Re United Medical Protection & ors [2002] NSWSC 413

Reported Decision : 41 ACSR 623

New South Wales Supreme Court

CITATION : Re United Medical Protection & ors [2002] NSWSC 413 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 2545/02, 2543/02, 2541/02 HEARING DATE(S) : 3 May 2002 JUDGMENT DATE : 3 May 2002

2545/02 United Medical Protection Ltd (Applicant)

PARTIES : 2543/02 Australasian Medical Insurance Ltd (Applicant)

2541/02 MDU Australia Insurance Co Pty Ltd (Applicant) JUDGMENT OF : Austin J

COUNSEL : Mr J Sackar QC with Mr M J Dawson (Applicants) SOLICITORS : Tress Cocks & Maddox (Applicants) CATCHWORDS : CORPORATIONS - application by the company for winding up on just and equitable ground - whether board of directors has power to resolve to make application for winding up and for appointment of provisional liquidator - whether receiver and manager would be more appropriate - relevance of attitude of board of directors Bastion v Gideon Investments Pty Ltd (2000) 35 ACSR 466 McMillan v Toledo Enterprises International Pty Ltd (1995) 18 ACSR 603 Re Botar-Tatham Pty Ltd (2001) 52 NSWLR 680 Re Inkerman Grazing Pty Ltd [1972] 1 ACLR 102 CASES CITED : Re Interchase Management Services Pty Ltd (1992) 9 ACSR 148 Re London, Hamburg and Continental Exchange Bank (1866) LR 2 Eq 231 Re T & L Trading (Aust) Pty Ltd (1986) 10 ACLR 388 Re United Uranium NL (1980) 8 ACLR 741 Re Westbourne Galleries Ltd [1973] AC 360 Riviana (Aust) Pty Ltd v Laospac Trading Pty Ltd (1986) 10 ACLR 865 DECISION : Provisional liquidator appointed

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

AUSTIN J

FRIDAY 3 MAY 2002

2545/02 IN THE MATTER OF UNITED MEDICAL PROTECTION LTD 2543/02 IN THE MATTER OF AUSTRALASIAN MEDICAL INSURANCE LTD 2541/02 IN THE MATTER OF MDU AUSTRALIA INSURANCE CO PTY LTD JUDGMENT (see page 18 of the transcript) (ex tempore; revised 9 May 2002) 1 HIS HONOUR: These are ex parte applications by United Medical Protection Ltd and two of its subsidiaries for the filing of originating processes for winding up on the just and equitable ground, and for the immediate appointment of a provisional liquidator to all three companies. 2 When I heard the applications this morning, I was not sure that provisional liquidation was the right concept in the circumstances, and I asked counsel to consider the appointment of a receiver and manager as an alternative. I also asked for further evidence with respect to the making of another call on members to improve the group's capital base. 3 I have appreciated the conscientious way in which the three plaintiffs have applied themselves to my provisional expressions of uncertainty. The further evidence with respect to calls on members, when considered with the other evidence in the case, enables me to reach the opinion that the proposal for interim administration (either by provisional liquidator or by a receiver and manager) is in the interests of the members of the company - a point of particular relevance where the application for winding up is made pursuant to a resolution of the directors rather than the members: Re T & L Trading (Aust) Pty Ltd (1986) 10 ACLR 388, 389. 4 As to the possibility of appointing a receiver and manager, counsel informed me this afternoon that while his clients would prefer the appointment of a provisional liquidator, they would be content with the appointment of a receiver and manager if the Court thought it preferable. 5 Occasions for comparing provisional liquidation with receivership have not often arisen in the decided cases (but cf McMillan v Toledo Enterprises International Pty Ltd (1995) 18 ACSR 603). Receivership is a very flexible equitable remedy (see, e.g., Bastion v Gideon Investments Pty Ltd (2000) 35 ACSR 466), not limited to the interim preservation of assets. While a receiver and manager may be personally liable for debts incurred in continuing the company's business (see J O'Donovan, Company Receivers and Administrators (Lawbook Co, looseleaf), para [24.70]) it may be possible for the Court to avoid that outcome in an appropriate case by directing the receiver to make contracts in the company's name and on its behalf. On the other hand, a provisional liquidator has the power to conduct the company's business on behalf of the company and in its name, and it is nowadays more common than it once was for the appointment of a provisional liquidator to be made where it is not intended that the company's business be immediately shut down. 6 In the end, the similarities and differences between the two offices were not fully explored because I decided to resolve the issue by recourse to purely practical considerations. After reviewing the proposed summonses that were prepared in the course of the day for the appointment of a receiver and manager as an alternative to the appointment of a provisional liquidator, I have decided that orders of those kinds would not achieve any practical advantage over provisional liquidation. 7 To achieve a practical advantage over provisional liquidation it would be necessary for the orders to give directions to the receiver/manager of a useful kind, such as to prepare a report and to inform the Court, and in that fashion to inform the members and the wider community, of what is going on. While there is an obvious public interest in this matter, and a manifest interest on the part of the members of the company, it does not seem to me, on balance, wise to impose a reporting obligation of that kind on the person who is charged with the responsibility of taking over those companies and trying to make some sense out of their future. The more important thing is for that person to be able to ascertain for himself or herself the true position with respect to the financial affairs of the companies, and the impact of the various developments which are likely to occur - including the increase as from 1 July of the prudential capital requirements for general insurance companies by APRA, the specific demand by APRA for the provision of capital to the AMIL company, and the foreshadowed change in accounting requirements by the Urgent Issues Group of the accounting bodies to bring IBNRs to account for balance sheet purposes. The person to be appointed will need to assimilate the effects of all of those developments, and make a judgment as to the prospects with respect to any future call on the members of the company (in light of the fact that the last call has produced certain consequences with respect to membership revenue and also that the time for payment of some of the instalments for the last call has not yet arrived). In addition to all of those matters, it appears likely that there will be further negotiations with the Commonwealth Government, notwithstanding the indications in the evidence that the negotiations by the directors have come to an end for the time being. 8 As I say, given the work that has to be done on those matters, a reporting obligation would, I think, be rather onerous at this stage. It therefore seems to me, on balance, that orders of the kind proposed in the draft summonses would not be optimal even if, in all other respects, the choice between receivership and provisional liquidation were evenly balanced. 9 If I appoint a provisional liquidator rather than a receiver and manager, there will be no particular reporting obligation in the short term, and the provisional liquidator will be free to attend to the tasks that I have described - and no doubt others - without the interference that a reporting requirement would impose. However, it seems to me the public interest in the matter, and interest of the members, can be addressed consistently with the appointment of a provisional liquidator in other ways. I have in mind that the originating process for the winding up of the companies would be made returnable at a time when the Court might fairly expect not a written report from the provisional liquidator, but an indication in open Court by counsel as to what stage all relevant matters have reached, so that in that fashion the public interest could be addressed to a degree and the members could, to that extent, be kept informed. 10 It would be open to the provisional liquidator to choose to communicate with the members, of course, and it appears that the members' rights under the constitution of the parent company to requisition meetings will continue. If they have any matter that they wish to raise in the course of the provisional liquidation, there will be an avenue for them to do so. To make sure there is no unexpected development that cannot be brought to the Court's attention, I will grant liberty to apply. 11 Therefore, I return to the original application as made this morning, which is as I have said, an application for the appointment of a provisional liquidator to each of the three companies concerned. In order to make such an appointment the Court must be satisfied of the matters outlined by Young J in Riviana (Aust) Pty Ltd v Laospac Trading Pty Ltd (1986) 10 ACLR 865 at 866: "…the plaintiff must show a real prospect that on the hearing of the winding up proceedings the company will be ordered to be wound up and that the circumstances are such as to render it proper and desirable in the public interest to appoint a provisional liquidator." 12 Here the applications for winding up are not on any ground of insolvency but on the just and equitable ground. The just and equitable ground is a very broad ground which permits the Court to exercise, in a statutory context, what has been described by the House of Lords as a broad equitable discretion: see Re Westbourne Galleries Ltd [1973] AC 360. It is not necessary to bring new circumstances squarely within any of the existing categories for the exercise of that discretion. The circumstances in which the order can be made are infinitely various. However, once this case comes to trial for a winding up order, it seems to me likely that there will be an analogy between the circumstances of the case and the so-called failure of substratum cases, if it appears that an order is then appropriate at all. 13 What seems to be emerging in the circumstances of this corporate group is that, because of a combination of developments, rather than any one particular development, the Group's capital reserves are declining while, at the same time, a demand for increased capital is to be made by the regulator, and foreshadowed changes to accounting standards will also affect the need for capital. 14 All of that is happening in the context of world developments which include the contraction of the medical insurance market, the effects of September 11 on investments by general insurers, and the effects of those events on the cost of reinsurance. To that one adds, in Australia, the specific effects of removing one the principal reinsurers in this category of insurance, namely the HIH Group. Those circumstances presage a further capital decline unless something can be done and, therefore, a risk that the company will be unable to continue to operate in the manner envisaged by the corporators and by the present membership. That is so regardless of whether, at some future time, the company comes to be clearly insolvent, in the sense in which that word is used in the Corporations Act. 15 I am on balance persuaded, although I said in argument that the case is not fully baked at this stage and that one has to engage in a degree of prognostication of almost actuarial proportions, that there is a likelihood when the case for winding up comes to trial, that there will be a ground for making the order, and that it is proper and desirable in the public interest that a liquidator now be appointed provisionally. 16 In reaching this conclusion I take into account the fact that the appointment of a provisional liquidator was approved by resolution of the board of directors of United Medical Protection. The fact that a provisional liquidator is sought by the company is not conclusive in favour of appointment, but it is a relevant and frequently a persuasive consideration: Re London, Hamburg and Continental Exchange Bank (1866) LR 2 Eq 231; Re T & L Trading (Aust) Pty Ltd, at 389. 17 Finally, I should note that I am satisfied, in the cases of all three companies, that the directors had the power to resolve that the company apply to the Court for winding up on the just and equitable ground, and for the appointment of a liquidator provisionally. In each case the constitution of the company empowers the directors not only to manage the company, but to exercise the powers of the company that are not required to be exercised in general meeting. Even if a resolution to apply for winding is not an exercise of the power to manage (see Re United Uranium NL (1980) 8 ACLR 741), it falls within the latter words (Re Interchase Management Services Pty Ltd (1992) 9 ACSR 148). It seems to me that there is now no longer any difference of approach on this question between the courts in New South Wales and Victoria: as to the former position, see Re Inkerman Grazing Pty Ltd [1972] 1 ACLR 102; as to the present position, see the Interchase case and also Re Botar-Tatham Pty Ltd (2001) 52 NSWLR 680, 682-3. Indeed, the present national system of company law and administration does not allow for differences of approach between States. It is necessary for any differences to be resolved by judicial process so as to produce a single national outcome. Fortunately there is now a national outcome on this point, the outcome being that if the constitutional provision conferring power on the board of directors is in the normal form, the directors have the power to make an application for winding up and for the appointment of a provisional liquidator. **********

Last Modified: 05/21/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.