As a (very) general rule, debts and claims rank equally in a company winding up. One of the exceptions to this rule applies where the company being wound up is an insurer. Where the company has entered into reinsurance contracts which cover it in respect of certain insurance contracts, money paid under the reinsurance contracts must be applied to satisfy amounts payable under those insurance contracts. This exception, which gives priority to insurance creditors over general creditors, is provided for in s 562A Corporations Act 2001 (Cth).

Section 562A provides that, ordinarily, reinsurance proceeds are to be applied equally to all relevant insurance contracts and in priority to the general priority payments’ regime in relation to a winding up under section 556, unless the Court considers it just and equitable to order otherwise. Amaca Pty Limited v McGrath [2012] NSWSC 1523 was the third application made by companies in the James Hardie group for orders that reinsurance proceeds be paid to them, and not applied equally to all relevant insurance creditors.

Facts and general principles

The principles to be applied in applications of this type were considered in the earlier decisions of Amaca Pty Ltd v McGrath [2012] NSWSC 176 (Amaca 2) and Amaca Pty Ltd v McGrath [2011] NSWSC 90 (Amaca 1). As was the case in those applications, there had been direct dealings between the Hardie companies and the reinsurers, and the Court could effectively “match” specific insurance contracts between the Hardie companies and HIH C&G with reinsurance contracts between HIH C&G and the relevant reinsurers. It was established that the Hardie companies would not have agreed to contract with HIH C&G without substantially the whole risk being placed with reinsurers, and the Hardie companies would have been significantly prejudiced if they did not receive all the proceeds of the reinsurance contracts.

What kind of reinsurance payments fall within s 562A?

Section 562A applies to amounts received by an insurer from a reinsurer “in respect of” the insurer’s liability under contracts of insurance. In Amaca 2, the moneys received from the reinsurers included payments made under a commutation agreement. In that case, the Court held that payments by way of commutation of past and future liability fell within the provision in the same way as amounts received for damages claims made to the Hardie companies by third parties.

In this application, the moneys received from reinsurers included payments received from the reinsurers under a creditors’ scheme of arrangement. The Hardie companies claimed that these payments, like payment under the commutation agreement and payment received for damages claims made by third parties, were received “under a contract of reinsurance”. The Court agreed.

Conclusion

As the Court noted, the words “in respect of” have a wide meaning and are “probably the widest of any expression intended to convey some connection between two related subject-matters” (at [28]). This means that s 562A is relatively broad in its application. It applies not only to payments received for third party claims, but also to agreements to commute past and future liabilities and, at least in some cases, to payments received pursuant to schemes of arrangement. However, whether or not a payment received under a scheme of arrangement will fall within the scope of s 562A will presumably depend on the particular terms of the scheme. If, for instance, the payments received under the scheme were characterised as payments pursuant to new rights created under a new contract, s 562A would not apply (see Re HIH Insurance Ltd [2008] NSWSC 9). In the present case, the Court rejected the argument that the payments should be given this characterisation.