Proceedings on Distribution of Proceeds from Reinsurance Agreement

The court determined that the proceeds from the termination of a reinsurance agreement are not subject to the provisions of the Corporations Act 2001, s 562A, as they do not constitute 'amounts in respect of a liability to pay amounts in respect of a contract of insurance'.

New South Wales Supreme Court

CITATION : [NAME] & Anor re [COMPANY] [2008] NSWSC 9

HEARING DATE(S) : 01/12/07

JUDGMENT DATE : 30 January 2008

JURISDICTION : Equity Division Corporations List

JUDGMENT OF : Barrett J

DECISION : Direction to be given to [NAME] : CORPORATIONS - winding up - insurance companies - application of insurance proceeds in winding up pursuant to Corporations Act 2001, s 562A - where reinsurance contract became subject to negotiated termination - whether sum paid on termination within s 562A(1)(b)

LEGISLATION CITED : Corporations Act 2001 (Cth), ss 479(3), 562A

CATEGORY : Principal judgment

CASES CITED : [NAME] v Cresdon Pty Ltd [1989] HCA 63; (1989) 168 CLR 242

PARTIES : [NAME] and [NAME] as [NAME] of [COMPANY](S) : SC 1799/01

COUNSEL : [redacted]

SOLICITORS : [redacted]

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

BARRETT J

WEDNESDAY, 30 JANUARY 2008

1799/01 [NAME] & ANOR RE [COMPANY]

JUDGMENT 1 The applicants are the [NAME] of [COMPANY] ("[COMPANY]"), a company subject to winding up by the court. In that capacity, they apply under s 479(3) of the Corporations Act 2001 (Cth) for a direction of the court in the following terms: "A Direction that [NAME] and [NAME], as [NAME] of the Company, would be justified in distributing the proceeds received by the Company under the Cancellation of Reinsurance Agreement dated 27 June 2001 between the Company and [COMPANY] (ARBN [PHONE]), together with interest received thereon on the basis that section 562A of the Corporations Act 2001 is not applicable to such proceeds (together with interest received thereon), to FAI General Insurance Company Limited (In Liquidation and Subject to a Scheme of Arrangement) (' FAI ') and [COMPANY] Casualty & General Insurance Company Limited (In Liquidation and Subject to a Scheme of Arrangement) (' [NAME] ') in the following proportions: FAI - 67.884% [NAME] - 32.116%." 2 Two issues are thus raised in relation to the proceeds received under the particular agreement of 27 June 2001 (together with interest): first, whether s 562A of the Corporations Act applies to those proceeds; and, second, whether funds should, as to the whole, be divided between [NAME] in the proportions stated. 3 The proceeds in question amount to $214,939,110.06. Those proceeds have, since receipt by [COMPANY], been retained in a separate account. Interest of some $118 million has accrued. 4 The agreement dated 27 June 2001 is an agreement between [COMPANY] ("[NAME]") and [COMPANY]. The agreement was made some three months after the commencement of the winding up of [COMPANY]. The then provisional [NAME] of [COMPANY] committed [COMPANY] to the agreement after receiving an appropriate direction from the court. The agreement contained recitals. It is appropriate to quote recitals A to D: "A. [NAME] as reinsurer and [COMPANY] as reinsured for and on behalf of the [COMPANY] entered into the Agreement, which was made exclusively between [NAME], and under which no other party (except a permitted assignee) is entitled to claim any rights or benefits. B. [COMPANY] believes that it is or may be entitled to make a claim under the Agreement. C. [COMPANY] wishes to enter into an agreement for the cancellation of the Agreement which settles any claims, including all existing and potential future claims, which [COMPANY] may be entitled to make for the payment of a benefit under the Agreement, including any claim [COMPANY] can presently bring under the Agreement, together with any right of commutation under the Agreement. D. [NAME] agree to cancel the Agreement on the terms set out below." 5 These recitals must be read in the light of the following definitions: "'Agreement' means the multi-year aggregate excess of loss agreement effective from 1 July 1999 entered by [NAME] as reinsurer and [COMPANY] as reinsured. '[COMPANY]' means [COMPANY] and its insurance operating subsidiaries including but not limited to: [COMPANY] Casualty and General Insurance Limited (Australian Operation), [COMPANY] Casualty and General Insurance Limited (Non-Australian Operation), [COMPANY], Cotesworth Capital Limited, Colonial Mutual General Insurance Company Limited, FAI General Insurance Limited, [COMPANY] America Compensation & Liability Insurance Company, and [COMPANY]." 6 The operative provisions (a) required [NAME] to transfer to [COMPANY] "the assets listed in Schedule A annexed to the Agreement, the value of which as at 21 June 2001 was A$220,280,009.73" – subject, however, to retention by [NAME] of "A$6,056,000 as fee or remuneration from amounts previously paid to it by or on behalf of [COMPANY]"; (b) provided that "[t]he Agreement is cancelled, effective from the last date of execution of the 27 June 2001 agreement by a party to it; (c) contained an acknowledgment by [COMPANY] that, "other than payments pursuant to this agreement, it is not entitled to any payment pursuant to the Agreement for existing or future claims or in respect of any right of commutation or otherwise; and (d) included machinery provisions. 7 [COMPANY] acknowledged in the document that it did not itself have any beneficial entitlement to the proceeds of the agreement. 8 The nature and effect of the "Agreement", as defined by the agreement of 21 June 2001, are explained in the affidavit of [NAME], one of the applicant [NAME], sworn on 29 November 2007: "12. On 21 January 2000, [COMPANY], for and on behalf of its insurance operating subsidiaries ('[COMPANY]'), signed a reinsurance slip with [COMPANY] ('[NAME]'). [NAME] also signed a Heads of Agreement dated 21 January 2000, and a total return swap agreement ('Swap Agreement'). The slip provided for what was described in it as a multi year aggregate excess of loss reinsurance contract which was effective for a 5 year period from 1 July 1999 to 30 June 2004 ('Reinsurance Contract') …

13. The subject business covered by the Reinsurance Contract was defined as being for all policies on insurance and reinsurance underwritten by the [COMPANY] on or before 30 June 2004. [COMPANY] itself was not a licensed insurer under the Insurance Act 1973 (Cth). At the time the Reinsurance Contract was entered into by [COMPANY], there were seven companies within the [COMPANY] which were licensed under the Insurance Act 1973 (Cth). Those companies included [NAME].

14. The Reinsurance Contract was divided into 3 sections: A, B and C (described in further detail below). Each of these sections was subject to its own limit (and retention) but there was also an overall aggregate limit being the lesser of 8.5% of total gross net earned premium (the gross premiums earned by [COMPANY] less premiums payable in respect of all reinsurance not including this policy) ('GNEP') and $1.075 million.

15. The Reinsurance Contract required [COMPANY] to pay a premium of 5% of GNEP in respect of accident years 1999 and 2000 and 5.2%of GNEP in respect of the accident years thereafter. This was subject to an annual minimum premium of $100 million. The premium was payable annually in advance on 1 July of each accident year. [NAME] was to retain 5%-6% of the premium with the balance being paid into an Experience Account.

16. The risks covered by each section of the Reinsurance Contract may be summarised as follows: (a) Section A - [NAME] indemnified [COMPANY] for the ultimate net losses which [COMPANY] was, or became obliged to pay, and did pay, in respect of losses occurring before 1 July 1999. The indemnity was subject to a retention (excess) of $2.715 billion in discounted losses and a limit of the lesser of $250 million and 50% of the total premium payable during the term of the agreement. (b) Section B concerned the sum which [COMPANY] was or became obliged to pay, and did pay, to insureds in respect of losses occurring on or after 1 July 1999 on business in force or written during the term of the Reinsurance Contract. Section B was subject to a retention for each accident year of discounted losses in an amount equal to the greater of: (i) 70% of GNEP and $1.4 billion in respect of accident years 1999 and 2000; and (ii) 71% of GNEP and $1.42 billion in respect of accident years 2001 to 2003. Section B was subject to a limit of 15% of GNEP for each accident year.

17. The Reinsurance Contract also provided for a combined limit for sections A and B being the lesser of 8% of total GNEP and $1 billion.

18. Section C covered sums which [COMPANY] was or became obliged to pay, and did pay, in respect of losses occurring on or after 1 July 1999 on business in force or written during the term of the Reinsurance Contract. The retention for section C was, in respect of each accident year, 21% of GNEP (on an undiscounted basis) plus the section B retention (on a discounted basis).

19. Section C was subject to both the limit of indemnity in respect of each accident year, being the lesser of 5% of GNEP for each accident year and $125 million, and an aggregate limit of indemnity for the term of the agreement, being the lesser of 1% of total GNEP and $125 million.

20. In addition to the individual limits of indemnity under sections A, B and C and the combined limits of indemnity of sections A and B, the Reinsurance Contract also provided for an overall aggregate limit during the term of the contract being the lesser of 8.5% of total GNEP and $125 million.

21. The Reinsurance Contract required that [NAME] establish and maintain a notional experience account during the term of the agreement, the balance of which would be 95% of the premium paid to [NAME] in respect of accident year 1999, and 94% of the premium paid to [NAME] in respect of accident years thereafter, plus or minus interest earned on the experience account minus losses paid by [NAME].

22. The Reinsurance Contract further provided for interest to be earned on the experience account balance at a rate of 6.8% compounded annually. However, the effect of the Swap Agreement was that [COMPANY] guaranteed that return. The Reinsurance Contract obliged [COMPANY] to provide [NAME] with quarterly loss reports and obliged [NAME] to indemnify [COMPANY] for amounts covered annually within 180 days of the receipt of the loss report for the quarter ending 30 June.

23. The Reinsurance Contract also provided that in the event that the experience account balance was positive as at 30 June 2000, or any in any subsequent year on 30 June, [COMPANY] was entitled to commute the reinsurance cover as at 30 June subject to 60 days prior written notice to [NAME]. Within 90 days following commutation, [NAME] was obliged to pay [COMPANY] 100% of any positive balance in the experience account.

24. [COMPANY] had not given 60 days prior written notice to [NAME] by 30 June 2001 so as to allow it to commute, rather than cancel, the Reinsurance Contract.

25. To the best of my knowledge, information and belief, no claim was ever made by the [COMPANY] on [NAME] under the Reinsurance Contract, nor were any payments made by [NAME] to [COMPANY] prior to the cancellation of the Reinsurance Contract referred to below.

26. In addition, the Reinsurance Contract obliged [COMPANY] to maintain all existing reinsurance cover (other than one named form of cover) which reinsurances would inure for the benefit of the Reinsurance Contract. The Reinsurance Contract also provided that if changes in exposure occurred during the term of the [NAME] contract, corresponding changes to the premium and limits would be mutually agreed by [NAME].

27. From the business records of the [COMPANY] I note that, following entry into the Reinsurance Contract, a number of significant events occurred which affected that contract. They were: a) entry by [COMPANY] into an underwriting facility with [NAME] on 1 December 2000. This effectively reduced [COMPANY]'s net exposure to the Australian Commercial Lines by 60%, due to the Quota share arrangement. b) With effect from 1 January 2001, [COMPANY] transferred its Personal Lines and CTP businesses to a joint venture with the [COMPANY] (49% [COMPANY] and 51% [NAME]). c) On 7 March 2001, [COMPANY] executed the Put Option selling its remaining 49% interest in the Personal Lines and CTP businesses to [COMPANY].

28. On 15 March 2001, the provisional [NAME] were appointed to [COMPANY]. This effectively terminated the underwriting of all new insurance business." 9 Copies of the documents to which [NAME] refers are annexed to his affidavit. 10 The first issue to be addressed is whether s 562A applies to the proceeds received under the agreement of 27 June 2001. That section affords special treatment, in the winding up of an insurer, to what are loosely termed the "proceeds" of a contract of reinsurance under which the insurer is itself insured. It is sufficient, for present purposes, to quote s 562A(1) which sets out the circumstances in which s 562A applies: "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 [NAME] under the contract of reinsurance. 11 The definition of "relevant contract of insurance" is found in s 562A(8): "In this section: relevant contract of insurance means a contract of insurance entered into by the company, as insurer, before the relevant date."

12 The fact that [COMPANY] entered into the agreement of 21 January 2000 "for and on behalf of its Insurance Operating Subsidiaries including but not limited to" nine named companies (including [NAME]) raises a question as to the identities of the parties entitled to the benefit of that agreement. In the case of the two particular companies mentioned ([NAME]), acquiescence in [COMPANY]'s contracting on their behalf may readily be inferred from the fact that each of them contributed to the premium paid. In fact, they, of all [COMPANY]'s subsidiaries, were the only contributors. They contributed in the proportions 67.884% (FAI) and 32.116% ([NAME]). [COMPANY] itself paid nothing. The questions posed by s 562A(1) should therefore be approached on the footing that each of [NAME] was, by the contract entered into by its agent, entitled to the protection afforded by [NAME] under the agreement of 21 January 2000. 13 Each of [NAME] is itself subject to winding up. Any relevant application of s 562A may therefore be taken to be application in relation to the winding up of each of [NAME]. 14 [NAME], who appeared upon the present ex parte application, made submissions to the effect that, in the circumstances that in fact happened, the agreement of 21 January 2000 was not, in reality, a "contract of reinsurance" or, at least, that it had ceased to be a "contract of insurance" by the time the agreement of 27 June 2001 was made. I do not pause to consider that question, as I am firmly of the view that another submission of [NAME]'s as to non-satisfaction of the s 562A(1) conditions must be accepted. 15 The proceeds received under the agreement of 27 June 2001 are not, in my opinion, properly regarded as an amount "in respect of" a "liability" of [NAME] "to pay amounts in respect of" a contract of insurance entered into by [NAME] "as insurer". Nor were the proceeds received "under" the agreement of 21 January 2000. 16 As to the first of these matters, the evidence contains no suggestion that [NAME] ever became subject to a "liability", under a contract of insurance written by it, which became the cause or occasion of any payment by [NAME]. No claim by [NAME] (or by [COMPANY] as their agent) was ever made upon [NAME] by reference to some insurance liability of [NAME]. There was thus no liability of either of them, as insurer, "in respect of" which the payment provided for by the agreement of 27 June 2001 was made. 17 As to the second matter, it is my opinion that an amount could be said to have been received "under" the agreement of 27 June 2001 if the payment of the amount represented discharge of a payment obligation created by the agreement or, looking at the matter from the other perspective, if receipt of the amount represented satisfaction of a right to payment created by the agreement. An amount might also be said to have been received "under" the agreement if it was a calculated sum paid in commutation of established rights. 18 The opinion I have just expressed is based on the approach to the words "failure … to pay any moneys under this lease" taken by Mason CJ, Brennan J, Deane J and McHugh J in [NAME] v Cresdon Pty Ltd [1989] HCA 63; (1989) 168 CLR 242. Their Honours said (at CLR 249): "The word 'under', in the context in which it appears, refers to an obligation created by, in accordance with, pursuant to or under the authority of, the lease." 19 In that case, an obligation to pay rent arising from a common law tenancy which preceded registration of a Torrens system lease was held to be an obligation distinct from any obligation to pay rent found in the subsequently registered lease. 20 In the present case, the parties to the agreement of 21 January 2000 simply decided to put an end to it. Having negotiated terms upon which the existing contract was to be terminated and releases were to be given, they embodied those terms in a new contract to which they then committed themselves. To the extent that those terms entailed the payment and receipt of money, the payment and receipt were "under" the new contract. 21 It follows that the sum received by [COMPANY], as agent, was not of the description in s 562A(1)(b) in respect of either [NAME]. 22 The second question raised by the [NAME] is as to the allocation of the net proceeds of the agreement of 27 June 2001. 23 The situation is one in which an agent received money from a third party for its [NAME]. [NAME] were the sole providers of the moneys paid to [NAME] pursuant to the agreement. The agreement was made by [COMPANY] as their agent. They, as the [NAME], are entitled to the proceeds of the subsequent cancellation or termination agreement in the proportion to their contributories. 24 I note that Australian Prudential Regulation Authority, by letter to the [NAME]' solicitors dated 27 November 2007, has stated that it has no objection to application of the proceeds in the way envisaged by the direction. 25 The court will make the direction sought by the [NAME] of [COMPANY]. **********

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