Australia: Praise The Lords: HIH Reinsurance Money Coming Home

Last Updated: 30 April 2008
Article by Jennifer Ball

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 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:

"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 Court)
"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 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:

"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 ordering remittal."

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 Foscote)

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

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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