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Focus: Insurance / Insolvency – June 2006

Do letters of request in cross-border insolvencies provide assistance? The English Court of Appeal decision in HIH Casualty and General Insurance Limited

In brief: A decision handed down by the English Court of Appeal earlier this month will have a significant impact on the consideration of letters of request in complex international insolvencies. The decision also has serious implications for the efficacy of section 562A of the Corporations Act 2001 (Cth) where Australian insurers are reinsured in London. Partner Michael Quinlan(view CV) and Overseas Practitioner* Angela Martin report.

Introduction

On 9 June 2006, the English Court of Appeal unanimously dismissed an appeal by the Australian liquidators of HIH Casualty and General Insurance Limited (HIH) against an English High Court decision. A single judge of the English High Court held that in an English liquidation of a foreign company, the English Court had no power to direct the English liquidator to transfer funds to Australia for distribution in the principal liquidation.

The judgment questions the efficacy of the letter of request procedure to procure an English Court to apply Australian insolvency law, where the principal liquidation is in Australia and the English liquidation is ancillary.

In Australia, the Corporations Act 2001 (Cth) provides for the courts to act in aid of, and be auxiliary to, each other in all external administration matters. Section 581 provides that, where a letter of request from a court of a country other than Australia requesting aid in an external administration matter is filed in an Australian court, the court may exercise such powers with respect to the matter as it could exercise if the matter had arisen in its own jurisdiction.

Reciprocally, the Australian court may request a court of a foreign country that has jurisdiction in external administration matters to act in aid of, and be of auxiliary to, it in an external administration matter.

The consideration of the judgment in this article follows our recent examination of the topic of letters of request from foreign Commonwealth countries and the principles to be applied in their consideration and the first instance decision of the English High Court in the HIH case.

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Background

In March 2001, an originating process to wind up HIH and three associated companies was presented to the New South Wales Supreme Court (the Supreme Court) and provisional liquidators were appointed in Australia on 27 August 2001. At the same time winding up petitions were presented to the Supreme Court, that court requested the High Court in England, pursuant to s426 of the UK Insolvency Act 1986, to appoint provisional liquidators to HIH and the English provisional liquidators were duly appointed.

At the time of its collapse, the HIH insurance group in Australia comprised 274 companies through which the group carried on insurance business in many countries, including Australia and England. Following the provisional liquidation of HIH, it subsequently became clear in Australia that, unless the sums collected by the English provisional liquidators from reinsurers of HIH were remitted to Australia for the Australian liquidators to apply in the due course of winding up HIH, or in accordance with the scheme of arrangement, insurance creditors of HIH would lose the benefit of s562A of the Corporations Act. English law contained no priority for insurance creditors in the winding up of an insurer.

Section 562A of the Corporations Act applies when an insurance company is in liquidation and gives all insurance creditors of such an insurance company a special priority over other creditors to share in any reinsurance, recoveries.1 Like most Australian insurers, much of HIH's reinsurance was written by London-based reinsurers. If those reinsurance proceeds recovered by the English provisional liquidators were not remitted to Australia and English law was applied to their distribution, insurance creditors would lose out.

In June 2005, the Australian liquidators asked the English provisional liquidators to remit the assets under their control to Australia for distribution by them in accordance with the Corporations Act. The English provisional liquidators declined to do so on the basis that they did not have such power, and instead applied to the High Court in England for directions as to the appropriate distribution of the sums collected in England. Accordingly, the Australian liquidators applied to the Supreme Court for a letter of request to the English court to be issued to this effect.

In the application of the Australian liquidators, Justice Barrett ordered the transmission of a letter of request to the English court on 4 July 2005. The letter did not directly ask that the English court direct the English provisional liquidators to pay over to the Australian liquidators the asset realisations. Instead, the letter requested the English court:

'to assist and to act in aid of and be auxiliary to this court in this proceeding by hearing and determining an application by the Australian liquidators for:

(a) 'Directions to the English provision liquidators to pay over to the Australian liquidators all sums collected, or to be collected, by them in their capacity as English provisional liquidators.....'

On the same date that Justice Barrett issued the letter of request in Australia, Justice Hart in the Companies Court in the Chancery Division of the English High Court ordered that the application for directions and the request application be expedited.

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Revisiting the decision at first instance

In October last year, we reported that Justice Richards in the High Court in England held that, if the companies in question were ordered to be wound up by the English courts, the English liquidators would be directed not to transfer assets to Australia, as those assets would not be distributed in Australia according to rules for a pari passu distribution in the way that the English rules provided. The court was also concerned with whether, notwithstanding that finding, it should direct the English provisional liquidators to make such a transfer in view of the fact that the directions for transfer were sought under a letter of request from the Supreme Court.

The judge directed the English provisional liquidators not to pay over to the Australian liquidators all or any sums collected, or to be collected, by them and refused to extend their powers to enable them to do so.

The explanation of the reasoning of Justice Richards is set out at paragraph 112 of his judgment:

'In an English liquidation of a foreign company, the court has no power to direct the liquidator to transfer funds for distribution in the principal liquidation, if the scheme for pari passu distribution in that liquidation is not substantially the same as under English law.'

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The English Court of Appeal Decision

The Court of Appeal (Sir Andrew Morritt Chancellor, Lord Justices Tuckey and Carnwarth) heard the appeal of the Australian liquidators in May 2006 and delivered one main judgment on 9 June 2006.2

Essentially, the question before the court was whether it had jurisdiction to entertain a request under the Insolvency Act for directions to the liquidators in England to transfer the assets collected by them to the liquidators in the principal Australian liquidation. This raises the issue whether such a transfer would:

  • interfere with the statutory scheme imposed on those assets by the Insolvency Act; and
  • whether or not the court ought to exercise its discretion in favour of such a transfer.

The Chancellor, Sir Andrew Morritt stated that the question had to be approached in two stages:

'(1) Could such a direction be given if the companies were in liquidation in England? If so;
(2) Did it make any difference that they are not currently being wound up in England?'

The Court of Appeal considered the jurisdiction to wind up foreign companies in England under s221 of the Insolvency Act and the relevant case law and found that Justice Richards had gone too far in his view that:

'The substantive rules of distribution under the English statutory scheme are mandatory and the court has no power to make an order which has the effect of disapplying them'.

The Chancellor found that there may be circumstances in which a transfer of assets is for the benefit of the creditors and the transfer should be made, notwithstanding that this would involve the disapplication of English insolvency priorities. The example given by the Chancellor was a savings in costs by avoiding duplication which could offset any reduction in a prospective dividend. 

The Court of Appeal also found that if the companies were in liquidation in England, the English court would have jurisdiction to entertain a request under s426 of the Insolvency Act for directions to the liquidators in England to transfer the assets collected by them to the liquidators in the principal liquidation, even though the result of such a transfer would interfere with the statutory scheme imposed on those assets by the Insolvency Act.

The Court of Appeal stated:

'Thus the court should comply with the request if it may properly do so. That will involve a consideration of all the circumstances including whether the transfer sought will prejudice the creditors or any class of them and whether there would be other advantages sufficient to counteract such prejudice'.

The Court of Appeal went on to say:

If the interests of creditors would be prejudiced by the transfer sought then the fact that the principal liquidation is in Australia is immaterial'.

The court also considered the regard to be paid to the rules of private international law when exercising its discretion under s426 of the Insolvency Act. The court found that while the provision for cross-border cooperation might serve a useful purpose where the request relates to a matter in which the rules of private international law might operate, there was no rule of domestic or private international law in this case that entitled the court to disregard the interests of creditors or any class of creditors. 

Accordingly, the Court of Appeal held that the starting point was to consider the scope of s426 of the Insolvency Act. Here, the Supreme Court letter of request did not fall outside the ambit of the concept of 'assistance' and the jurisdiction conferred by s426 did not preclude the High Court in England from a proper consideration of the request. The court also held that if s426 could authorise a transfer from the liquidators of an ancillary winding up to the liquidators of the principal winding up, then the only question would be whether the court should exercise its discretion to do so. In exercising its discretion, the court had to consider the prejudice to the interests of some creditors of such a transfer. In this case, the Court of Appeal held that it would not direct a transfer of the English assets by the English provisional liquidators to the Australian liquidators because to do so would prejudice the interests of many of the creditors. 

Accordingly, the appeal was dismissed.

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Impact of the findings

The Australian liquidators have one month from the date of judgment to decide whether to seek permission from the Court of Appeal to appeal to the House of Lords and it is not known whether they will choose to do so.

As the law stands, the implications of the Court of Appeal's decision are as follows:

  • the Court of Appeal's decision has led to a conservative view of the letters of request procedure in English insolvency law and continues to reflect a leaning towards a territorial approach in cross-border insolvency matters, although not being quite as restrictive as the approach of the first instance judge;
  • the Court of Appeal has found that where it is asked by a letter of request to do so it can apply foreign rather than English law, but whether or not it should do so is a matter of discretion;
  • where the exercise of that discretion would see creditors or a class of creditors disadvantaged, the court will not exercise its discretion in favour of disapplying English law;
  • the court was not prepared to direct the payment of funds from England to Australia as the effect of s562A would be to prefer insurance creditors, and it would act to the detriment of other creditors in comparison to the result under English insolvency law;
  • the effectiveness of s562A of the Corporations Act has been undermined, at least in the circumstances where an Australian insurer goes into liquidation and an ancillary liquidator is appointed in the United Kingdom; and
  • notwithstanding the fact that the majority of the reinsurance of Australian insurance risks is, and has historically been, written out of London, reinsurance proceeds recovered in England in these circumstances will not be remitted to Australia for distribution to creditors in accordance with Australian insolvency law.

*Admitted in England & Wales only.

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Footnotes
  1. In AssetInsure Pty Ltd v New Cap Reinsurance Corporation Ltd [2006] HCA 13 the High Court of Australia determined that  the phrase 'contract of reinsurance' includes retrocession contracts.
  2. [2006] EWCA CIV732.

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