799/01

1798/01

1801/01

1806/01

1808/01

1810/01

1815/01

HEARING DATE{S): 20 and 23 April 2001

JUDGMENT DATE: 23/04/2001

PARTIES:

1799/01 - HIH Insurance Limited (P)

1798/01 - FAI Traders Insurance Company Pty Limited (P)

1801/01 - HIH Underwriting and Insurance (Australia) Pty Limited (P)

1806/01 - CIC Insurance Limited (P)

1808/01 - FAI General Insurance Company Limited (P)

1810/01 - HIH Casualty and General Insurance Limited (P)

1815/01 - HIH Underwriting and Agency Services Limited (P)

JUDGMENT OF: Hamilton J

LOWER COURT JURISDICTION: Not Applicable

LOWER COURT FILE NUMBER(S): Not Applicable

LOWER COURT JUDICIAL OFFICER: Not Applicable

COUNSEL:

B A J Coles QC (Ps)

SOLICITORS:

Blake Dawson Waldron (Ps)

CATCHWORDS:

CORPORATIONS [286] - Winding up - Liquidators - Rights and powers - In winding up by Court - Power to enter into agreement on company's behalf - Necessity for approval if performance of contract may extend beyond 3 months - Approval by Court - Basis on which discretion may be exercised - Relevant considerations.

ACTS CITED:

Corporations Law s 477(2B)

DECISION:

Entry into contracts approved.

JUDGMENT:

IN THE SUPREME COURT

OF NEW SOUTH WALES

EQUITY DIVISION

HAMILTON J

MONDAY, 23 APRIL 2001

1799/01 RE HIH INSURANCE LIMITED

1798/01 RE FAI TRADERS INSURANCE COMPANY PTY LIMITED

1801/01 RE HIH UNDERWRITING AND INSURANCE (AUSTRALIA) PTY LIMITED

1806/01 RE CIC INSURANCE LIMITED

1808/01 RE FAI GENERAL INSURANCE COMPANY LIMITED

1810/01 RE HIH CASUALTY AND GENERAL INSURANCE LIMITED

1815/01 RE HIH UNDERWRITING AND AGENCY SERVICES LIMITED

JUDGMENT - On applications under s 477(2B) of the Corporations Law

1 HIS HONOUR: These are applications by the liquidator of seven companies for the approval of the Court under s 477(2B) of the Corporations Law to the entry into an agreement on the companies' behalf by the provisional liquidator. The proceedings arise out of the much publicised collapse of the HIH Insurance Group. One of the companies in respect of which application is made is the principal company in the Group, HIH Insurance Limited (in provisional liquidation), and the other companies are subsidiaries of or companies associated with that company.

2 On 14 March 2001, HIH Insurance Limited ("HIH") entered into an Insurance Portfolio Agreement with NRMA Insurance Limited ("NRMA"). By that agreement, HIH sold to NRMA shares in four companies, being four of the other companies in respect of which these applications are made. The agreement also provided for NRMA, from the completion date of the agreement, to offer new policies on expiry of policies of HIH and it provided for the sale of certain assets by HIH to NRMA. On the very next day, 15 March 2001, a provisional liquidator was appointed to HIH, and the other six companies, the subject of these applications, have also been placed in provisional liquidation. On 23 March 2001, HIH, then in provisional liquidation, entered into an Amendment and Supplemental Agreement with NRMA, varying the Insurance Portfolio Agreement. And on 23 March 2001, each of the seven companies, all then being in provisional liquidation, entered into a Claims Management Agreement with NRMA. That agreement was entered into in pursuance of and for the purpose of carrying out the Insurance Portfolio Agreement as amended. In substance, the Claims Management Agreement provides by clause 2.1:

"That each of the seven companies appoints NRMA to provide to it claims management services and provides that the term of the agreement will commence on the date of the agreement and continue until all managed claims have been fully and finally resolved or the agreement is terminated pursuant to its terms."

There is no doubt that term will be for a period far beyond three months.

3 It is the Claims Management Agreement which is the subject of the present applications. It is clear, by the provisional liquidator's entering into the Amendment Agreement and the Claims Management Agreement, as well as by his evidence, that the proper course is for the Investment Portfolio Agreement entered into by HIH on the last day before its provisional liquidation to be carried out, despite the actual provisional liquidation and likely final liquidation of the companies. However, probably by oversight, approval under s 477(2B) to the entry into the Insurance Portfolio Agreement was not sought before the liquidator purported to enter into that agreement.

4 Section 477(2B) of the Corporations Law provides as follows:

"(2B) Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not enter into an agreement on the company's behalf (for example, but without limitation, a lease or a charge) if:

(a) without limiting paragraph (b), the term of the agreement may end; or

(b) obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance;

more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those 3 months."

Each of the potential grantors of approval is, in effect, given coordinate power; there is no suggestion that a committee of inspection or a meeting of creditors should be approached before the Court is approached for its approval under the subsection, and such has not occurred in this case.

5 The considerations which the Court ought take into consideration in approaching the exercise of its discretion under the subsection have been dealt with in a number of cases. In Re G A Listing & Maintenance Pty Limited (1994) 15 ACSR 308, Young J (as his Honour then was) said (at 310):

"The whole purpose of liquidation is, to borrow a metaphor used by Sir Laurence Street some years ago, to lead the horse back into the stable. The activities of the liquidator must always be directed towards reducing the company's assets to cash or divisible property, paying the debts and distributing any surplus to the members. Any activity which marks a substantial deviation from the activity of `leading the horse back to the stable' is, generally speaking, outside the power of the liquidator. However, human activity is so diverse that there will be situations where the liquidator cannot lead the horse back to the stable by the direct route. He may have to pause along the way because the path is blocked by some litigation or other impediment. Thus, whilst leasing of the company's property is generally outside the power of the liquidator because it does not assist in the realization of the assets, there are exceptions. Thus in Re Premier Permanent Building Society [1890] VicLawRp 132; (1890) 16 VLR 643, a company had a very large quantity of freehold property and the property market in the 1890 depression was such that it would be disastrous to force the whole of the property onto the market at once. The court, accordingly, thought that it was appropriate to sanction a lease by the liquidator so the property could be the subject of orderly marketing ..."

After considering further authority, his Honour said (at 311):

"In my view this line of cases gives the clue as to whether the court should exercise its power under s 477(2B) of the Corporations Law. If the court can see that the transaction that is to enure past three months is really for the proper realization of the assets of the company or assists its winding up, then the leave should be granted. In view of the general attitude in the Harmer Report that, subject to the particular fetters spelt out in the legislation, liquidators should be given fairly free rein to conduct the winding up. The court's duty is to see that despite the prolongation of the leading the horse home process, the transaction is in the interests of the company, the creditors and the community."

See also Re Feastys Family Restaurants Pty Ltd (in liq) (1996) 14 ACLC 1058; Re Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 29 ACSR 109. I can muster no enthusiasm for Sir Laurence Street's metaphor (adopted by Young J) of leading the horse back to the stable, but, in my view, the citation from the judgment of the now Chief Judge in Equity in the G A Listing case correctly sets out the approach which the Court ought take to the exercise of its discretion.

6 The only other point of law which needs attention is the question of whether the approval provided for by s 477(2B) may be given by the Court retrospectively, since the agreement has already been entered into. It is now plain that the approval may be given nunc pro tunc. In Empire (Aust) Nominees Pty Ltd v Vince [2000] VSC 324; (2000) 18 ACLC 738 in the Supreme Court of Victoria Warren J said (at 741):

"Such approval should be obtained in advance of the exercise of the power in question, although the court has the power to give a retrospective sanction in a proper case to action taken without the requisite approval: see Re Associated Travel, Leisure & Services Limited (in liq) [1978] 1 WLR 547; also, McPherson, The Law of Company Liquidation (4th ed) 349."

In Re Associated Travel, Leisure & Services Limited (in liq) [1978] 1 WLR 547, Templeman J sitting in the Chancery Division of the High Court of Justice had allowed a liquidator, who had employed a solicitor under similar provisions of English companies legislation, to have the solicitor's costs out of the company's funds, albeit approval to the solicitor's employment was not obtained until after the event; in the Empire Nominees case, Warren J gave the Court's approval under s 477(2B) after the event. There is, therefore, no difficulty in my now granting approval to the entry into the subject agreement by the seven companies if minded to do so.

7 I bear in mind the injunctions in the authorities that a liquidator's activities must be limited to those necessary for winding up the company and distributing its assets to those who are entitled to them. However, I also bear in mind the complication of the windings up of insurance companies which collapse with many, many policies outstanding. In this regard, I particularly bear in mind the community interest which Young J in G A Listing specifically says may be taken into account. There is here a community interest in having the administration of claims under the outstanding policies dealt with in an orderly way and orderly arrangements made for the provision of replacement and renewal insurance to policy holders who are left, in effect, without insurance by the companies' collapse. In the circumstances of these cases, there is no doubt in my mind that the proper course is to grant the approvals sought and I propose to do so. In each of the seven matters, appropriate short minutes have been brought in and in each of the seven matters there will be orders in accordance with the short minutes initialled by me and to be placed with the papers when the appropriate interlocutory applications are filed.

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LAST UPDATED: 17/05/2001