G.J. Cleaver and Another v Delta American Reinsurance Company (a Company incorporated under the laws of Kentucky (in Liquidation))
| Jurisdiction | UK Non-devolved |
| Judge | Lord Scott of Foscote |
| Judgment Date | 01 February 2001 |
| Neutral Citation | [2001] UKPC 6 |
| Court | Privy Council |
| Docket Number | Appeal No. 5 of 2000 |
| Date | 01 February 2001 |
[2001] UKPC 6
Present at the hearing:-
Lord Steyn
Lord Lloyd of Berwick
Lord Cooke of Thorndon
Lord Scott of Foscote
Sir Patrick Russell
Privy Council
This is an appeal from the Court of Appeal of the Cayman Islands. There are three issues for decision. The first issue is whether and how the principle of hotchpot, derived from such cases asBanco de Portugal v. Waddell (1880) 5 App. Cas. 161, Selkrig v. Davis (1814) 2 Rose 291 and Ex parte Wilson (1872) L.R. 7 Ch. App. 490, should be applied to the proof of debt submitted by Delta American Reinsurance Company ("Delta Re") in the liquidation of Transnational Insurance Co. Ltd. ("Transnational"). The second issue is one of construction of the Retrocession Agreement between Transnational and Delta Re entered into in March 1984. The third issue relates to Delta Re's entitlement to interest under Rule 4.93 of the Insolvency Rules 1986. The second and third of these issues are, of course, of some importance to the parties. But the first raises an important point of general principle in the winding up of companies.
Transnational is an insurance company incorporated and licensed under the laws of the Cayman Islands. It carried on business as a retrocessionaire. Delta Re is a re-insurance company incorporated under the laws of Kentucky and licensed to do business in Kentucky and New York. In March 1984 Delta Re and Transnational entered into the Retrocession Agreement to which I have referred. It was a one year agreement but was renewed for the period 1st January 1985 to 31st December 1985. It is common ground that New York law is the proper law of the Retrocession Agreement.
Under the Retrocession Agreement Delta Re ceded and Transnational, as retrocessionaire, accepted a percentage of Delta Re's liability under certain contracts of insurance and treaty re-insurance.
On 15th September 1985 Delta Re was placed in liquidation by the Franklin Circuit Court in Kentucky. The Commissioner of Insurance of the Commonwealth of Kentucky was appointed liquidator. On 2nd May 1989 the Commissioner, as liquidator of Delta Re, commenced proceedings in the U.S. District Court in New York against Transnational and several other retrocessionaires. Some, like Transnational, were foreign companies and carried on business outside the U.S. It was alleged by Delta Re that the defendant retrocessionaires had failed to pay current balances due to Delta Re and had indicated their refusal to pay sums that might become due in the future under the respective retrocession agreements they had entered into with Delta Re. The relief sought against Transnational included a declaration as to Delta Re's rights, and payment of all sums due under the Retrocession Agreement.
For the purposes of the New York Insurance Law, section 1213, Transnational was an "unauthorised foreign or alien insurer". Paragraph (c)(1) of section 1213 provides as follows:-
"Before any unauthorised foreign or alien insurer files any pleading in any proceeding against it, it shall either:
(A) deposit with the clerk of the court in which the proceeding is pending, cash or securities or file withsuch clerk a bond with good and sufficient securities, to be approved by the court, in an amount to be fixed by the court sufficient to secure payment of any final judgment which may be rendered in the proceeding, but the court may in its discretion make an order dispensing with such deposit or bond if the superintendent certifies to it that such insurer maintains within this state funds or securities in trust or otherwise sufficient and available to satisfy any final judgment which may be entered in the proceeding, or
(B) procure a license to do an insurance business in this state."
On 20th July 1990 the Magistrate of the U.S. District Court ordered each of the foreign retrocessionaire defendants to provide security pursuant to section 1213. The order was made following the hearing of a motion by the retrocessionaires to be relieved of the requirement of providing security. In her judgment, the Magistrate described section 1213 as:-
"primarily a long-arm statute … [which] addresses the concern that many residents of this state hold policies of insurance issued or delivered in this state by insurers while not authorized to do business in this state, thus presenting to such residents the often insuperable obstacle of resorting to distant forums for the purpose of asserting legal rights under such policies."
She ordered Transnational to give security equal in amount to Transnational's proportion of the amount of the claims which had been actually paid by Delta Re's ceding companies. She gave Delta Re liberty to apply for an increase in the amount of the security as the amount of Delta Re's paid losses increased. The initial amount of the security to be given was agreed by Delta Re and Transnational to be U.S. $380,000.
Transnational provided the security by arranging for a letter of credit to be issued by Barclays Bank Plc to the Kentucky Commissioner of Insurance. The letter of credit was duly issued on 30th November 1990. Under it the bank agreed to pay the stipulated sum, $380,000, upon receipt (a) of a certified copy of a judgment of the U.S. District Court in favour of the Commissioner and against Transnational and (b) of an affidavit bythe Commissioner confirming that the judgment was final, with no rights of appeal outstanding, and that the $380,000 was due from Transnational to the Commissioner.
In consideration of Barclays Bank issuing the letter of credit, Transnational agreed (i) that Barclays should have a charge over Transnational's credit balances as security for Transnational's contingent obligation to indemnify Barclays against any payment made by Barclays under the letter of credit and (ii) to maintain with Barclays a credit balance at least equal to the amount payable under the letter of credit.
Having procured the letter of credit in favour of the Commissioner to be issued by Barclays Bank, and thereby having complied with the order of the U.S. District Court to give security, Transnational was free to contest Delta Re's claims and filed pleadings in the New York court alleging that the Retrocession Agreement was void for misrepresentation.
As Delta Re's paid losses increased, Transnational was called upon from time to time to provide additional security. It did so by arranging with Barclays for the sum specified in the letter of credit to be increased, and by maintaining with Barclays correspondingly increased credit balances. By July 1992 the amount of the security had increased to U.S. $735,393. Following the July 1992 increase, further increases were ordered by the U.S. District Court. But Transnational was unable to provide them and on 15th January 1993 went into creditors, voluntary liquidation. On 8th March 1993 the liquidation was ordered to continue under the supervision of the Grand Court of the Cayman Islands.
On 23rd March 1993 Delta Re applied to the U.S. court for an order striking out Transnational's Answer and Counterclaim and for default judgment to be entered against Transnational. The ground of the application was Transnational's failure to provide the increased security that had been ordered.
On 8th April 1993 the Grand Court, on the application of the liquidators, directed that Transnational take no further part in the New York action. And on 5th May 1993 the New York court gave judgment in default against Transnational. Transnational was held liable to Delta Re in the sum of U.S. $988,680.56.
The default judgment was followed, not surprisingly, by a claim on Barclays Bank under the letter of credit. Barclays duly paid the Commissioner U.S. $735,393 and deducted that sumfrom Transnational's credit balances with the Bank at its Grand Cayman branch.
The receipt by Delta Re of the $735,393 left a balance still outstanding and on 6th December 1995 Delta Re submitted a proof in Transnational's liquidation. The proof was based upon the default judgment that had been obtained from the U.S. court. The liquidators of Transnational did not renew the claim that the Retrocession Agreement was void. The misrepresentation allegations did not reappear. On the contrary, the liquidator accepted some of the items in Delta Re's proof but rejected others. Delta Re then applied to the Grand Court for a review of the liquidator's decision. The issues before the Grand Court, and later before the Court of Appeal of the Cayman Islands, were those three issues to which brief reference has already been made.
The liquidators of Transnational contend that before receiving any dividend Delta Re should be required to bring into hotchpot the $735,393 obtained, via the letter of credit, from Barclays Bank. The acts of the Commissioner in seeking default judgment against Transnational at a time when Transnational was already in liquidation in the Cayman Islands, and then claiming against Barclays Bank under the letter of credit, had the result that Barclays, having honoured the letter of credit, indemnified itself out of Transnational's credit balances over which it had a charge. These credit balances would otherwise have formed part of Transnational's assets in the liquidation, available for distribution among the unsecured creditors, including Delta Re,pari passu. Delta Re, by availing itself of New York law and the procedures of the New York court had obtained an inequitable advantage over the other unsecured creditors of...
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