Re Transnational Ins Company Ltd

• Jurisdiction: Cayman Islands
• Judge: (Smellie, J.)
• Judgment Date: 04 March 1998
• Court: Grand Court (Cayman Islands)
• Date: 04 March 1998

Grand Court

(Smellie, J.)

IN THE MATTER OF TRANSNATIONAL INSURANCE COMPANY LIMITED

J.R. McDonough for the applicant;

G.A. Locke for the respondent.

Cases cited:

(1) -Aetna Casualty & Surety Co. v. Home Ins. Co.UNK(1995), 882 F. Supp. 1328, distinguished.

(2) -Banco de Portugal v. Waddell, In re HooperELR(1879), 5 App. Cas. 161, applied.

(3) -Compton Corp., In re, Kellogg v. Blue Quail Energy Inc.(1987), 831 F. (2d) 586, considered.

(4) -Felixstowe Dock & Ry. Co. v. United States Lines Inc., [1989] Q.B. 360; [1988] 2 All E.R. 77, considered.

(5) -Ford, In re, [1900] 2 Q.B. 211; [1900] W.N. 124, distinguished.

(6) -Humber Iron Works & Shipbuilding Co., In re, Warrant Fin. Co”s CaseELR(1869), L.R. 4 Ch. App. 643; 38 L.J. Ch. 712, considered.

(7) -Midland Ins. Co., In re, Kemper Reinsurance Co. v. Corcoran(1992), 582 N.Y.S. (2d) 58, applied.

(8) -‘Minna Craig’ S.S. Co. v. Chartered Mercantile Bank of India, London & China, [1897], 1 Q.B. 460; (1897), 66 L.J.Q.B. 339, considered.

(9) -Moor v. Anglo-Italian BankELR(1879), 10 Ch. D. 681; 40 L.T. 620, considered.

(10) -Oriental Inland Steam Co. Ltd., In reELR(1874), L.R. 9 Ch. App. 557; 43 L.J. Ch. 699, applied.

(11) -Power Curber Intl. Ltd. v. National Bank of Kuwait S.A.K., [1981] 1 W.L.R. 1233; [1981] 3 All E.R. 607.

(12) - Rubin, In re(1993), 160 B.R. 269.

(13) -Selkrig v. DaviesENR(1814), 2 Dow 230; 3 E.R. 848, followed.

(14) -Unigard Sec. Ins. Co. Inc. v. North River Ins. Co.UNK(1991), 762 F. Supp. 566, distinguished.

(15) -Vocalion (Foreign) Ltd., In re, [1932] 2 Ch. 196; [1932] All E.R. Rep. 519, applied.

(16) -West Cumberland Iron & Steel Co., In reELR, [1893] 1 Ch. 713; sub nom. In re West Cumberland Steel & Iron Co. Ltd.(1893), 62 L.J. Ch. 367, considered.

(17) -Wilson, Ex p., In re DouglasELR(1871), L.R. 7 Ch. App. 490, applied.

Legislation construed:

Companies Law (1995 Revision) (Laws of the Cayman Islands, 1963, cap. 22, revised 1995), s.100: The relevant terms of this section are set out at page 122, lines 17–20.

s.160: ‘In the event of any company being wound up under this Law, all debts payable on a contingency and all claims against the company whether present or future, certain or contingent, ascer-tained or sounding only in damages, shall be admissible to proof against the company . . . .’

Insolvency Rules 1986 (S.I. 1986/1925), r.4.83(1): The relevant terms of this paragraph are set out at page 118, lines 42–45.

r.4.86(1): The relevant terms of this paragraph are set out at page 127, lines 31–32.

(2): The relevant terms of this paragraph are set out at page 127, lines 32–34.

r.4.93: The relevant terms of this rule are set out at page 131, lines 23–35.

r.13.12(3): ‘For the purposes of references in any provision of . . . the Rules about winding up to a debt or liability, it is immaterial whether the debt or liability is present or future, whether it is certain or contingent, or whether its amount is fixed or liquidated . . . .’

Companies-compulsory winding up-creditors-interim dividend-by Companies Law (1995 Revision), s.100 and in equity, moneys paid to judgment creditor under letter of credit following winding up order held on trust for benefit of all creditors-judgment creditor to account for moneys already received if seeks to prove for balance of debts

Companies-compulsory winding up-creditors-contingent liabilities-insurance losses incurred but not reported provable as debts at estimated value in liquidation of reinsurance company, by Companies Law (1995 Revision), s.160 and Insolvency Rules, rr. 4.86 and 13.12(3)

Companies-compulsory winding up-creditors-interest on debts-by Insolvency Rules, r.4.93 creditor entitled to interest on debt up to date of debtor”s liquidation at rate specified in Judgment Debts (Rate of Interest) Order 1985, if debt payable within fixed time

The applicant applied for an order requiring the liquidators of the respondent company to admit its claims in full.

The respondent, a Cayman company, entered a retrocession agreement to provide reinsurance services for the applicant, a US reinsurance company. The applicant went into liquidation and its liquidators brought proceedings in New York to recover sums due under the contract in respect of claims filed by its insured. The respondent was required to provide security by way of a letter of credit in respect of the insured losses, as a condition of leave to defend the proceedings. The amount was increased as the total claims paid out by the applicant increased.

The applicant obtained judgment against the respondent, which by then was also in liquidation and was no longer able to meet the increases in security required by the New York court. The applicant drew upon the letter of credit and presented a claim to the respondent”s liquidators for the balance of paid-out losses covered by the retrocession agreement as well as an amount representing contingent claims in respect of losses incurred by its insured but not yet reported, and interest due to it on claims paid out before the respondent”s liquidation.

The respondent”s liquidators refused to accept the applicant”s proof of debt for the purposes of the payment of an interim pro rata dividend to creditors.

On appeal to the Grand Court under r.4.83 of the English Insolvency Rules 1986 (applicable in the Cayman Islands), the applicant submitted

that the sum it had already received under the letter of credit should not be deducted by the liquidators when calculating the interim dividend to which it was entitled, since under New York law, which governed the retrocession agreement, the letter of credit, once issued, no longer formed part of the respondent”s assets but was instead unconditional security in favour of the applicant; (b) the respondent was obliged by New York law to honour its agreement to provide for losses incurred but not yet reported, even though the applicant”s own liquidators had made no such provision, since art. 16 of the agreement provided that all covered losses were payable by the respondent regardless of the applicant”s insolvency; (c) since art. 8 of the agreement imposed a time-limit for the payment of claims by the respondent and since there was no provision in the letter of credit for interest on claims paid out by the applicant, it could now submit a claim for interest accrued up to the date of the respondent”s liquidation, under the Insolvency Rules, r.4.93, at the rate specified in the Judgment Debts (Rate of Interest) Order 1985.

The respondent submitted in reply that (a) since payment under the letter of credit had been conditional upon the applicant obtaining judgment and since that judgment had been obtained only because of its own insolvency, of which the applicant had had notice, the letter was impressed with a trust under the Companies Law (1995 Revision), s.100 and remained part of the liquidation estate; (b) in any event, the New York bankruptcy court would, on application, have stayed the proceedings by the applicant, preventing the realization of funds under the letter; (c) accordingly, the sum already paid to the applicant was to be deducted in the calculation of the interim dividend, and once this was done the applicant had already received more than would be due to it from the payment of a pro rata interim dividend; (d) the applicant was therefore required to elect between retaining the sum paid in execution of the New York judgment and proving in the liquidation for the balance of paid-out losses due under the agreement; (e) since art. 7 of the retrocession agreement provided that the respondent should ‘follow the fortunes’ of the applicant, it was not required to pay for losses which had not yet arisen and for which the applicant”s liquidators had made no provision, and since the applicant”s own dividend plan provided that such losses would be payable only when crystallized as actual claims by its insured, a payment by the respondent under this head would be an unjust windfall for the applicant; and (f) the applicant was not entitled to claim interest on the sum already recovered since that interest, together with the sum on which it had accrued, still formed part of the respondent”s estate in liquidation.

Held, ordering that the respondent admit the applicant”s claim in part:

(1) The sum received under the letter of credit by the applicant with notice of the respondent”s liquidation would be discounted from the applicant”s entitlement to a pro rata interim dividend. Whilst New York law governed the retrocession agreement, all matters concerning the winding up of the respondent company were governed by Cayman law.

By s.100 of the Companies Law (1995 Revision), which prohibited the continuation of proceedings in relation to the assets of a liquidated company without the Grand Court”s leave, all such assets were impressed with a trust for the benefit of the respondent”s creditors. This provision reinforced the position in equity that although the letter of credit constituted enforceable security according to its terms in New York, the applicant was required, as a creditor recovering assets overseas from an insolvent Cayman estate, to account for such assets if it also sought to prove in the Cayman liquidation. It must therefore elect whether to retain the benefit (page 122, lines 10–25; page 123, lines 6–15; page 123, line 42 – page 124, line 2; page 124, lines 34–44; page 125, lines 10–19; lines 26–31; page 126, lines 5–7).

(2) Under s.160 of the Companies Law (1995 Revision) and the English Insolvency Rules, rr. 4.86(2) and 13.12(3), contingent liabilities such as losses incurred but not yet reported by the applicant”s insured were provable as debts in the respondent”s liquidation at an estimated value. Furthermore, the effect of art. 16 of the retrocession agreement under New York law was that the respondent was primarily liable to make provision for such losses and not merely to...