RE SINGAPORE INSURANCE CO LTD AND OTHERS

IN THE SUPREME COURT OF HONG KONG

COMPANIES WINDING-UP

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RULING

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1. As the rulings, I am about to give concern issues of importance which are of considerable public interest I have agreed at the suggestion of Mr. Kaplan on behalf of the Official Receiver to deliver them in open Court.

2. The Official Receiver is the liquidator of five insurance companies: Singapore Insurance Co. Ltd., Kyoto Insurance Limited, Scotland Insurance Co. Ltd., China Underwriters Life & Insurance Co. Ltd., and Bedford Insurance Co. Ltd. (the companies) which companies have been wound-up compulsorily. All the companies underwrote risks of personal injury and death to third parties.

3. Summonses have been issued by the Official Receiver for directions in each case as to who is entitled to prove in the winding-up of the Companies and for directions on ancillary matters. The Official Receiver has no personal interest in the result, but seeks rulings, to assist him in the administration of the liquidations. Accordingly Mr. Kaplan who has been of great assistance to the Court has argued the points raised in effect as amicus curiae.

4. The Director of Legal Aid represents the majority of the third party claimants, but although served with the summonses, he chose not to be represented at the hearing. However, Mr. Warren Chan appeared on the instructions of the Attorney General on behalf of the Director of Social Welfare. The Director of Social Welfare was represented because the Hong Kong Government has made proposals to introduce a scheme whereby payments out of the Traffic Accident Victims Assistance Scheme (TAVAS) will be made to third party claimants. Upon payment, the third parties will assign their rights, including any rights that they may have to claim in the liquidations of the companies.

5. Mr. Chan submitted that all interested parties apart from third party claimants, such as the insured, unsecured creditors and contributories should be before the Court and that the correct procedure should be by way of originating summons and not by summons see Re Islington Metal and Plating Works Ltd. (1983) 3 ALL E. R. 218. However, that case is not relevant for it related to a voluntary winding-up. I am satisfied that the procedure by way of summons is correct for by virtue of Section 200(3) of the Companies Ordinance, the Official Receiver may apply to the Court for directions in relation to any particular matter arising under the winding-up which applications are required to be made by summons pursuant to Rule 7(3) of the Companies (Winding-Up) Rules. Although it may be of assistance to the Court for all parties interested to appear, it may be impracticable for them to be before the Court even if all of them can be ascertained. I do not therefore consider that this is a valid reason for declining to hear the summonses.

6. Before consideration of the matters raised in the summonses, my attention was drawn by Mr. Kaplan to the conflicting decisions of Vinelott, J. in Re Berkeley Securities (Property) Limited (1980) 1 W.L.R. 1589 and Harman, J. in Re Islington Metal and Plating Works Limited (1983) 3 ALL E. R. 218. Whereas prior to the Berkeley case, it had been assumed that unliquidated claims for damages in tort could not be proved in a liquidation, doubt was cast on the position by Vinelott, J. in that case where it was held that Section 317 of the Companies Act 1948 did not operate to exclude a claim for damages in tort which had not been liquidated by judgment before the commencement of the winding up, but only to exclude from proof a claim which had not been liquidated by judgment at the time when the claimant came in to prove his debt.

7. The relevant sections of the Companies Ordinance are Sections 263 and 264. These sections are the equivalent mutatis mutandis of Sections 316 and 317 of the Companies Act 1948.

8. Section 263 provides:-

9. Section 34(1) of the Bankruptcy Ordinance which applies the Bankruptcy Rules to the Winding-up of insolvent companies reads:-

"34(1)   Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, .... shall not be provable in bankruptcy."

10. Herman, J. proceeds to discuss the Berkeley case at length and expresses his strong dissent. At p.221 and 222 he had this to say

11. Mr. Kaplan cited Colchester Estates (Cardiff) v. Carlton Industries P. L. C. (1984) 2 ALL E. R. 601 where Nourse, J. following the dictum of Denning, J. in Minister of Pensions v. Higham (1948) 1 ALL E. R. 865 held that where a judge at first instance is faced with conflicting decisions of equal authority the later decision is normally to be preferred if reached after full consideration of the earlier decision unless the third judge is convinced that the second judge was wrong not to follow he first. Not only do I agree with the decision of Harman, J. but it was clearly made after a full consideration of the Berkeley case. The words of S. 34(1) of the Bankruptcy Ordinance also support the decision. Accordingly I have no hesitation in following the Islington Metal case. As a result a creditor's right to proof must be determined at the date of the commencement of the winding up i.e. at the date of the presentation of the petition. Claims in tort that are unliquidated at that date are therefore not admissible to proof.

12. I shall now deal with the questions that have been raised by the Official Receiver in the summonses.

1(a)(i)      In respect of claims for personal injury and death as are mentioned in section 6(1)(b) of the Motor Vehicles Insurance (Third Party Risks) Ordinance. Cap.272 ("Third Party Claims") whether persons having Third Party claims which have not been liquidated by Judgment or settlement before the date of the winding up order are entitled to prove such claims in the liquidation by virtue of Section 10 of Cap. 272 during the insolvency of the Companies.

13. Section 10 is concerned with the duty of insurers to satisfy judgments against persons insured in respect of third party risks.

14. Section 6(1)(b) of Cap. 272 provides:-

Claims for damages for personal injury and death referred to in Section 6(1)(b) against the insured are undoubtedly unliquidated claims in tort. It is then necessary to consider whether the claims are provable in bankruptcy pursuant to Section 34 of the Bankruptcy Ordinance. This may arise under two heads. Firstly, cases in which a third party sues in respect of a risk covered by a valid policy of insurance. Secondly, if the claim is not covered, but comes within the definition of Section 9 or Section 10 of the Motor Vehicle Insurance (Third Party Risks) Ordinance. Section 9 provides:-

By virtue of the Ordinance, the insured is able to sue the insurance company when the insured could have sued the insurer for an indemnity. The position was explained by Lord Denning in Post Office v. Norwich Union Fire Insurance Society Ltd. (1967) I ALL E. R. 577 at p. 579 where he said -

"Under section 1 of the Act of 1930 the injured person cannot sue the insurance company except in such circumstances as the insured himself could have sued the insurance company. Potters could have sued for an indemnity only when their liability to the third person was established and the amount of the loss ascertained. In some circumstances an insured might sue earlier for a declaration, e.g. if the insurance company were repudiating the policy for some reason; but where the policy is admittedly good, the insured cannot sue for an indemnity until his own liability to the third person is ascertained."

Mr. Chan agreed that a third party's claim against an insured is for unliquidated damages in tort, but said that an insured's claim against the insurers is based on the contract of insurance whilst the cause of action of the third party is based upon the certificate of insurance and the judgment pursuant to Section 10 of Cap. 272. He therefore contends that upon a construction of Section 10 the claim by the third party against the insurer is not in the nature of unliquidated damages in tort for it is a claim made under the judgment which is for a liquidated sum. On the other hand he argues that even if the demand is in the nature of unliquidated damages the claim can still be proved for it does not arise otherwise than by reason of a contract.

15. Mr. Chan submitted that the words arising otherwise than by reason of a contract' are capable of two meanings the narrower meaning of 'arising under' see Gatoil International Inc. v. Arkwright - Boston Manufacturers Mutual Insurance Co. (1985) 2 W.L.R. 74 and the wider meaning of 'connected with' see The "Antonis P. Lemos "(1984) 2 W.L.R. 825. In order to succeed under Section 10 Mr. Chan submits that it is necessary for a certificate of insurance to have been issued and for judgment to be obtained against the insured. He contends that there is a causal connection between the demands of the third party as against the insurance company which arise by reason of the contract of insurance. That the third party demands are connected with the contract of insurance within the wider meaning of 'arising ......... by reason of' and that the demands arise under the contract of insurance, within the narrower meaning of 'arising ........ by reason of'. He therefore concludes that the third party demands against the insurers are not demands 'arising otherwise than by reason of a contract.'

16. Mr. Kaplan analysed sections 9 and 10 by considering whether they modify the contract of insurance by estopping the insurer from relying upon common law defences such as failure to maintain and failure to notify which could otherwise be open, but otherwise maintaining the contract whole and intact or whether the insurer's liability is statutory by virtue of sections 9 and 10 being a precondition for the insurer to carry on business that he must undertake to indemnify third parties under the ordinance although he is under no contractual obligation to do so.

17. Having considered the submissions and after construing the relevant sections I am quite satisfied that the liability' of the insurer does not arise by reason of the contract, but by virtue of the ordinance. Accordingly such a claim does not arise otherwise than by reason of a contract. The claims are unliquidated claims in tort so they are not provable in the liquidation.

"1 (a) (ii)  In respect of claims for personal injury and death under section 6(l)(b) of Cap. 272 whether persons having third party claims which have not been liquidated by judgment or settlement before the date of the winding up order are entitled as against the insurance companies to assert the provisions of Section 9 of Cap. 272 during the insolvency of the insurance companies."

18. Mr. Kaplan submitted that different considerations may apply to Sections 9 and 10 of Cap. 272 with regard to the different wording and that section 9 is more apt to preserve the contractual position with amendment pursuant to the purposes of the Ordinance. The recourse position is stated to be pursuant to "any provisions in a policy ....." The right of recourse is by the proviso still the contractual one. However, in my opinion, the liability of the companies only arise as a result of the provisions set out in the ordinance which are independent from the contract of insurance.  I accept Mr. Kaplan's submission that the draftsman could have retained the contractual relationship had this been intended by making the conditions referred to in the section illegal instead of void as against the third party. As a result, I hold that third party claimants are not entitled to prove in the liquidation during the insolvency of the companies.

"1 (a) (iii)  In respect of claims for personal injury and death under Section 6(1)(b) of Cap. 272 whether persons having Third Party claims which have not been liquidated by judgment or settlement before the date of the winding order would be entitled to claim directly against the insurance companies under the provisions of Section 10 Cap. 272 in the event that the companies became solvent."

19. This is a hypothetical question, but I have been invited by Mr. Kaplan to answer it on the basis of the decision made by Harman, J. in the Islington Metal case. In that case he considered Sections 316 and 317 of the Companies Act 1948, and said at page 225 -

"In my judgment, the key to the whole problem lies in the concept that a company in liquidation starts subject to Section 317 but can then move to Section 316. The tests for admission to proof are different in the two sections. The fact that this shift of position may occur demonstrates, in my judgment, that the theory of simultaneous dealing has to be modified to this limited extent.

 

     I confess to being glad to be able to reach this result. As Vinelott, J. rightly pointed out in Re Berkeley Securities ....., the gross injustice which would be caused by ruling out a claim, in a liquidation where all 'undoubted' creditors have been paid, by persons such as the tort claimants here is a consideration such as must impel any judge to try and find a way of allowing them to prove. As I held earlier, I was forced to the conclusion that the decision of Vinelott, J. in the Berkeley case was wrong. I am happy that his well justified desire to see justice fairly applied can to some extent be achieved without the difficulties which the liquidators in this case put before me as arising from the full scope of that decision."

20. I am in entire agreement with the decision of Harman, J. which should bring about a just solution to the problem. Accordingly I hold that claimants in tort are entitled to claim directly against the companies in the event that they become solvent.

"I (b) (i)   In respect of claims of personal injury and death under Section 6(1)(b) of Cap. 272 whether judgment debt interest on such claims can be proved and to what extent."

21. Section 71(1) of the Bankruptcy Ordinance, Cap. 6 provides -

"Where a debt has been proved and the debt includes interest or any pecuniary consideration in lieu of interest, such interest or consideration shall, for the purposes of dividend, be calculated at a rate not exceeding 8 per cent annum and be calculated only up to the date of the receiving order, without prejudice to the right of a creditor to receive out of the estate any higher rate of interest to which he may be entitled after all the debts proved in the estate have been paid in full."

The question to be decided is whether the terminal date for interest to be calculated at the appropriate rate is the date of the presentation of the petition or the date on which the winding-up order is made. This issue was considered by Vinelott, J. in Re Amalgamated Investment and Property Co. Ltd. (1984) 3 ALL E. R. 272 in which he reviewed a number of authorities including Re Lines Brothers Ltd. (1982) 2 ALL E. R. 183, Re Humber Ironworks and Shipbuilding Co., Warrant Finance Company's case (1869) L.R. 4 Ch. App. 643, Re Agricultural Wholesale Society Ltd. (1929) 2 Ch. 261 and Re Parent Trust and Finance Co. Ltd. (1936) 1 ALL E. R. 641. The last two decisions and that of Vinelott, J. held that interest terminates at the date of presentation of the petition. Vinelott, J. was asked by Counsel in Re Amalgamated not to follow the earlier authorities and to award interest up to the date of the winding up order. He considered the issue on three main grounds at page 287. I do not propose to rehearse what he said, but merely to observe that the most cogent reason for adopting the cut off date as at the date of presentation of the petition is because the affairs of the company are in effect put into suspense on that date. Upon the making of the winding up order it is established that the company was insolvent at the time of the presentation of the petition see Wallberg's case (1872) 17 SJ69. Rule 88 of the Companies (Winding - Up) Rules also supports the position that interest is payable up to the commencement of the winding up.

22. I find no compelling reasons to depart from the position that applies in England. Accordingly I hold that interest at the appropriate rate is payable up to the date of the presentation of the petition, but that no interest is payable after that date.

"1 (b) (iii)  In respect of claims for personal injury and death under Section 6(1)(b) of Cap. 272 whether in the event that a Third Parts Claimant has received payment of his claim in whole or in part from the insured, any such payment may be set off against judgment debt interest accruing after the winding-up when proving in the liquidation ."

23. Mr. Kaplan cited in Re London Windsor and Greenwich Hotels Company (Quartermaine's case) (1892) 1 Ch. 639 where Stirling, J. held that the third party's claim was to be assessed at the date of the presentation of the petition such claim to include both principal debt and interest accrued, but that interest accruing after that date was not to be allowed. If, the third party came into prove he should do so upon giving credit for all amounts received as against the sum calculated at the date of the presentation of the petition. I agree with Mr. Kaplan that this question should be answered in the negative.

"1(b) (iii)  In respect of claims for personal injury and death under Section 6(1)(b) of Cap. 272 where the Third Party claimant and the insured both file proofs of debt, the proper method of paying dividends on such proofs."

24. Mr. Kaplan said that this question will arise if the third party does not require the interposition of sections 9 and 10, and if the sections give rise to a contractual obligation. He submitted that the doctrine of election is applicable. From some of the authorities cited it would appear that election may well have to be decided as a matter of fact. 0n the other hand Mr. Chan contended that there may be no juridical basis for the doctrine in the present circumstances.

25. Irrespective of the merits of the doctrine of election clearly there can be no double proof. However in the absence of further argument from parties who may be interested I decline to answer this question at the present time.

26. Nevertheless, the Court may fix a time limit for submission of proofs see Mason v. Bogg (1837) 2 M.Y. & Cr 443, which was approved by Vinelott J. in Re Amalgamated Investment and Property Co. Ltd. (1984) 3 ALL E. R. 272 at p. 291.

"1(c)(i)     In respect of claims for personal injury and death under Section 6(l) (b) of Cap. 272 whether to the extent that any judgment in respect of such claims includes an interest award in respect of general or special damages, such interest and as is applicable to the period before the commencement of the winding up is limited to 8% for the purpose of the payment of a dividend during the insolvency of the companies."

Rule 88 of the Companies (Winding-Up) Rules provides that the present rate of interest is 8%. Upon the authority of Vinelott, J. in Re Amalgamated Investment and Property Co. Ltd. to which I have already referred and with which I agree interest is only provable at the appropriate rate for the period up to the presentation of the petition.

"1(c)(ii)    In respect of claims for personal injury and death under Section 6(1)(b) of Cap. 272 whether to the extent that any judgment in respect of such claims includes an interest award in respect of general or special damages, such interest as is applicable to a period after the commencement of the winding up is provable during the insolvency of the companies."

27. Having regard to my answer to question 1(c)(i), it is clear that no interest will be awarded after the date of the presentation of the petition.

"1(d)        In respect of claims for personal injury and death under Section 6(1)(b) of Cap. 272 whether judgment debt interest due from any insured by reason of his failure to satisfy any judgment given in respect of any claim against him:

               (i)   is provable

                (ii)  if provable may not be proved for after the commencement of the winding up and then at the rate of 8% only."

28. No interest is payable after the commencement of the winding up with the result that no judgment debt interest due from any insured arising from his failure to satisfy any judgment given in respect of any claim against him is provable except so far as it relates to a period before the date of the winding up which will be at the rate of 8%.

"2(a)(i)     In respect of claims for injury to employees arising out of and in the course of employment as are mentioned in Section 40(l) of the Employees Compensation Ordinance Cap. 282 (employees' claims) whether persons having employees' claims which have not been liquidated by judgment or action prior to the date of the winding up order are entitled to prove in the liquidation by virtue of Section 44 of Cap. 282 during the insolvency of the Companies."

29. Section 44 of the Employees' Compensation Ordinance provides -

"Every policy of insurance issued for the purposes of this Part shall be deemed to provide that any employee or other person having a claim against the person insured in respect of the liability in regard to which such policy was issued shall be entitled to recover in his own name, as though he were a party to the policy, directly from the insurer any amount which he would have been entitled to recover from the person insured."

Mr. Kaplan drew my attention to Section 43 of the Employees' Compensation Ordinance which sets out the conditions under which liability for payment by an insurer arises, and whether the liability under Section 43 is the same liability that is referred to in Section 44. I accept the views expressed by Mr. Kaplan that upon a construction of the provisions of Section 43 a third party has the option of either making the insured or the insurer or both parties to an action and that such an action does not arise out of the contract of insurance. Section 43 is therefore quite distinct from the rights a third party may have under section 44. By section 44 the claimant is deemed to be a party to the policy.  The rights acquired under section 44 arise out of the contract of insurance. Accordingly I agree with Mr. Kaplan, that the answer to this question should be in the affirmative.

"2(a)(ii)    In respect of claims for injury to employees arising out of and in the course of employment as are mentioned in Section 40(1) of the Employees' Compesnation Ordinance, Cap. 282 (employees' claims) whether persons having employees 'claims which have not been liquidated by judgment or action prior to the date of the winding up order are entitled as against the companies to assert the provisions of Section 42 of Cap. 282 during the insolvency of the insurance companies."

Section 42 reads:-

"Any condition in a policy of insurance issued for the purposes of this Part providing that no liability shall arise under the policy, or that any liability so arising shall cease, in the event of some specified thing being done or omitted to be done after the happening of the accident giving rise to a claim under the policy, shall be of no effect upon the claim made by an employee under section 44: Provided that nothing in this section shall be taken to render void any provision in a policy requiring the insured employer to repay to the insurer any sums which the latter may have paid under the policy in satisfaction of any such claim."

I accept the submission made by Mr. Kaplan that employees' claims which have not been liquidated by judgment or action prior to the date of the winding up order are entitled to claim against the insurance companies by invoking the provisions of section 42 of Cap. 282 during the insolvency of the companies.

"2(a)(iii)    In respect of claims for injury to employees arising out of and in the course of employment as are mentioned in Section 40(1) of the Employees' Compensation Ordinance Cap. 282 (employees' claims) whether persons having employees' claims which have not been liquidated by judgment or action prior to the date of the winding up order would be entitled to claim directly against the companies under the provisions of Cap. 282 in the event of the companies becoming solvent."

30. This is another hypothetical question, but having regard to the opinion that I have expressed in answer to question l(a)(iii), the answer to this question is in the affirmative.

"2(b)       In respect of claims for injury to employees arising out of and in the course of employment as are mentioned in Section 40(1) of the Employees' Compensation Ordinance, Cap. 282 (employees' claims) whether the provisions of section 43 Cap. 282 qualify any liability of the companies arising by reason of section 44 or create a liability separate from section 44 and if so, whether that liability is additional to, or in substitution for the liability under section 44."

31. Having regard to my previous answers, the answer to this question is necessarily in the negative.

"2 (c)        In respect of claims for injury to employees arising out of and in the course of employment as are mentioned in Section 40(1) of the Employees' Compensation Ordinance, Cap. 282 (employees' claims) whether in the event that liability of the companies under section 43 is separate from liability under section 44 whether in the case of claims mentioned in section 40, which are made pursuant to section 43, which have not been liquidated by settlement or judgment at the date of the winding-up such claims are capable of proof by the employees of the insured against the companies while insolvent."

32. For the reasons that I have already given the answer to this question is in the negative.

"2 (d)       In respect of claims for injury to employees arising out of and it the course of employment as are mentioned in Section 40(1) of the Employees' Compensation Ordinance Cap. 282 (employees' claims) whether in relation to employee claims the like directions as are sought in questions 1(b)(i), and (iii) apply."

33. For the reasons I have already given, the same directions should apply.

"3(a)          In relation to claims of third parties against persons insured as are mentioned in section 2(1) of the Third Parties (Rights Against Insurers) Ordinance Cap. 273 whether such third parties may prove in the liquidation during the insolvency of the Companies where the events referred to in section 2(1)(a) to (c) of Cap. 273 occur after the date of the winding up order and the claim of such third party was at the date of the winding up order liquidated by judgment or settlement."

34. Section 2(1)(a), (b) and (c) of the Third Parties (Rights Against Insurers) Ordinance Cap. 273 provides -

"2(1)     Where under any contract of insurance a person (hereinafter referred to as the insured) is insured against liabilities to third parties which he may incur, then -

 

if, either before or after that event, any such liability as aforesaid is incurred by the insured, his rights against the insurer under the contract in respect of the liability shall, notwithstanding anything in any enactment or rule of law to the contrary, be transferred to and vest in the third party to whom the liability was so incurred."

 

The words of the section "his rights against the insurer under the contract" clearly indicate that liability arises out of the written contract of insurance. Accordingly I hold that such claims will be provable in the liquidation.

"3(b)         In relation to claims of third parties against persons insured as are mentioned in section 2(1) of the Third Parties (Rights Against Insurers) Ordinance Cap. 273 whether such third parties may prove in the liquidation during the insolvency of the Companies where the events referred to in section 2(1)(a) to (c) of Cap. 273 occur after the date of the winding up order and the claim of such third party was at the date of the winding up order unliquidated by judgment or settlement but was so liquidated before the occurrence of the events referred to in section 2(1)(a) to (c) of Cap. 273."

35. I am quite satisfied on the argument presented by Mr. Kaplan that the third party is entitled to prove in the liquidation. Quite clearly the contract will remain in force until it is terminated.

"3(c)        In relation to claims of third parties against persons insured as are mentioned in section 2(1) of the Third Parties (Rights Against Insurers) Ordinance Cap. 273 whether such third parties may prove in the liquidation during the insolvency of the Companies where the events referred to in section 2(1)(a) to (c) of Cap. 273 occur after the date of the winding up order and the claim of such third party was at the date of the winding up order unliquidated by judgment and settlement and remained unliquidated at the time of the occurrence of the events referred to in section 2(1)(a) to (c) of Cap. 273."

36. Having regard to my answer to 3(b) the answer to this question must also be in the affirmative.

37. With regard to the payment of interest, the same principles apply as set out in the answers to the previous questions.

38. Again, I would like to express my thanks to Mr. Kaplan for the invaluable assistance that he has given to me on behalf of the Official Receiver and also to Mr. Warren Chan.