Australia: Battles From Afar: A Liquidator’s Fight To Recover Payments To UK Companies

In a win for Australian liquidators, New Cap Reinsurance Corp Limited v A Grant & Ors, Lloyd's Syndicate No. 991 [2009] NSWSC 662 allowed the Australian liquidator of a re-insurer recovery of payments to two UK companies under sections 588FF and 588FE of the Corporations Act 2001 (Cth).

Key Points:

• Arbitration clauses in a reinsurance treaty may not bind a liquidator seeking to recover voidable payments as this is not a right of the contracting party but a statutory entitlement of the liquidator.
• Although reciprocity of civil judgments is commonly assumed between Australia and the UK, this does not apply to court orders not relating to compensation or damages.
• Non-appearance by a defendant still carries a significant risk due to other mechanisms available to parties to give effect to orders overseas, such as a letter of request to the UK court.

Background

In the early 1990s, Sydney developed grand plans for itself as a worldwide reinsurance centre. After the recession in the 1990s there was a shortage of capacity in the traditional reinsurance markets of London and New York. A number of reinsurance companies set up business in Sydney to cultivate and grow this opportunity.

By the end of the 1990s, the grand plan was in tatters. Most of these companies failed, combining reinsurance risk that had been rejected by the London or New York markets with reinsurance against a series of natural disasters that occurred across Europe and North America.

One of the more spectacular failures was New Cap Reinsurance Corporation Limited (NCR) which was publicly listed on the Australian Stock Exchange on 12 December 1996. Its flame burned brightly for two years before having a provisional liquidator appointed on 18 May 1999. However, in the decade since that time the NCR group and its liquidators have left a rich legacy of case law concerning innovative aspects of the liquidation of Australian reinsurance companies. Over two dozen published judgments of superior courts have emerged on a range of aspects of the liquidation of reinsurance companies in Australia, including: legal professional privilege; unfair preferences; access by a creditor to documents produced to the liquidator prior to a creditor's examination; insolvency of a reinsurer within section 95A of the Corporations Act 2001 (Cth) (the Act), insolvent trading; the application of section 562A of the Act to contracts of reinsurance; and (of course) costs.

Facts

On 14 July 2009 Justice Barrett in the Supreme Court of New South Wales delivered judgment in the latest chapter, New Cap Reinsurance Corporation Limited v A.E. Grant & Ors, Lloyds Syndicate No. 991 [2009] NSWSC 662. The facts of the case are relatively simple. The liquidator of NCR commenced proceedings under section 588FF(1) of the Act to recover two payments made by NCR to the defendants – US$2 million on 8 January 1999 and US$3,980,600 on 14 January 1999 – asserting that they constituted 'voidable transactions' within the meaning of section 588FE of the Act.

An earlier judgment by Justice White in the Supreme Court of New South Wales (New Cap Reinsurance Corporation Limited (in liquidation) v A.E. Grant & Ors [2008] NSWSC 1015) had determined the date on which NCR became insolvent within the meaning of section 95A of the Act, namely at all relevant times after 31 December 1998.

Interestingly, the defendants in both cases were members of a Lloyds Syndicate No. 991. They were resident outside Australia in London. They filed no appearance and did not seek to take part in either of these proceedings. In correspondence their solicitors made it clear that they did not submit to the jurisdiction of the Supreme Court of New South Wales. For reasons outlined below, this can make the carriage of such proceedings both simpler (in the Justice White judgment) and more difficult (in the Justice Barrett judgment for a liquidator).

Justice Barett's Judgment

On the liquidator's evidence, and as a question of fact, Justice Barrett had no difficulty satisfying certain statutory elements of the liquidator's claim. These included findings that the subject electronic transfers of funds on 8 January 1999 and 14 January 1999 were payments by NCR to the defendants and that they were sourced from NCR funds held in New South Wales. This was relevant both to the fact of payment and to jurisdiction.

In relation to section 588FE of the Act, Justice Barrett had little difficulty finding that the payments were 'transactions', that they occurred within the period of six months ending on the relation-back day, that NCR was insolvent when each transaction was entered into and that the payments to the defendants were as a creditor of NCR for an unsecured debt. Also, Justice Barrett found that the payments were 'unfair preferences' to the defendants within section 588FA(1)(b) of the Act in that the payments were more than the defendants would have received if the payments were set aside and the defendants had proved as unsecured creditors in the actual winding up of NCR.

Justice Barrett relied on the earlier judgment of Justice White on the insolvency issues. Justice Barrett also found that the liquidator's application was not time-barred as it was made during the three year period ending on the relation-back day under section 588FF(1) of the Act. At this point, some of the issues relating to the defendants' failure to submit to the jurisdiction and their non-appearance arose.

Defendants' Failure To Submit And Non-Appearance

In correspondence, the defendants' solicitors outside the jurisdiction had raised a substantive law issue with their opponents. They asserted that any claims which the NCR liquidator had in connection with the reinsurance contracts must be submitted to arbitration in London in accordance with Article 16 of the Reinsurance Treaties and that the current proceedings were in breach of these agreements.

Also, because of the non-appearance of the defendants, an issue arose around the enforcement of any order obtained by the NCR liquidator outside New South Wales and in England, whether reciprocal enforcement legislation applied and if not the appropriate mechanism for enforcement.

Failure To Submit To Jurisdiction

Justice Barrett considered the arbitration clause in the Reinsurance Treaties, which stated:

Detailed procedures for arbitration were then set out. Justice Barrett found that an order under section 588FF(1) of the Act had, as he delicately put it, 'nothing to do with the reinsurance contract'. Justice Barrett found that the liquidator was not attempting to enforce some right of a contracting party, but rather a statutory right given only to the liquidator. Therefore the arbitration provision did not extend to such an action.

Non-Appearance

On the enforcement issue arising as a result of the defendants' non-appearance, Justice Barrett found that an order under section 588FF(1) of the Act requiring the defendants to repay moneys to NCR was not a 'judgment' under section 11(1) of the Foreign Judgments (Reciprocal Enforcement) Act 1933 (UK) (Foreign Judgments Act) or its application to Australia through the Reciprocal Enforcement of Foreign Judgments (Australia) Order 1994 (UK).

Section 11(1) of the Foreign Judgments Act states:

Justice Barrett found that the payment of money required in obedience to a section 588FF(1) order is not payment 'in respect of compensation or damages to an injured party'. The payment will in fact be to NCR as a result of the Court's findings about several statutory elements. NCR is not an 'injured party' and the money does not have the character of 'compensation or damages'.

As a result of this last finding the liquidator of NCR was required to find alternative means to enforce any section 588FF(1) order. Assistance was found in section 581(4) of the Act which states:

Justice Barrett also referred to section 426(4) of the Insolvency Act 1986 (UK) which states:

Australia is a 'relevant country' for the purposes of the UK Insolvency Act.

Having determined that the Supreme Court had power to make the relevant request of the English court, Justice Barrett satisfied himself first that there was good substantive reason for the request and second, that there was utility in the request in that the English court was likely to exercise its power to act on the request if it was made.

In determining the issue of utility, Justice Barrett relied on the written opinion of Senior Counsel of the English Bar which was put into evidence. Unsurprisingly, the opinion of the English Senior Counsel referred favourably to Lord Hoffmann's magnanimous judgment in the House of Lords' decision in McGrath & Anor v Riddell v Ors [2008] UKHL 21 (see Insurance Focus, May 2008).

Conclusion

Justice Barrett granted the orders sought by the liquidator of NCR under the Act and the letters of request. DLA Phillips Fox will follow in due course the progress of this matter including the response that the letters of request illicit in the English court and any rearguard action that may be assembled by the defendants.

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