Re Transnational Ins Company Ltd

• Jurisdiction: Cayman Islands
• Judge: (Zacca, P., Kerr and Collett, JJ.A.)
• Judgment Date: 16 April 1999
• Date: 16 April 1999
• Court: Court of Appeal (Cayman Islands)

Court of Appeal

(Zacca, P., Kerr and Collett, JJ.A.)

IN THE MATTER OF TRANSNATIONAL INSURANCE COMPANY LIMITED

J.R. McDonough for the appellant;

G.A. Locke for the respondents liquidators.

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, distinguished.

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

(4) Humber Ironworks & Shipbuilding Co., In re, Warrant Fin. Co.”s CaseELR(1869), L.R. 4 Ch. App. 643; 38 L.J. Ch. 712, applied.

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

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

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

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

(9) 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, followed.

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 213, lines 13–16.

Grand Court Rules, O.1, r.7(1): The relevant terms of this paragraph are set out at page 222, line 13.

O.102, r.17: The relevant terms of this rule are set out at page 222, lines 1–8.

Insolvency Rules 1986, (S.I. 1986/1925), r.4.83(1): The relevant terms of this paragraph are set out at page 211, lines 30–33.

r.4.93(1): The relevant terms of this paragraph are set out at page 221, lines 18–20.

(2): The relevant terms of this paragraph are set out at page 221, lines 21–23.

(3): The relevant terms of this paragraph are set out at page 221, lines 24–26.

(6): The relevant terms of this paragraph are set out at page 221, lines 28–30.

Companies-compulsory winding up-creditors-moneys paid to creditor under pre-existing letter of credit following winding-up order not part of liquidation estate and not held in trust for estate under Companies Law (1995 Revision), s.100-creditor need not surrender moneys to common fund before proving in liquidation 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-if retrocession agreement contains insolvency clause company”s liability based on insolvent creditor”s liability to make provision, not on claims actually paid out

Companies-compulsory winding up-creditors-interest on debts-creditor entitled to interest on debt up to date of debtor”s liquidation at rate specified in Judgement Debts (Rates of Interest) Rules 1995

The appellant appealed to the Grand Court against the rejection of its proof of debt by the liquidators of the respondent company.

The respondent, a Cayman company, entered a retrocession agreement to provide reinsurance services for the appellant, a US reinsurance company. The appellant went into liquidation and its liquidators brought proceedings in New York against the respondent to recover sums due under the agreement 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 increased.

The appellant 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 appellant 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 appellant”s proof of

debt for the purposes of the payment of an interim pro rata dividend to creditors.

The Grand Court held that the sum already received by the appellant under the letter of credit would be discounted from its entitlement to a dividend, since (a) under the Companies Law (1995 Revision), s.100, the assets of a company in liquidation were impressed with a trust in favour of its creditors; and (b) as a creditor having recovered assets abroad from an insolvent Cayman estate, the appellant was required in equity to account for such assets if it sought also to prove in the Cayman liquidation. The retrocession agreement made the respondent primarily liable to provide for losses incurred but not reported by the appellant”s insured, and not merely to indemnify the appellant for payments already made. Such losses were provable as contingent liabilities under the Companies Law (1995 Revision), s.160 and the English Insolvency Rules. Finally, interest was payable under the Insolvency Rules up to the date of the respondent”s liquidation on claims made before its liquidation and not met within the time specified under the agreement, at the rate specified in the English Judgment Debts (Rate of Interest) Order 1985 (in force at the date of liquidation). The proceedings in the Grand Court are reported at 1998 CILR 114.

On appeal, the appellant submitted that (a) under New York law, the law of the letter of credit, the letter had not formed part of the respondent”s estate at the time of its liquidation; (b) even under Cayman law, as a pre-existing security, enforceable against the issuing bank according to its terms, the letter had been the property of the appellant from its creation; (c) thus, neither the law of equity nor s.100 of the Companies Law precluded the appellant from proving in the liquidation for the balance of claims due under the contract without first bringing the sum already realized on the letter of credit into account; (d) since art. 16 of the retrocession agreement provided that all covered losses were payable by the respondent regardless of the appellant”s insolvency, the Grand Court had correctly found the respondent liable to provide for losses incurred but not yet reported by the appellant”s insured; and (e) since art. 8 of the agreement imposed a time-limit for the payment of claims by the respondent, and since there was no provision for interest in the agreement, the Grand Court had properly awarded interest accrued up to the date of the respondent”s liquidation at the rate of 15% under the Insolvency Rules and the Judgement Debts (Rate of Interest) Order.

The respondent submitted in reply that (a) since payment under the letter of credit had been conditional upon the appellant obtaining judgment in the New York court and since that judgment had been obtained only because of the respondent”s insolvency, of which the appellant had had notice, the sums due under it remained part of the liquidation estate; and (b) accordingly, the moneys already paid to the appellant would have to be surrendered into a common fund for the benefit of all creditors if the appellant wished also to prove in the Cayman liquidation. On its cross-appeal, it submitted that (c) since art. 7 of the

retrocession agreement provided that the respondent should ‘follow the fortunes’ of the appellant, the Grand Court had erred in ordering it to pay for IBNR losses which might not ever arise, and for which the appellant”s own liquidators had made no provision; this had placed the appellant in a better position than prior to its liquidation, contrary to the principles of insolvency law; (d) the court had wrongly awarded pre-liquidation interest, since under the Grand Court Rules, O.102, r.17, the English Insolvency Rules were to be applied only to procedural matters; alternatively (e) the wrong rate of interest had been applied since the English rules applied only in the absence of applicable local rules, and the local Judgement Debts (Rates of Interest) Rules prescribed a rate of 7 3/8%.

Held, allowing the appeal and allowing the cross-appeal in part:

(1) The Grand Court had erred in finding that the moneys realized by the appellant under the letter of credit were impressed with a statutory trust, as forming part of the estate at the time of the respondent”s liquidation. Whether viewed as a matter of New York common law, or of the rules of equity applying in the Cayman Islands, the letter, as a pre-existing security payable upon demand once judgment was obtained in the New York court, had been from its creation the property of the appellant. It was to be regarded as equivalent to cash. Accordingly, neither s.100 of the Companies Law (1995 Revision), nor the equitable rule requiring a person recovering assets abroad from an insolvent Cayman estate to surrender them into hotchpot before seeking to prove in the Cayman liquidation applied to the appellant. The rule in question applied only to a creditor who had recovered assets in insolvency proceedings abroad and then sought to do the same here (page 214, lines 16–26; page 215, lines 6–26; page 216, line 6-20; page 217, line 23 – page 218, line 9).

(2) The court had properly found that under art. 16 of the retrocession agreement, the respondent was liable to make provision for incurred but not reported losses based on the appellant”s liability and not merely to indemnify the appellant for payments already made. Thus, under New York law, the appellant”s insolvency had no bearing on the respondent”s liability, despite the ‘follow the fortunes’ provision in art. 7. Since the IBNR provision was based on valid actuarial assumptions as to claims which might arise, the respondent”s cross-appeal on this point would be dismissed (page 219, lines...