Magellan reinsured New Hampshire and was obliged to pay monies into a trust account against which New Hampshire could make withdrawals for specific purposes in accordance with the trust agreement.
By the end of 2001, the trust account contained over US$2.5 million and, in April 2002, New Hampshire made various written requests of the trustee for payment to cover unpaid losses due for settlement under the reinsurance.
The withdrawals effectively emptied the trust account, which New Hampshire alleged Magellan was obliged to replenish. Magellan denied these allegations, claiming that the withdrawals made by New Hampshire included unsubstantiated claims.
On 30 September 2003, New Hampshire served a statutory demand in the Turks and Caicos Islands asserting that Magellan had incurred a debt of over US$1.4 million consisting of a "shortfall in payment to trust account pursuant to reinsurance agreement of 17 January 1997".
First instance decision
At first instance it was held that Magellan had agreed to pay into the trust account a sum determined by New Hampshire, which New Hampshire was entitled to withdraw without notice to Magellan. The Chief Justice concluded that Magellan owed a significant sum to the trust account and that, given Magellan was unable to pay its debts as they fell due in the ordinary course of business, s.93 of the Companies Ordinance regarding winding up was satisfied.
Court of Appeal
Magellan appealed to the Court of Appeal, which held that New Hampshire was not a creditor of Magellan as:
- The alleged sum outstanding was not and had never been owed to New Hampshire; and
- An obligation to provide security for a debt which may become payable was not in itself a debt.
It was held that New Hampshire did not therefore have the entitlement to petition for Magellan's winding up.
New Hampshire appealed on the basis that the petition related to an obligation to pay into the trust account sums which were proved at first instance to be payable under the reinsurance and that any sums payable into the trust account belonged in equity to New Hampshire.
After consideration, the Privy Council dismissed the appeal, holding that the primary expectation of the parties was that any sums due would be settled directly between them. The trust account was established to hold unearned premium plus losses reserved but not yet paid. The fact that New Hampshire's withdrawals placed the trust account in deficit did not demonstrate that it was entitled to recover anything further from Magellan.
The trust account provided New Hampshire with security in respect of risks not yet run or crystallised. Magellan remained entitled to receive interest, dividends and capital from the assets in the trust account as well as retaining voting rights and the balance of assets after satisfaction of its reinsurance obligations. Such provisions were held to be inconsistent with a proposition that New Hampshire had an equitable right to trust assets.
Magellan's failure to make payment into the trust account was a breach of the reinsurance policy but such a breach did not make New Hampshire a creditor of Magellan entitling it to petition to wind Magellan up. Interestingly, had New Hampshire claimed a breach of contract against Magellan and converted by judgment a successful award into a liquidated claim it appears that they would then have been entitled to petition for Magellan's winding up in accordance with Turks and Caicos law.