After a legal battle lasting almost three years, HIH's UK reinsurance money is coming to Australia.
On Wednesday night (Australian time), the House of Lords reversed two earlier decisions and held that proceeds of reinsurance policies taken out in the UK should be handed over to HIH's Australian liquidators.
The significance of this is that Australian law requires that reinsurance proceeds flow directly through to the insureds. If the money had not been remitted to Australia, it would have been distributed equally among creditors, with no special provision for those holding insurance with HIH.
Background
HIH had a number of subsidiaries which were incorporated in Australia but registered as overseas companies in England. Those subsidiaries had taken out reinsurance in England. The NSW Supreme Court appointed a liquidator to HIH in 2001. It also successfully requested the English High Court to appoint provisional liquidators to the "English" companies in the group.
The NSW Supreme Court later issued a letter of request to the English High Court, asking it to order the English provisional liquidators to remit the subsidiaries' English assets to Australia. Prominent among those assets were the proceeds of the reinsurance policies. The High Court refused to make the order, and the Australian liquidators appealed to the Court of Appeal. When that appeal failed, the liquidators appealed to the House of Lords.
The issue
At issue were two statutory provisions: section 562A of the Corporations Act 2001 (Australia) and s 426 of Insolvency Act 1986 (Eng).
Section 562A only applies to insurance companies. In effect, it mandates a see-through approach to the reinsurance: if an insolvent insurance company has reinsurance, the proceeds of that reinsurance are to be distributed to the holders of the relevant insurance policies. This quarantines reinsurance proceeds from the general pooling of assets and pari passu distribution among all unsecured creditors that is otherwise a common feature of both Australian and English corporate insolvency law.
Section 426 requires English Courts to assist courts which have "the corresponding jurisdiction in & any relevant country" (which includes Australia).
Both the High Court and the Court of Appeal refused to order a transfer to Australia, because there was (at that time) no English equivalent of s 562A:
The House of Lords
The liquidators successfully appealed to the House of Lords.
It is fair to say that the Law Lords took a more laidback view of s 562A. In part, this was because, after the HIH issue arose, English law had changed to provide some preference for insureds. Although the change came too late to apply to HIH, some of the Law Lords saw it as providing a policy justification for remitting the reinsurance proceeds to Australia.
The Law Lords were also prepared to take a "broad brush" approach to the question of equivalence of English and Australian insolvency law. Lord Hoffmann pointed out that, if an English Court's power to remit was only used where a foreign insolvency regime was identical to English law, it would largely be a dead letter:
Generally, the Law Lords agreed that s 562A did not mean that the differences between Australian and English insolvency law were so great that the reinsurance proceeds should not be remitted to Australia:
The only substantive point on which the Law Lords disagreed among each other was whether remittal could be ordered under s 426 or an inherent power of English Courts. This is not significant for Australian companies and their liquidators, because, as indicated above, English regulation specifically includes Australia in the list of countries whose courts can use s 426.
Implications
The significance of this decision lies in the fact that London is a major hub for reinsurance. Until the House of Lords decision, the dominance of London meant that the policy behind s 562A could effectively be frustrated.
It is, perhaps, ironic that the Law Lords' decision comes just after APRA toned down its requirements for capital charges against foreign reinsurance recoveries
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