On 5 March 2012, the NSW Supreme Court held in Amaca Pty Ltd (under NSW administered winding up) & Ors v Messrs A G McGrath & C J Honey (as liquidators of the HIH Group of Companies) & Anor [2012] NSWSC 176 that the reinsurance proceeds be paid contrary to general principles on the basis that it is just and equitable.

Facts

Amaca held a policy of insurance with HIH which was covered by contracts of reinsurance.

The general rules for the distribution of the assets of a company in liquidation including its reinsurance assets are governed by section 562A(1)-(3) of the Corporations Act and essentially provides that a liquidator of an Australian insurer is required to pay the proceeds of reinsurance received by them (net of expenses of or incidental to collecting the proceeds) to certain insureds in priority to other creditors (for example, unsecured creditors).

Amaca brought proceedings against the HIH liquidators seeking an order under section 562A(4) of the Corporations Act that the general rules do not apply to the receipt of specified reinsurance monies and that those monies should be paid by the Liquidators to them as priority.

Section 562A(4) states:

"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 the manner that the Court considers just and equitable in the circumstances".

The "just and equitable" criteria contained in section 562A(4) provide the Court with wide discretion. Further, section 562A(5) of the Corporations Act lists certain matters that the Court may take into account in considering whether to make the orders sought by Amaca, including:

  1. "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
  2. 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
  3. Whether particular relevant contracts of insurance include statements to the effect that the contracts are to be protected by reinsurance; and
  4. Whether a person to whom an amount is payable under the relevant contract of insurance would be severely prejudiced if subsections (2) & (3) applied to the amount received under the contract of reinsurance".

Decision

Justice Black held that it was just and equitable to make the orders sought by Amaca on the following basis:

  • The limited role played by HIH in insuring the risk;
  • The unusually direct relationship between the Plaintiffs and the reinsurers and the fact that Amaca paid their premiums to HIH for cover to be afforded by the reinsurers rather than HIH;
  • Payments which were received by HIH were directly linked to the reinsurance arrangements referrable to the James Hardie Group; and
  • The prejudice to Amaca of being deprived of the proceeds of the reinsurance for which they bargained for would be significant and the adverse impact of the orders sought on the other insurance creditors of HIH would be widely diversified and therefore, the detriment suffered to any individual creditor limited.

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