HIH’s liquidators held moneys received from reinsurers under contracts for reinsurance made by HIH. Sydney Water Corporation (SWC) held insurance policies with HIH. Before the group’s liquidation, HIH accepted a claim from SWC, made a claim under its reinsurance contracts and paid SWC approximately $2.5 million. SWC’s subsequent unpaid claims amounted to more than $7.5 million, and it applied under Corporations Act 2001 (Cth) s 562A(4) for an order that the reinsurance proceeds held by the liquidators be paid to it, rather than distributed among all insurance creditors. SWC argued that this would be ‘just and equitable’ in the circumstances, particularly because of the close business relationship it had fostered with HIH’s reinsurers and the role they had played in helping to secure HIH’s reinsurance contracts. The primary judge dismissed this application, concluding that there was no ‘extraordinary or unusual’ relationship between SWC and HIH’s reinsurers that would justify the order.
The Court of Appeal upheld the primary judge’s decision that it was not ‘just and equitable’ to give SWC priority over other insurance creditors. The decision confirms that the bar for an ‘extraordinary or unusual relationship’ that would result in a successful priority application under s 562A(4) is quite high – the mere development of a close business relationship will not be unusual enough to obtain any advantage in respect of reinsurance proceeds in the event of insolvency.
You can access the reasons for judgment here.