Amaca Pty Ltd v McGrath & Anor as liquidators of HIH Underwriting and Insurance (Australia) Pty Ltd [2011] NSWSC 90

The Corporations Act 2001 (Cth) makes special provision for satisfying the claims of insurance creditors in the winding up of an insurer.  Section 562A provides that payments from reinsurance contracts that predate the winding up are to be quarantined from other assets and applied to satisfy the insurer’s liability under any insurance contracts that predate the winding up.  The proceeds are not available to satisfy any other kind of debt unless or until those insurance liabilities are satisfied in full.  Section 562A accordingly overrides the general priority rules in sections 555 and 556.

Sections 562A(2) and (3) give priority to all insurance creditor claims, without the need for any connection between a given insurance contract and the reinsurance proceeds.  However, s 562A(4) empowers the court to displace this rule and order that reinsurance proceeds be applied by the liquidator in a manner that the court considers “just and equitable in the circumstances”.

Three companies in the James Hardie Group (Hardie Companies) applied for an order under s 562A(4) that certain reinsurance contract payments received by the liquidators of HIH Underwriting and Insurance (Australia) Pty Ltd (HIH) be paid to them, in priority to any other insurance creditors.  They sought a similar order in respect of certain future payments that the liquidators were expected to receive.  

The liquidators neither consented to nor opposed the order sought in relation to money already received.  However, they opposed the order sought concerning future payments, on the basis that the court did not have power to make that order.

The court, having regard to the “just and equitable” criterion and the considerations set out in s 562A(5), concluded that the special circumstances of the case warranted an order in relation to reinsurance proceeds already received.  The reinsurance contracts were entered into for the express purpose of meeting the needs of the Hardie Companies, and the latter were aware that “the whole of the risk nominally taken by HIH would be laid off in the London market by means of facultative reinsurance contracts specifically sought and obtained for that purpose” (at [78]).  The facts showed that the contracts were entered into to provide insurance cover that HIH was unable to provide without the assistance of reinsurers, and which the reinsurers could not provide directly.  The premiums paid by the Hardie Companies (less commission) were passed through to the reinsurers.

However, the court declined to make an order about future receipts.  It held that the wording of s 562A only empowered the court to make orders in relation to amounts actually received.  Section 562A(4) was to be applied having regard to the specific factual circumstances prevailing at the time the court was asked to make the order; it was not possible to apply the provision to future receipts. 


There were special circumstances in this case which enabled the court to link the reinsurance contracts to the insurance contracts entered into by the Hardie Companies.  This will not always be possible and, unless an order is made under s 562A(5) and subject to the operation of s 116(3) of the Insurance Act 1973 (Cth), all insurance creditors under policies written prior to commencement of the winding up of the reinsured are entitled to share in reinsurance payments, even those whose insurance contracts are unrelated to the reinsurance contract(s) in question.

If an insured wishes to seek priority over other insureds, it should take steps to ensure that there is a clear connection between its insurance contract and any reinsurance contract to which it claims a connection.  Section 562A(5) sets out the factors that the court may take into account when considering whether it is “just and equitable” to order priority to an insurance creditor.  They include:

  • whether it is possible to identify particular relevant contracts of insurance as being the contracts in respect of which the contract of reinsurance was entered into;
  • whether it is possible to identify persons who can be said to have paid extra in order to have particular relevant contracts of insurance protected by insurance; and
  • whether particular relevant contracts of insurance include statements to the effect that the contracts are to be protected by reinsurance.

These factors should be considered by an insured who wishes to establish a link between its insurance  contract(s) and any reinsurance contract entered into by its insurer.