Judgments - McGrath and another (Appellants) and others v Riddell and others (Respondents) McGrath and another and others (Appellants) v Riddell and others (Respondents) (Conjoined Appeals)

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30.  I must respectfully disagree. The primary rule of private international law which seems to me applicable to this case is the principle of (modified) universalism, which has been the golden thread running through English cross-border insolvency law since the eighteenth century. That principle requires that English courts should, so far as is consistent with justice and UK public policy, co-operate with the courts in the country of the principal liquidation to ensure that all the company’s assets are distributed to its creditors under a single system of distribution. That is the purpose of the power to direct remittal.

31.  In the present case I do not see that it would offend against any principle of justice for the assets to be remitted to Australia. In some cases there may be some doubt about how to determine the appropriate jurisdiction which should be regarded as the seat of the principal liquidation. I have spoken in a rather old-fashioned way of the company’s domicile because that is the term used in the old cases, but I do not claim it is necessarily the best one. Usually it means the place where the company is incorporated but that may be some offshore island with which the company’s business has no real connection. The Council Regulation on insolvency proceedings ((EC) No 1346/2000 of 29 May 2000) uses the concept of the “centre of a debtor’s main interests” as a test, with a presumption that it is the place where the registered office is situated: see article 3.1. That may be more appropriate. But in this case it does not matter because on any view, these are Australian companies. They are incorporated in Australia, their central management has been in Australia and the overwhelming majority of their assets and liabilities are situated in Australia.

32.  It is true that Australian law would treat insurance creditors better and non-insurance creditors worse than English law did at the relevant time. But that seems to me no reason for saying that the Australian law offends against English principles of justice. As it happens, since the appointment of the provisional liquidators, English law has itself adopted a regime for the winding up of insurance companies which gives preference to insurance creditors: see regulation 21(2) of the Insurers (Reorganisation and Winding Up) Regulations 2004 (SI 2004/353), giving effect to the European Parliament and Council Directive 2001/17/EC on the reorganisation and winding up of insurance companies. So English courts are hardly in a position to say that an exception to the pari passu rule for insurance creditors offends against basic principles of justice.

33.  Furthermore, it seems to me that the application of Australian law to the distribution of all the assets is more likely to give effect to the expectations of creditors as a whole than the distribution of some of the assets according to English law. Policy holders and other creditors dealing with an Australian insurance company are likely, so far as they think about the matter at all to expect that in the event of insolvency their rights will be determined by Australian law. Indeed, the preference given to insurance creditors may have been seen as an advantage of a policy with an Australian company.

34.  As for UK public policy, I cannot see how it would be prejudiced by the application of Australian law to the distribution of the English assets. There is no question of prejudice to English creditors as such, since it is accepted that although section 116(3) of the Insurance Act 1973 (Cth) gives creditors whose debts are payable in Australia a first call upon Australian assets, this provision will not in practice prejudice the interests of creditors in the English assets. Furthermore, if there were to be a separate liquidation of the English assets in England, all creditors would be entitled to prove. Those Australian (or other foreign) creditors who see an advantage in proving in England after bringing into hotchpot their dividends in Australia would no doubt do so. But UK public policy does not require them to be afforded this facility.

35.  The fact that there are assets in England is principally the result of the companies having placed their reinsurance business in the London market. For the purposes of deciding how the assets should be distributed, that seems to me an entirely adventitious circumstance. Indeed, it may not be to the advantage of London as a reinsurance market if the distribution of the assets of insolvent foreign reinsurance companies is affected by whether they have placed their reinsurance business in London rather than somewhere else.

36.  In my opinion, therefore, this is a case in which it is appropriate to give the principle of universalism full rein. There are no grounds of justice or policy which require this country to insist upon distributing an Australian company’s assets according to its own system of priorities only because they happen to have been situated in this country at the time of the appointment of the provisional liquidators. I would therefore allow the appeal and make the order requested by the Australian court.

LORD PHILLIPS OF WORTH MATRAVERS

My Lords

37.  I have had the benefit of reading in draft your Lordships’ speeches. They contain areas of common ground that result in the conclusion that this appeal should be allowed. I share those areas of common ground and agree with the result to which they lead. They are:

i.  Section 426(4) and (5) of the Insolvency Act 1986 give the court jurisdiction to accede to the request of the Australian Court and

ii.  On the facts of this case the court ought to accede to that request.

38.  I had initially reservations about the second proposition. The business of insurance has certain special characteristics. These include the fact that, for a premium paid at the start of the contractual relationship the insurer undertakes obligations that may extend over a considerable future period. It is commonplace for countries to regulate insurance business under conditions that require insurers to demonstrate that they have adequate resources to meet such obligations before being authorised to enter into contracts of insurance. That is certainly the case in the United Kingdom. It appears also to be the case in Australia.

39.  Where the law of a country requires an insurer to maintain assets, which may include rights under contracts of reinsurance, that are designed to protect policy holders who have taken out insurance within that country, one would normally expect the insolvency law of that country to afford priority to those policy holders in relation to such assets. In such circumstances, one would not expect rules of private international law or international comity to require the transfer of those assets to liquidators in another country who would not recognise such priority.

40.  There are now in place in this jurisdiction Regulations which make special provision for distribution to creditors of insolvent insurance companies. These are the Insurers (Reorganisation and Winding-up) Regulations 2004, S.I. 2004/353, which implement Directive 2001/17/EC of the European Parliament and of the Council of 19 March 2001.

41.  These Regulations do not apply to the insolvencies with which this appeal is concerned because they were not in force when the provisional liquidators were appointed. Those insolvencies are, however, subject to Australian legislation whose overall effect will be, if the English assets are remitted to the Australian liquidators, that insurance and reinsurance creditors as a whole will benefit at the expense of other creditors. On the other hand insurance and reinsurance creditors whose liabilities are not in Australia will be worse off. This is not, however, the result of any special priority given to them under English law.

42.  When considering the exercise of discretion under section 426(4) and (5) of the 1986 Act the following matters seem to me to be material

i)  The companies in liquidation are Australian insurance companies.

ii)  Australian law makes specific provision for the distribution of assets in the case of the insolvency of such companies.

iii)  These do not conflict with any provisions of English law in force at the material time designed to protect the holders of policies written in England.

iv)  The policy underlying these provisions appears to accord with the policy of Regulations that have since been introduced in this jurisdiction.

43.  These matters have persuaded me that it is in accordance with international comity and with the principle of universalism, as explained by my noble and learned friend Lord Hoffmann that the English court should accede to the request of the Australian liquidators.

44.  These are my reasons for agreeing that this appeal should be allowed. I do not propose to stray from the firm area of common ground onto the controversial area of whether, in the absence of statutory jurisdiction, the same result could have been reached under a discretion available under the common law.

LORD SCOTT OF FOSCOTE

My Lords,

Introduction

45.  This appeal concerns the question whether the English assets of four insolvent Australian insurance companies, each of which is in compulsory liquidation in Australia and, in England, is under the control of provisional liquidators appointed by the High Court pursuant to a request made by the Australian liquidators, should in principle be remitted to the Australian liquidators for distribution in accordance with the Australian statutory scheme applicable to the liquidation of insolvent insurance companies, or should be retained in England and distributed in accordance with the English statutory scheme. Both David Richards J at first instance and the Court of Appeal (Sir Andrew Morritt C and Tuckey and Carnwarth LJJ) held that an order for the remission of the English assets to the Australian liquidators could not, or should not, be made. The Australian liquidators and two of the Australian insurance creditors have appealed to this House. The respondents are the provisional liquidators appointed by the High Court. The appeal depends on the answer to the question I have referred to, and the answer to that question depends, in my opinion on how section 426(4) and (5) of the Insolvency Act 1986 should be applied in a case such as this. The facts that have given rise to a need for an answer to the question are fully set out in the 7 October 2005 judgment of David Richards J (paragraphs 9 to 21) and the judgment of the Chancellor (paragraphs 2 to 9). It is not necessary for me to do more than outline the nature of the problem that has arisen and sufficient of the details to explain why I, and I believe all your Lordships, have come to a different conclusion from that reached by the courts below.

The facts

46.  The four insolvent companies were incorporated in Australia. They are conveniently referred to in the judgments below as HIH C & G, FAIG, WMG and FAII and I shall so refer to them (for their respective full corporate names, see para.10 of David Richards J’s judgment). They are members of the HIH Group which, until its collapse in March 2001, was the second largest insurance group in Australia. Its corporate members, 274 in number, included eight companies that were licensed insurance companies in Australia. The four companies with which this appeal is concerned were among them but were authorised also, under the Insurance Companies Act 1982, to carry on insurance business in the United Kingdom, and did so, as well as carrying on business in Australia and elsewhere. The majority of the assets and liabilities of the four companies are located in Australia but each has significant assets and liabilities in England. The relative size of the assets and liabilities in each of these countries can be judged from the table set out in paragraph 12 of David Richards J’s judgment and, for convenience, repeated here. The figures are approximate, based on estimates as at 31 March 2005 and expressed in Australian $ millions.

Assets HIH C&G FAIG FAII WMG
Australia 864 799 33 15
UK 206 23 10 8
Total 1111 892 43 23
Liabilities
Australia 3488 2274 1903 35
UK 882 5 85 12
Elsewhere 129 50 154 0
Total 4500 2329 2142 47

The figures demonstrate the great preponderance of Australian assets and Australian liabilities over those in the United Kingdom.

47.  Winding up orders in respect of the four companies were made in Australia on 27 August 2001 (they had previously been in provisional liquidation). Petitions for winding-up orders against the four companies in England had been presented on 24 July 2001 by a corporate member of the HIH Group that was a creditor of each of the companies. Those petitions remain pending but each of the companies is insolvent and, pursuant to letters of request issued by the Australian court on 10 September 2001, the High Court in England made orders appointing the respondents joint provisional liquidators (and at the same time revoking a similar appointment that had been made before the presentation of the petitions). The orders appointing the provisional liquidators do not contain any provision permitting the remission of English assets to Australia.

48.  On 4 July 2005 the New South Wales Supreme Court issued a Letter of Request asking the High Court in England to assist the Australian liquidators by hearing and determining an application issued on the same day. The application asked the High Court to direct the provisional liquidators in England to pay over to the Australian liquidators

“ … all sums collected, or to be collected, by them in their capacity as English Provisional liquidators, after paying or providing for all proper costs, charges and expenses of the English Provisional Liquidators.”

This application, together with an application to the High Court by the provisional liquidators for directions, was heard by David Richards J and led to his judgment to which I have referred. He rejected the Australian liquidators’ request for the direction above referred to.

49.  It had been common ground that the way in which a winding-up of the four companies would be most satisfactorily achieved would be via a scheme of arrangement approved under section 411 of the Corporations Act 2001 in Australia and section 425 of the Companies Act 1985 in England. The schemes would need to reflect the priorities that would be applicable to the distribution of assets among creditors if the liquidations were to run their ordinary course (see para.4 of David Richards J’s judgment). It was here that the problem which led to David Richards J’s refusal to make the order for remission to Australia of the English assets arose. Australian law has certain statutory provisions relating to insurance companies which depart from the insolvency principle of a pari passu distribution of assets among unsecured creditors. It is necessary to describe the effect of those provisions.

50.  Section 116(3) of the Australian Insurance Act 1973 provides that in the winding-up of a company authorised under the Act to carry on insurance business

“… the assets in Australia of the [company] shall not be applied in the discharge of its liabilities other than its liabilities in Australia unless it has no liabilities in Australia.”

The Australian courts have held that “assets in Australia” in section 116(3) means assets in Australia at the time of the winding-up (New Cap Reinsurance Corp. v Faraday Underwriting (2003) 117 FLR 52 and Re HIH Casualty and General Insurance Ltd (2005) 215 ALR 562). It is common ground, therefore, that section 116(3) would not apply to assets transferred or remitted to Australia after the commencement of the winding-up. Moreover, in the New Cap Reinsurance case it was held that the principle of hotchpot applied in relation to section 116(3) so that creditors with “liabilities in Australia” who received distributions from the proceeds of “assets in Australia” would not be entitled to participate in a distribution of the proceeds of other assets until the same level of dividend had been paid on debts which were not liabilities in Australia. David Richards J held that section 116 did not constitute a bar to an order directing remission to Australia of the English assets of the four companies and there has been no cross-appeal on that point.

51.  Section 562A of the Australian Corporations Act 2001 does, however, present a more substantial problem. The section is fully set out in paragraph 44 of the judgment of David Richards J. It provides, in summary, that the re-insurance recoveries of an insurance company must be distributed, in priority to other creditors, to those creditors who have insurance claims against the company. It has been held by the High Court of Australia that the term “contract of insurance” in section 562A(1) includes a contract of re-insurance and that “contract of re-insurance” includes a contract of retrocession (Asset Insure Pty Ltd v New Cap Reinsurance Corporation Ltd (2006) 226 ALR 1). Accordingly, it is common ground that section 562A confers on all creditors of an insurance company with insurance and reinsurance claims priority over all other creditors in respect of re-insurance, including retrocession, recoveries. Moreover, section 562A(4) gives the court power, in relation to amounts received under a contract of re-insurance or retrocession, to confer further priority on a particular insurance or re-insurance creditor, in “… a manner that the Court considers just and equitable in the circumstances.” Section 562A has no territorial limits. Its application is mandatory so far as Australian liquidators are concerned. And, in Re HIH Casualty and General Insurance Ltd (2005) 215 ALR 562 at 591 the Supreme Court of New South Wales held that the principles of hotchpot do not apply so as to require dividends received by a creditor under section 562A (3) or (4) to be brought into account by the creditor when proving against other assets of the insolvent insurance company.

52.  By contrast, David Richards J held, and it was common ground before the Court of Appeal and not disputed before your Lordships, that, in a winding-up in England governed by English distribution rules, creditors who had received dividends under section 562A in Australia would have to bring them into account, by way of hotchpot, when claiming dividends in the English winding-up.

53.  The approximate effect on creditors of the remission to Australia of the English assets, according to a table produced by the Australian liquidators and the English provisional liquidators (but not agreed by the 3rd and 4th appellants) is set out below.

Type of creditor Company Anticipated dividend (cents/A$) if there is no remission of English assets Anticipated dividend (cents/A$) if there is remission of English assets
Insurance/reinsurance Creditors with liabilities in Australia HIH WMG FAII 25.8 49.0 1.3 28.5 55.1 13.3
Insurance/reinsurance creditors with liabilities that are not liabilities in Australia HIH WMG FAII 25.4 49.0 1.3 19.3 39.49 12.8
Other creditors with liabilities in Australia HIH WMG FAII 25.4 49.0 1.3 19.3 44.9 0.9
Other creditors with liabilities that are not liabilities in Australia HIH FAII 25.4 1.3 19.3 0.4

According to the Agreed Statement of Facts and Issues (para.41) the Australian liquidators believe that the dividends receivable by the creditors of FAIG would be unaffected by the remission.

54.  Following the judgment of David Richards J the proposed schemes of arrangement were redrafted. They have, as I understand it, been drafted on alternative footings, dependant on whether your Lordships dismiss this appeal and hold that David Richards J and the Court of Appeal were right to refuse to direct the remission of the English assets to Australia, or allow this appeal and hold that in principle the English assets ought to be remitted to Australia. These schemes of arrangement providing for alternative modes of distribution, I understand, have been approved both in Australia and in England. How they will be implemented depends upon your Lordships’ decision, first, whether the High Court has power to direct the remission of the English assets to Australia and, second, whether in the circumstances of this case that power should, in principle, be exercised. There are two possible sources of such a power. One, espoused by my noble and learned friend Lord Hoffmann, whose opinion I have had the advantage of reading in draft, is an inherent power in the court established not by statute but by previous judicial decisions. The other is section 426 of the Insolvency Act 1986, introduced into our law, as Lord Hoffmann has explained (para.5 of his opinion), in consequence of a recommendation by the Cork Committee in 1982.

Section 426

55.  The section is headed “co-operation between courts exercising jurisdiction in relation to insolvency” and subsections (4) and (5) provide as follows :

“(4) The courts having jurisdiction in relation to insolvency law in any part of the United Kingdom shall assist the courts having the corresponding jurisdiction in any other part of the United Kingdom or any relevant country or territory.

(5) For the purposes of sub-section (4) a request made to a court in any part of the United Kingdom by a court in any other part of the United Kingdom or in a relevant country or territory is authority for the court to which the request is made to apply, in relation to any matters specified in the request, the insolvency law which is applicable by either court in relation to comparable matters falling within its jurisdiction. In exercising its discretion under this subsection, a court shall have regard in particular to the rules of private international law.”

By the Co-operation of Insolvency Courts (Designation of Relevant Countries and Territories) Order 1986 (SI.1986/2123) Australia was designated a “relevant country” for the purposes of section 426.

56.  David Richards J, in paragraph 112 of his judgment, expressed the conclusion that

“… 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.”

He said that he regarded that conclusion as an application of my reasoning in Re BCCI (No 10) [1997] Ch.213. I think, with respect, that that was a mistaken basis for his conclusion. My reasoning in Re BCCI (No.10) related only to the inherent power of the court. It had nothing to do with section 426. The BCCI (No 10) case was concerned with the question of remission of assets from England to Luxembourg, the country where BCCI had been incorporated and the seat of the principal liquidation. Luxembourg had not been designated a “relevant country” for the purposes of section 426. A letter of request under section 426, asking for the remission to Luxembourg of the assets held by the English liquidators, had not been, and could not have been, issued by the Luxembourg court to the High Court. The issue was whether the High Court had an inherent jurisdiction to authorise the English liquidators, conducting an ancillary liquidation in England, to remit assets to the liquidators conducting the principal liquidation and, if so, the scope of that inherent jurisdiction. It was common ground in Re BCCI (No.10) that the High Court had no statutory jurisdiction to remit the assets or to direct the liquidators to do so.

57.  Although David Richards J expressed his conclusion as a lack of “power” to give the direction sought by the Australian liquidators, I think, reading his judgment as a whole, that he was not really taking a jurisdictional point but was concluding that it would not be right to direct a remission of assets in circumstances where the remission would reduce the dividends that would have been recovered under the English scheme of insolvency distribution by those creditors who were not insurance creditors. That certainly was the approach of the Chancellor when the case reached the Court of Appeal. He said, in paragraph 35 of his judgment that

“… the concept of ‘assistance’ should not be restrictively construed so as to limit the jurisdiction of the court”

and that the assistance that the New South Wales court had requested by its Letter of Request of 4 July 2005 did not fall “outside the ambit of that concept.” He concluded that -

“if the Companies were in liquidation in England the Court in England would have jurisdiction to entertain a request under s.426 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 be to interfere with the statutory scheme imposed on those assets by [the] Insolvency Act 1986” (para.50)

With all of that I respectfully agree. The Chancellor went on to consider whether the High Court could “properly” give the requested direction. That, he thought, was the critical question (para.36). Again, I respectfully agree.

 
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