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.
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 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.
At issue were two statutory provisions: section 562A of the
Corporations Act 2001 (Australia) and s 426 of Insolvency Act
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
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:
"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." (High
"All the cases and all the academic commentators
demonstrate clearly that the Court will not order the
transfer of assets by liquidators in an ancillary winding up
in England to the liquidators in the principal liquidation
abroad if the rights of creditors would be prejudiced and
they would obtain no countervailing advantage in the
principal liquidation." (Court of Appeal)
The House of Lords
The liquidators successfully appealed to the House of
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
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:
"In practice such a condition would never be satisfied.
Almost all countries have their own lists of preferential
creditors. These lists reflect legislative decisions for the
protection of local interests, which is why the usual English
practice is, when remittal to a foreign liquidator is
ordered, to make provision for the retention of funds to pay
English preferential creditors. But the existence of foreign
preferential creditors who would have no preference in an
English distribution has never inhibited the courts from
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 notion of preferential creditors is, and long has
been, part of our insolvency regime, and it is almost
inevitable that different insolvency regimes will have
slightly different categories of preferential creditors. It
cannot be right that such differences should always, or
(arguably) even frequently, be a bar to an order for remittal
... ." (Lord Walker of Gestingthorpe)
"The Australian statutory scheme allows insurance and
reinsurance creditors of insolvent insurance companies to be
paid in priority to ordinary creditors. There is nothing
unacceptably discriminatory or otherwise contrary to public
policy in these statutory provisions." (Lord Scott of
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.
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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The failure of a party to call a witness does not necessarily give rise to an adverse inference being drawn in accordance with Jones v Dunkel (1959) 101 CLR 298. An unfavourable inference is drawn only if evidence otherwise provides a basis on which that unfavourable inference can be drawn.
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