Skip to content.

Home

Allens Arthur Robinson

Focus: Insolvency / Insurance – April 2008

Judicial cooperation in cross-border insolvencies

In brief: The House of Lords has acceded to a letter of request that the English court received from the Supreme Court of New South Wales and has ordered that assets held by the HIH group of companies in England should be remitted to Australia for distribution in accordance with Australian law. Partner John Morgan (view CV) and Senior Associate Christopher Prestwich report.

How does it affect you?

  • The decision is good news for insurance creditors of the HIH group with liabilities in Australia and bad news for non-insurance creditors of HIH group and insurance creditors of the HIH group with liabilities that are not in Australia.
  • The decision represents the adoption of a universalist approach to cross-border insolvencies by the House of Lords. It is likely to be very influential in future cross-border issues in common law countries that have similar 'letter of request' legislation.
Background

In the winding up of the HIH group of companies, the Supreme Court of New South Wales sent a letter to the English court requesting the court's assistance to the Australian liquidators in their requests for the English provisional liquidators of HIH to remit English assets to Australia for distribution in accordance with Australian rules. Overturning the first instance and Court of Appeal decisions, the House of Lords has acceded to that letter of request.

In a winding-up, Australian law (unlike English law at the time) gives priority to insurance creditors in respect of reinsurance recoveries made by the insurance company. The assets in England were largely the proceeds of reinsurance claims on policies taken out in London. Those English assets will now be distributed in accordance with the Australian statutory scheme, which is to the benefit of insurance creditors of the HIH group as a whole.

Provisional liquidators were appointed to HIH and three associated companies on 27 August 2001 by the Supreme Court of New South Wales (the Supreme Court). The Supreme Court requested the High Court in England to appoint provisional liquidators to the same companies and this was agreed.

At first instance, the High Court in England held that it did not have power to remit the English assets to Australia in circumstances where the Australian scheme for distribution was different to that which applied in England (the difference being the priority afforded to insurance creditors). That decision was appealed to the Court of Appeal, which held that it did have the power to remit the assets to Australia but it declined to exercise its discretion to do so, as that would have prejudiced the interests of non-insurance creditors. The provisional liquidators appealed to the House of Lords.

Return to top

The House of Lords' decision
Power to remit assets?

In considering whether it had the power to remit the assets to Australia, the House of Lords considered two possible bases for that authority.

Comity and general principles of private international law: the court noted a general principle that there should be a single insolvency administration in the court of the insolvent company's domicile which is recognised world-wide and applies to all the bankrupt's assets. Two members of the House of Lords held that the court did have jurisdiction at common law to direct remittal of English assets, notwithstanding that they might be distributed otherwise than in accordance with the English statutory scheme. Two members held that the inherent jurisdiction of the court was not sufficient to enable the court to remit English assets abroad where distribution of those assets would not be in accordance with the English insolvency regime. The fifth judge declined to resolve the question.

Letters of request: section 426 of the English Insolvency Act 1986 gives a court with jurisdiction in relation to insolvency law the power to assist other courts with a corresponding jurisdiction in any relevant country (Australia having been designated as a relevant country). A request for assistance having been made, the House of Lords held unanimously that s426 did give the court the power to remit assets to Australia, notwithstanding differences in the schemes for distribution in the two countries.

Should the court exercise its discretion to remit the English assets?

That left the question of whether the House of Lords should exercise its discretion to order the remittal of those assets. The Australian scheme for the distribution of assets of an insolvent insurance company is different to that which applied in England at the relevant time in the following respects:

  • section 562A Corporations Act 2001 (Cth) gives priority to insurance creditors in respect of re-insurance recoveries made by an insurance company; and
  • section 116(3) Insurance Act 1973 (Cth) provides that assets in Australia at the time of the winding up should be applied to liabilities in Australia in priority to liabilities that are not in Australia.

As the English assets were not 'assets in Australia' at the time of winding up they were not caught by s116(3) of the Insurance Act. The relevant difference in the statutory schemes for distribution was the priority afforded to insurance creditors by s562A of the Corporations Act. In the event that assets were remitted to Australia, insurance and reinsurance creditors as a whole would benefit at the expense of other creditors.

The House of Lords held unanimously that the court should exercise its authority to remit the English assets to Australia. It noted a number of factors relevant to the exercise of that discretion:

  • there is nothing unacceptably discriminatory or otherwise contrary to public policy in the Australian statutory provisions;
  • the English insolvency regime now includes very similar preferential provisions for insurance companies to those that apply in Australia, so it could not be said that the Australian law offends English principles of justice;
  • different countries inevitably have slightly different categories of preferential creditors, but that is not a bar to an order for remittal; and
  • given that creditors had been dealing with an Australian insurance company, the application of Australian law to the distribution of assets was more likely to give effect to the expectations of creditors as a whole than the distribution of some assets according to English law.

Return to top

Comment

The House of Lords noted the desirability of a universal, rather than territorial, approach to cross-border insolvency, with all of the assets of an insolvent company being distributed in accordance with rules of its home jurisdiction. This is consistent with the principles behind the Model Law on Cross-Border Insolvency developed by the United Nations Commission on International Trade Law. Legislation seeking to implement the Model Law has been passed by both houses of parliament in Australia and is awaiting Royal Assent.

The case also illustrates the importance of a letter of request in a cross-border insolvency. The House of Lords was divided as to whether it has the power at common law to order the remittal of assets in the absence of such a request. It is also unclear whether the English Court had the power to assist where it received a letter of request from a country that was not a prescribed country.

In Australia, s581(2)(a) of the Corporations Act contains similar provisions to s426(4) of the English Insolvency Act. Accordingly the decision is likely to be influential in the event that:

  • the court receives a letter of request from a prescribed country and is considering whether to comply with that request; or
  • receives an application from foreign liquidators seeking assistance without a letter of request.

However, s581(2)(b) of the Corporations Act provides that the Australian court may act in aid of a court in a non-prescribed country, so the issue of whether any common law power to direct the remittal of assets abroad if a request is received from a non-prescribed country would not arise. It should be noted that the implementation of the UNCITRAL Model Law now offers an alternative means of obtaining the court's assistance in cross-border insolvencies in England and will do the same in Australia if and when it is implemented.

The earlier first instance and Court of Appeal decisions had been very important in forming the thinking of the Australian Prudential & Regulatory Authority (APRA) in relation to its proposals for strengthening the capital requirements applicable to offshore reinsurance arrangements. Although APRA, in its most recent announcement on 2 April 2008, has shifted its position in relation to its requirements for holding capital in respect of reinsurance recoverables, it appears that it retains the view that reinsurance arrangements should be subject to Australian law, that there should be a submission to Australian jurisdiction and that the contract should expressly provide for payment in Australia.

The decision removes some of the concerns raised by APRA particularly in relation to reinsurance placed in the London market where the fact that the recoverable was payable in the United Kingdom had led to the proposition that under private international law that the debt resided in the United Kingdom. However, it does not mean that in other jurisdictions, a similar issue will not arise with a different result and it indicates some of the problems in global markets for the alignment of domestic prudential regulation protecting local policyholders with insolvency laws in different jurisdictions. It also highlights perhaps the need for the private international law rules relating to the location of a debt to be further considered by our courts and by the courts in those other jurisdictions where reinsurances are likely to be placed. In the meantime, the contractual requirements required by APRA would appear to assist local insurers in relation to any future like dispute.

Return to top

For further information, please contact:

Return to top

Bookmark with

What are these?

Recent Insolvency & Restructuring publications