Re Transnational Insurance Company Ltd
| Jurisdiction | Cayman Islands |
| Judge | Smellie J. |
| Judgment Date | 04 March 1998 |
| Court | Grand Court (Cayman Islands) |
| Date | 04 March 1998 |
Smellie, J.
Grand Court
Company law - Winding up — Creditors — Interim dividend to be accounted for by judgment creditor — 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) — Whether creditor entitled to interest on debt up to date of debtor's liquidation at rate specified in Judgments Debt (Rate of Interest) Order, 1985, if debt payable within fixed time..
Bruce Campbell & Co. for the applicant
W.S. Walker & Co. for the respondent
Transnational was incorporated and licensed under the laws of the Cayman Islands and carried on business as a retrocessionaire — a reinsurer of other reinsurance companies. It reinsured mainly property and third party risks. Transnational was placed into voluntary liquidation in January 1993. As it had become involved in litigation instituted by Delta Re in New York and was then likely also to become involved in further litigation in the Cayman Islands, its winding up threatened to become complex and so an order was granted by this court on March 8th, 1993 that its winding up continue subject to the court's supervision.
The present application is brought by Delta Re and is related, in part, to the litigation, which it instituted in New York against Transnational in 1989 (“the New York action”). More is explained about the New York action below.
Delta Re's claim
Delta Re was itself a reinsurance company organized under the laws of the State of Kentucky, and licensed to conduct insurance business in Kentucky and New York. Delta Re was placed in liquidation by the courts of Kentucky in September 1985. By an agreement entered into in 1984 (“the retrocession agreement”) Delta Re ceded, and Transnational accepted, a percentage of Delta Re's liability under certain of Delta Re's contracts and treaties of reinsurance. The retrocession agreement had therefore only shortly been in effect when Delta Re was placed in liquidation.
The retrocession agreement is described as being fairly typical of its kind: A quota share reinsurance contract by which Delta Re paid to Transnational (as it did to other party retrocessionaires) a percentage of premiums which it received from its insured in return for the acceptance by Transnational of that percentage of Delta Re's liability for losses which it insured, and under which Transnational agreed to indemnify Delta Re in respect of liability to that extent.
Delta Re (along with six other reinsurance companies which had reinsurance arrangements with Transnational) has submitted its claim for covered losses in the liquidation of Transnational. Delta Re's claim has only been partially admitted by the liquidators. This application by Delta Re is for orders requiring the liquidators to admit its claim in full. The application is brought by way of an appeal against the liquidators' decision and is pursuant to r.4.83 of the English Insolvency Rules, which apply in the Cayman Islands by virtue of 0.102, r.17 of the Grand Court Rules. Rule 4.83 provides:
“(1) If a creditor is dissatisfied with the liquidator's decision with respect to his proof (including any decision on the question of preference), he may apply to the court for the decision to be reversed or varied.”
Although the liquidators intend to admit certain aspects of Delta Re's claim in the liquidation, they do not intend to do so for the purposes of an interim dividend, which has been declared. This is because the sum to which Delta Re would otherwise be entitled as dividend at this stage is exceeded by sums, which it has already, obtained in the liquidation. This was, as the liquidators see it, by the realization of a letter of credit, which was issued in the New York action on behalf of Transnational by way of security for judgment. This letter of credit was a prerequisite to Transnational being allowed to defend the New York action, which had been instituted in 1989, prior to Transnational's liquidation.
The letter of credit in the sum of US$735,393 was, however, and importantly for present purposes, drawn upon by Delta Re after Transnational went into liquidation, upon the execution of a default judgment, which it obtained against Transnational. This came about because Transnational, having been placed in liquidation, found itself unable further to contest the New York action.
There are three aspects to Delta Re's claim, which it seeks to enforce by the present application. The first relates to the letter of credit. Delta Re claims it is entitled to treat it as security for the debt owed to it by Transnational up to its value of US$735,393, and then to prove in the liquidation for the rest of its claim. The total sum of Delta Re's claim thus calculated is US$1,583,648.40. The second aspect of it relates to certain contingent liabilities of Delta Re, which have been notionally booked by Delta Re as losses, which have been “incurred [by its insured] but not yet reported” (“IBNR”). The third relates to interest, which Delta Re claims is due to it upon losses, which arose and were paid by it prior to the liquidation of Transnational (“pre-liquidation interest”).
The letter of credit and the New York action
Before Transnational was put into liquidation it had disputed certain claims from Delta Re for the payment of losses relating to the retrocession agreement. Delta Re, which was itself already in liquidation, commenced the New York action in an attempt to enforce those claims (amongst other claims against other retrocessionaires) to obtain reimbursement for the losses of its insured, which it had paid. Delta Re sued in New York on the basis — now accepted by the liquidators — that New York law is the proper law of the retrocession agreement.
In order to be allowed to defend the New York action, Transnational was required by New York law (and ordered by the New York court) to put up security for judgment of a sum reflecting the losses actually paid by Delta Re and claimed by it to be reinsured by Transnational. As those paid losses increased during the pendency of the New York action, the amount of security required increased commensurately. To meet the condition imposed by the New York court for leave to defend, Transnational provided the letter of credit (increased as required so long as liquidity allowed) as security for judgment in Delta Re's favour.
Transnational presented a defence and counterclaim in the New York action alleging that the retrocession agreement was void because of fraudulent misrepresentation and non-disclosure on the part of Delta Re's management. It was alleged (as described by the liquidator, Mr. Cleaver, in his affidavit) that they failed to disclosed Delta Re's insolvency when entering into the retrocession agreement. Notwithstanding its pleaded defence, Transnational later having been placed in liquidation and finding itself without the means was unable to meet the further increases of security required in the New York action. It was also unable, as then advised, to take steps to obtain a stay of those proceedings. As a result, and notwithstanding that it had by then had notice of Transnational's liquidation, Delta Re obtained its default judgment and drew on the letter of credit.
The question now is whether, those being the circumstances under which Delta Re benefited from the letter of credit, the liquidators should be entitled, as they have decided, to off-set the sum covered by it, treating it as dividends already paid against Delta Re's claim. When interest on the sum of the letter of credit is calculated and added since it was paid, Delta Re has recovered in excess of US$840,000. When that sum is notionally discounted from the overall amount of Delta Re's claim which the liquidators are agreeable to admitting in the liquidation (US$1,260,445,20) and pro rated by reference to the dividend rate of 35.8 cents in the dollar, Delta Re has already received more than it would be entitled in the liquidation ( i.e. US$451,239) up to the date of the declared interim dividend.
It follows then that the treatment of the sum of the letter of credit is of crucial importance to Delta Re's claim and to the liquidation of Transnational overall, and thus to the claims of other creditors. I am, of course, precluded from any examination of the merits of Delta Re's New York action at this stage. Delta Re obtained default judgment in the courts of its domicile and in accordance with the proper law of the retrocession agreement. It is a judgment, which has not been appealed.
Mr. McDonough and Mr. Locke each presented clear and attractive arguments for the respective positions of Delta Re and the liquidators. I will summarize the arguments and then turn to consider the authorities, which most directly informed my decision on this aspect of the matter. Delta Re contends that the sum paid under the letter of credit (and the notional interest earned upon it since then) should not be treated as part of the liquidation estate of Transnational but should be regarded as unconditional security for Delta Re's judgment, having been hypothecated by the issuing bank for those purposes. Mr. McDonough argued that whether the proper law of the letter of credit is regarded as that of the Cayman Islands or New York, the letter of credit, expressed to be irrevocable (although described as a “standby” letter of credit), was provided as security for the judgment which Delta Re eventually obtained and therefore the sum, upon being so secured, was no longer a part of Transnational's assets. This is notwithstanding the blameless default of Transnational in not having the ability to contest the New York action fully. Delta Re was therefore — the argument goes —...
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