HIH Casualty & General Insurance Ltd & Ors v McMahon & Ors

The Court of Appeal dismissed the appeals against David Richards J's decision refusing to direct the English provisional liquidators to remit assets collected in England to the Australian liquidators. The court held that section 426 of the Insolvency Act 1986 authorises the English court to consider requests from a foreign insolvency court and, in principle, to apply foreign insolvency law or its own law in providing assistance, but whether to order a transfer is a discretionary decision of the English court.

The court emphasised that the discretionary exercise requires a balancing of prejudice to creditors in the English estate against any countervailing advantages of remittance. Because section 562A of the Corporations Act 2001 (Australia) gives mandatory priority to insurance/reinsurance recoveries in Australia and the proposed remittal would materially prejudice most classes of English creditors without sufficient compensating benefits, the court would not order transfer. The provisional status of the English proceedings made no difference to that conclusion.

Background and parties. The appeals arose from insolvencies in the HIH group. Four Australian-incorporated companies had provisional liquidators appointed in England at the request of the Supreme Court of New South Wales under s.426 Insolvency Act 1986. The Australian liquidators sought directions and an order that the English provisional liquidators remit to them assets collected in England so those assets could be distributed under Australian law or under schemes of arrangement sanctioned in Australia.

Nature of the application. Applications in England sought: (i) directions as to distribution of English assets if the companies were wound up in England, (ii) directions to enable formulation of schemes of arrangement, and (iii) whether creditors should be divided into classes for voting. The Australian court made a letter of request under s.426 seeking an order that the English assets be paid over to the Australian liquidators and an extension of the powers of the English provisional liquidators to enable that payment.

Issues framed by the court. The judge formulated four main questions: (1) Whether the English court can direct transfer of assets to the principal liquidator where the foreign distribution regime materially differs from the English regime; (2) Whether English hotchpot would apply to Australian distributions under s.562A; (3) Whether the request under s.426 and the letter of request alter the position; (4) Whether the provisional (not final) status in England mattered.

Court of Appeal reasoning and decision. The Court of Appeal (Chancellor, Tuckey LJ and Carnwath LJ) held that s.426 empowers the English court to consider and, in principle, to grant the assistance requested, and that the court in England would have jurisdiction to direct a transfer even if it interfered with aspects of the English statutory insolvency scheme. However, that is a discretionary power to be exercised by balancing the interests of creditors and any countervailing benefits. The court analysed the interaction between English law (pari passu distribution and hotchpot) and Australian provisions, notably s.562A Corporations Act 2001, which gives reinsurance recoveries priority in Australia and is mandatory in effect. The court concluded that remittal would materially prejudice most English creditors and there were not sufficient countervailing advantages to justify remittance. The provisional status of the English appointments did not alter that conclusion because winding-up orders in England were a realistic prospect absent approved schemes. The court therefore dismissed the appeals and refused the costs order sought by the Australian insurance creditors.

Wider context. The judgment explains the proper scope of s.426: the English court must consider whether, under English law, foreign insolvency law or the law of the requesting jurisdiction, the assistance sought can properly be granted and must take account of private international law and creditor protection principles. It identifies the appropriate discretionary test as a balancing of prejudice to creditors against compensating benefits rather than an absolute requirement of substantial compliance with English distribution rules.

Appeal dismissed. The Court of Appeal held that section 426 empowers the English court to consider requests by foreign insolvency courts and, in principle, to direct transfers of English assets to foreign liquidators, but that this power is discretionary and must balance prejudice to English creditors against any countervailing advantages. Because remittance would have materially prejudiced most English creditors (particularly in light of the mandatory priority created by s.562A Corporations Act 2001 in Australia) and there were insufficient compensating benefits, the court would not direct transfer; the provisional status of the English proceedings did not alter that conclusion.

Appeal from the High Court of Justice, Chancery Division, Companies Court (David Richards J). The judge made orders on 24 October 2005 and delivered a comprehensive judgment on 7 October 2005 refusing to direct the English provisional liquidators to remit English assets to the Australian liquidators; the decision was appealed to the Court of Appeal ([2006] EWCA Civ 732) which dismissed the appeals.