Focus: Insolvency, Insurance & Product Liability – April 2007

Schemes of arrangement: can future asbestos claimants be bound by a scheme?

In brief: Partner Michael Quinlan (view CV) and Senior Associate Christopher Prestwich discuss a recent Federal Court decision on a proposed scheme of arrangement that sought to transfer liability for future asbestos-related claims from one group company to another, along with the benefit of associated insurance policies, enabling the original company to be deregistered.

• Introduction
• The proposed scheme of arrangement
• The decision of the Federal Court
• Impact of the findings

How does it affect you? According to this recent decision, future liability for future asbestos claims may be transferred from one company to another, along with the benefit of insurance policies by way of a scheme of arrangement. The Federal Court's decision is in contrast to an earlier ruling by the New South Wales Court of Appeal, which found that future asbestos claims do not amount to a 'claim' in a liquidation.

Introduction

In Stork ICM Australia Pty Ltd v Stork Food Systems Australia Pty Ltd [2006] FCA 1849, Justice Lindgren considered a scheme that sought to transfer the present, contingent and future liabilities of a company, including claims by future personal injury claimants who were not presently ill, to another group company. Justice Lindgren held that future asbestos claims were capable of being made the subject of an order under s413(1) of the Corporations Act 2001 (Cth), and approved the proposed scheme. Future personal injury claimants without an accrued cause of action would be bound by this scheme of arrangement.

The proposed scheme of arrangement

Stork ICM Australia Pty Ltd (Stork ICM) had sold its business assets in 2003 and had not carried on business since that time. It had been named as a defendant in a number of asbestos-related personal injury claims and had the benefit of various insurance policies in respect of such claims. The only 'business' of Stork ICM was dealing with claims arising out of its earlier business.

Stork ICM sought to enter into a scheme of arrangement whereby its property and liabilities would be transferred to another group company, Stork Food Systems Australia Pty Ltd (Stork FSA). Stork ICM would then be deregistered and, upon that deregistration, the group's ultimate Dutch parent would be able to claim the benefit of tax losses attributable to its investment in Stork ICM.

In September 2006, the court had convened meetings of the shareholders of Stork ICM. The shareholders (all being members of the same group) had approved the proposed scheme. The court then considered whether the scheme should be approved. The issues included the following:

1. was the proposed scheme a members' scheme or a creditors' scheme?
2. could the court make an order that had the effect of making Stork FSA rather than Stork ICM liable to potential creditors?
3. could the court make an order that assigned Stork ICM's right of insurance indemnity to Stork FSA?

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The decision of the Federal Court

Creditors' scheme or a members' scheme?

The proposed scheme involved the transfer of the whole of the assets and liabilities of one group company to another. Justice Lindgren held that it was settled law that a scheme of this type is a members' scheme alone. The scheme would only be voted on by members, although the position of creditors was a factor that the court would take into account when considering whether to approve the scheme at the second court hearing.

Transferring liability for personal injury claims that have not accrued

Section 413(1)(a) of the Corporations Act enables the court to permit the transferral of property and liabilities from one company to another. The question here was whether future asbestos claims constituted a 'liability'. The original drafting of the term 'claim' in the scheme broadly reflected s553 of the Corporations Act in terms of the types of claims that would be compromised by the scheme.

Justice Lindgren held that, for the purposes of s413(1)(a), claims for future asbestos-related diseases did fall with the meaning of 'liability' and could be transferred to Stork FSA. His decision relied on the High Court's decision in Crimmins v Stevedoring Industry Finance Committee [1999] HCA 0059. In Crimmins, it was held that the meaning of 'liability' in the Stevedoring Industry Acts (Termination) Act 1977 (Cth) could include contingent or potential liabilities, including exposure to asbestos, even though the injury was suffered after the vesting under the relevant Act took place. The definition of the term 'claim' in the scheme was broadened to include claims that might only accrue in the future.

The question of whether future personal injury claimants who have been exposed to asbestos but who are not presently ill are 'contingent creditors', and thus have a 'claim', has been considered in other cases:

• in Edwards v Attorney-General¹, the New South Wales Court of Appeal held that such individuals did not then have an accrued cause of action and were not contingent creditors in an Australian winding up; and
• in T&N Limited and Others², the English High Court held that such individuals were contingent creditors in an English scheme of arrangement and could be bound by a scheme.

Neither of these cases are mentioned in Justice Lindgren's judgment.

Assigning the benefit of an insurance policy without consent

As part of the proposed scheme of arrangement, Stork ICM's right to indemnity would be transferred to Stork FSA. A number of Stork ICM's insurance policies contained 'no assignment without consent' provisions. Justice Lindgren considered whether the court was able to make an order vesting the contractual right to enforce a right of insurance indemnity in Stork FSA in place of Stork ICM, and whether such an order would change the content of the insurer's obligation.

Justice Lindgren held that he did not need to determine these issues, as Stork ICM could be deregistered without transferring all of its property - the benefit of any insurance policies that the insurer had not consented to transfer could be excluded from the transfer. However, Justice Lindgren expressed his view that such policies could nevertheless be transferred without consent and that such a transfer would not impact upon the nature of the insurer's obligation. As Stork ICM was not engaging in any new business and the insurance policies did not apply to its ongoing business, any claim would be in respect of claims where 'all those circumstances have already occurred, even though they have not yet crystallised in the form of a notified claim'. The transfer of liability would not impact upon the content of the insurer's obligation and it would be immaterial to the insurer whether a claim was brought by Stork ICM or Stork FSA.

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Impact of the findings

The decision in this case addressed the issue of whether the future liability for future asbestos claims could be transferred from one company to another, along with the benefit of insurance policies.

Justice Lindgren's finding that asbestos claims by personal injury claimants who were not presently ill constitute a 'liability' of the company for the purposes of s413(1)(a) is in contrast to the position of the New South Wales Court of Appeal in Edwards in relation to liquidation.

The cases of Edwards and T&N Limited and Others illustrate the different approaches that courts have taken in Australia and England in the past in considering whether individuals who have been exposed to asbestos but have not yet suffered an injury have a 'claim' against the company for the purposes of schemes of arrangement and a liquidation.

Footnotes

1. [2004] NSWCA 272 – see pp 63-65 of the Allens Arthur Robinson Annual Review of Insolvency & Restructuring Law 2004.
2. [2006] EWHC 1447 (Ch) - see http://www.aar.com.au/pubs/insol/foinsaug06.htm.

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For further information, please contact:

Michael Quinlan Partner, Sydney Ph: +61 2 9230 4411 Michael.Quinlan@aar.com.au		Oscar Shub Partner, Sydney Ph: +61 2 9230 4305 Oscar.Shub@aar.com.au
Clint Hinchen Partner, Melbourne Ph: +61 3 9613 8924 Clint.Hinchen@aar.com.au		Geoff Rankin Partner, Brisbane Ph: +61 7 3334 3235 Geoff.Rankin@aar.com.au
Kim Reid Partner, Perth Ph: +61 8 9488 3727 Kim.Reid@aar.com.au		Simon McConnell International Partner, Hong Kong Ph: +852 2840 1202 Simon.McConnell@aar.com.au

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