Differences between UK and Australian insolvency laws will affect creditors

English assets owned by four insurers in the failed Australian-based HIH insurance group must be remitted to the Australian liquidator, the House of Lords has ruled.

The House of Lords five-member appeal committee’s judgement overturned earlier judgements in 2005 and 2006 by the England & Wales High Court and the England & Wales Court of Appeal against sending the assets out of the UK.

The Lords all agreed to meet a 2005 request from the New South Wales Supreme Court that the liquidators, Anthony McGrath and Chris Honey, partners with McGrathNicol, in Sydney, be able to gain access to the English assets.

Lord Scott of Foscote said HIH’s English assets totalled about $247m, less than 20% of its total estimated assets of more than $A2bn. HIH’s liabilities are more than $9bn, with $7.7bn of them (85%) in Australia. The UK assets are mainly reinsurance claims on policies taken out in London.

“Some creditors will do better and others worse. Generally speaking, insurance creditors will be winners and other creditors will be losers

Lord Hoffman

The lower courts had considered that, because Australian law had a different insolvency regime applicable to insurers, the outcome for some English creditors would be worse if remission of the assets were ordered.

However, the House of Lords considered that the UK now had more wide-ranging laws applicable to insolvent insurers through implementing European Union legislation. Remission would not alter the amount available to distribute to creditors, just the way it was allocated.

Lord Hoffman said the differences in the two countries’ insolvency laws when the HIH action began meant “some creditors will do better and others worse. Generally speaking, insurance creditors will be winners and other creditors will be losers”.

However, he said English courts should co-operate with courts in other countries to ensure “a single system of distribution” of assets to creditors. Since UK courts began hearing the remittance application, English insolvency law had changed to provide preference for some insureds, similar to provisions in Australia’s Corporations Act.

“I do not see that it would offend against any principle of justice for the assets to be remitted to Australia

Lord Hoffman

“In the present case, I do not see that it would offend against any principle of justice for the assets to be remitted to Australia. Furthermore, it seems to me that the application of Australian law to the distribution of all the assets is more likely to give effect to the expectations of creditors as a whole than distribution of some assets according to English law. Policyholders and other creditors dealing with an Australian insurance company are likely to expect that, in the event of insolvency, their rights will be determined by Australian law.”

Mark Craggs, an associate at Norton Rose LLP, which represented McGrathNicol throughout the litigation, said the House of Lords’ judgement was “a bold commitment to an internationalist approach in dealing with cross-border insolvencies” and a “refreshing endorsement of the principles of comity and universalism”.

Australian insurance law specialist Peter Mann, a partner with Clayton Utz in Sydney, said it was coincidental, yet ironic, that the House of Lords judgement followed the Australian Prudential Regulation Authority’s decision to relax its proposed requirements for capital charges against foreign reinsurance recoveries.

Mann said APRA last year had cited the UK appeal court ruling as justification for its original proposals to impose higher capital requirements on overseas-based reinsurers. But, when APRA announced the final form of its planned changes to the general insurance industry’s prudential framework on April 2, less than a week before the House of Lords judgement, the regulator said it intended to replace its previous proposals for reinsurers with a risk-based scale of capital factors to be applied to unsecured recoverables under new reinsurance contracts from December 31 this year.