ATTORNEY GENERAL v. OFFICIAL RECEIVER

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JUDGMENT

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Sir Alan Huggins, V.-P.:

1. This is an appeal against the order of Jones, J. upon a summons for directions in proceedings for the compulsory winding-up of five insurance companies. In the court below it was in issue whether the application to the judge was properly made by summons, and it was held that it was - by virtue of s.200(3) of the Companies Ordinance The point has not been pursued upon the appeal, so that we have heard no argument upon it. Nevertheless I wish to express my doubt whether the "directions" contemplated by s.200(3) were intended to encompass anything more than directions as to the conduct of the proceedings. Had the application been by Originating Summons not only might other interested parties have had notice of it but we should have had evidence before us on a number of relevant matters. As it is, we are told that the official Receiver has received notice of claims against one or more of the companies from third parties who say that they are entitled to demand unliquidated damages from the companies by reason of the existence of policies of compulsory insurance taken out by divers owners of motor vehicles and employers. We are asked to assume that each of the companies is insolvent, and it is common ground that the material date for ascertaining whether a debt may be proved in a winding up is the date of the winding-up order.

2. Jones, J. in a careful judgment decided that unliquidated claims brought pursuant to the Employees' Compensation Ordinance could properly be proved, but that claims under the Motor Vehicles Insurance (Third Party Risks) Ordinance could not. The Attorney General appeals on behalf of the Director of Social Welfare in respect of the claims under the latter Ordinance, the Director being interested by reason of the new Traffic Accident Victims Assistance Scheme, under which the third parties may be granted compensation from the Director if they do not recover it from the insured owners or from the companies.

3. Any right to claim in the winding-up stems from s.264 of the Companies Ordinance :

We therefore have to turn to the Bankruptcy Ordinance. The relevant sub-sections of s.34 are :

Mr. Smith for the Official Receiver contends that the order of those sub-sections is material in that what appears to be an exception to the general rule is placed first and thus takes on a special significance, whilst Mr. Tong for the Attorney General urges that sub-s.(1) is in the nature of a proviso, which ought to be strictly construed. That might be material, because the vital words appear in sub-s.(1), namely "demands arising by reason of a contract".

4. First we have to consider what is the nature of the demands against the companies which are here in issue. Clearly there was no privity of contract between the third party claimants and the insurance companies: those contracts were made by the insurers with the insured. But for the statute the third parties could have no right to proceed against the insurers. However, the protection which the Legislature intended to afford to third party victims of traffic accidents by imposing on users of motor vehicles an obligation to insure against third party risks could only be fully effective if a direct right of action against the insurers were conferred. As I understand it, third party claims must be brought under s. 10(1). The only other provision in the Ordinance which gives a right of indemnity, is s.6(2), but (in so far as it is concerned with rights rather than liabilities) that is concerned with the right of a "person specified in the policy" other than the insured himself to claim in his own name against an insurer. Such persons would have no privity of contract and at Common Law would have no right to sue under the policy for an indemnity if a third party claim were made against him. The effect of the equivalent English provision (s.36(4) of the Road Traffic Act, 1930) was discussed in Guardian Assurance Co. Ltd. v Sutherland 1939 2 All E.R 246, a case concerned with the right of an insurer to avoid a policy issued in reliance upon representations which were shown to have been false. In the course of his judgment Branson, J. said of s.36(4) at p. 250D :

Section 10(1) of the Road Traffic Act 1934 is in the same terms as s.10(1) of the Motor Vehicle Insurance (Third Party Risks) Ordinance and accordingly it is argued that the right given by the latter provision is on all fours with that given by s.36(4) of the Road Traffic Act 1930, namely a statutory right to sue the insurer where the third party has obtained a judgment against any person insured by the policy, that is to say against the policy holder or against any other "person specified in the policy". Mr. Smith fairly points out that Branson, J. was not concerned with s.10(1) of the Road Traffic Act 1934, and there is an obvious distinction (whether material or not) between conferring a right to sue upon a contract and conferring a right to sue upon a judgment given in an action upon the contract. We have, of course, no evidence before us that judgments have been obtained in the present case against the persons protected by the relevant policies or, if they have, whether they were judgments for damages which have been assessed or for damages which have yet to be assessed. Only in the latter case would the demands against the companies under s.10 be for liquidated damages. It is not disputed that such judgments would be based upon a claim in tort and would be against the Defendants as tortfeasors and not as parties to a contract. It is argued that the third parties would have no right to sue under the statute were the companies not "insurers" by virtue of the contracts, and that cannot be gainsaid. Is it enough to justify holding that the demands arose "by reason of" the contracts? Undoubtedly the contracts were a sine qua non for liability, but the liability itself arose under the statute. On behalf of the Attorney General it is urged that, if the contracts were a sine qua non for liability, they were necessarily a reason for the demands, even if the liability did not arise under the contracts but under the statute.

5. Mr. Tong seeks to support his argument by reference to the provisions of the Employees' Compensation Ordinance, which is said to be in pari materia. Jones, J. took the view that the wording of the two statutes was sufficiently different to force upon him the distinction which he made between them, and at least at first sight there is ground for that view: the scheme of the Employees' Compensation Ordinance is clearly to make statutory amendments to those contracts of employment to which it relates, with the result that the right of a workman to sue his master's insurer directly is a right which arises under the contract itself. Thus ss.43(1) and 44 provide:

What one then has to ask is this, If the third party were a party to the policy, what would be the nature of his claim against the insurer?  The parties are not ad idem as to the answer to that question, for the Respondent submits that the liability of the insurer arises under s .44 whereas the Appellant contends that the insurer's liability arises under s.43(1) and that s.44 merely provides machinery for giving effect to a claim under s.43(1). For my part I do not think anything turns upon this. It seems to me that the sections are to be read together, but the effect is that the statute operates to give the third party - by virtue of the statutory fiction that the third party was a party to the contract - a right to sue under the contract for the indemnity to which the insured would have been entitled under the policy. That right would not exist but for the statute, but it must, none the less, be deemed to be a contractual right, and any unliquidated demand by the third party would clearly be within s.34(1) of the Bankruptcy Ordinance. Therefore, Mr. Tong argues, the case under the Motor Vehicles Insurance (Third Party Risks) Ordinance should similarly be regarded as falling within s.34(1) of the Bankruptcy Ordinance: in neither case would liability exist in the absence of the statute or in the absence of the contract. He goes on to point out the anomalies which would arise if the judge were right in distinguishing between the two cases. One example he gives is that of a workman injured in a traffic accident in the course of his employment through the negligence of a stranger. The risk of such injury is one which must be covered by compulsory employees' compensation insurance: s.40. In respect of the same injury the workman might be able to prove in the winding up of the master's insurers by virtue of the provisions of the Employees' Compensation Ordinance but could not prove in the winding up by virtue of the provisions of the Motor Vehicles Insurance (Third Party Risks) Ordinance, although similar protection was aimed at by both pieces of legislation.

6. In my judgment the fallacy in this argument on behalf of the Appellant is the treating of these statutes as in pari meteria: they do not deal with the same subject matter but with different subject matters in a comparable way. In no sense do they form a system or code of legislation. They must therefore be construed independently.

7. Similarly I find no assistance from the Third Parties (Rights Against Insurers) Ordinance, although it could properly be considered as in pari materia with the Motor Vehicle Insurance (Third Party Risks) Ordinance. Section 2 of the former statute is concerned with cases where it is the insured who becomes bankrupt or makes a composition or arrangement with the creditors. In such circumstances the insured's rights against the insurer "under the contract" are "transferred to and vest in the third party". That being so, the third party acquires a right which is clearly to be regarded as contractual in nature although conferred by statute.

8. We must in the end come back to the words of s.34(1) of the Bankruptcy Ordinance and give them their normal meaning. To be provable, the demands must have arisen "by reason of a contract". It is the old problem of causation in one of its many contexts. Put in another way the question is whether the contracts which the Legislature had in mind were necessarily contracts to which the third party was, or by statute was deemed to be, a party. Mr. Smith in effect submits that they were, and he bases his contention on the fact that before the Bankruptcy Act, 1869 no unliquidated claims were provable; it was in that statute that the present s.34(1) originated; it was the object of the Legislature to allow proof of a demand where the bankrupt had personally promised to undertake a liability to the claimant; here there was no such promise, either in fact or in legal fiction; as this provision became law before the Judicature Acts, the old rules of pleading were in force; therefore it was necessary to bring the claims within one of the recognized forms of action; the claims in question would necessarily have been pleaded as actions on the statute and not in assumpsit. As I see it, in a claim under s.10(1) of the Motor Vehicles Insurance (Third Party Risks) Ordinance, whilst the contract constitutes a less important element than in a claim under s.43 of the Employees' Compensation Ordinance or under s.2 of the Third Parties (Rights Against Insurers) Ordinance, it is still a vital element: the claim cannot be (and never could have been) pleaded without alleging the contract. I am not persuaded that the words "arising by reason of a contract" were related to the old form of action in the manner suggested. Again, Harvey v R.G. O'Dell Ltd. (1958) 2 Q.B. 78 is of no assistance. There it was held that an action for contribution under s.6 of the Law Reform (Married Women and Tort feasors) Act, 1935 was not a proceeding "in respect of a cause of action in tort". Despite the possible difference of opinion between Lord Porter in Heyman v Darwins Ltd. (1942) A C. 356, 398 and lord Salmon in The Evje (1974) 2 Lloyd's Rep. 57, 67, I respectfully think that there is often a difference between a demand arising "by reason of a contract" or "out of a contract on the one hand and one arising "on a contract" or "under a contract" on the other both the later phrases seem to me to imply that the claimant is party to the contract. I find some support for this dichotomy in the speech, of Lord Brandon in Samick Lines Company Limited v Owners of the Antonis P. Lemos (1985) 2 W.L.R.468 when he said at page 474A :

Although he was dealing with a different statute, I accept the view of Windeyer, J. in Government Insurance Office of N.S.W. v R.J. Green & Lloyd Pty. Ltd. (1966) 114 C.L.R. 437, 447 :

In my judgment the contracts of insurance are a contributing factor to the demands made by the third parties here.

9. For these reasons I conclude that the claims of the third parties may be provable in the winding-up and I would allow the appeal. I would like to hear counsel as to the precise terms of the order we should make. The parties have agreed that each should bear its own costs.

Kempster, J.A.:

10. On 27th November 1985 and pursuant to section 200(3) of the Companies Ordinance (Cap. 32), as to the procedural propriety of which I share the doubts of my Lord the Vice-President, Jones J. heard an application for directions made by the Official Receiver in his capacity as liquidator of five companies which had carried on business as authorised insurers within the meaning of section 2(a)(i) of the Motor Vehicles Insurance (Third Party Risks) Ordinance (Cap. 272). The directions which are the subject of appeal and therefore presently material were: -

11. These conclusions were reached after hearing argument advanced on behalf of the Official Receiver and of the Attorney-General, as representing the interests of the Director of Social Welfare, respectively. We too have had the benefit of such argument.

12. The effect of the directions is to preclude persons injured or the personal representatives of persons killed as a result of the use of a motor vehicle on a road from so availing themselves of the provisions of sections 9 and 10 of the Ordinance as to prove in the liquidation of any of the companies in question, so long as they are insolvent, for the amount of any judgment obtained or arbitration award made against or agreement for payment of damages concluded with a person insured by any of them, regardless of any contractual defence that may obtain as between insurer and insured, unless the judgment in question was entered, the award made or the relevant agreement concluded before the date of the winding-up order. If Jones J. was right the advice given by Professor Gower in ''Modern Company Law" (4th Ed. at p. 731) "that a creditor whose sole claim is in tort should not delay in enforcing his rights against a company if its financial stability is in doubt" should be heeded. It is true that he revised these words following the decision of Vinelott J. in Re Berkeley Securities (Property) Ltd. 1980 1 W.L.R. 1589 but it is accepted before us in general terms that the subsequent decision of Harman J. which reaffirmed earlier authorities to the effect that claims in tort for damages unliquidated at the commencement of winding-up are not admissible to proof, unless and until the company is shown to be solvent, has since been, and should be, followed. Re Islington Metal and Plating Works Ltd. 1983 3 All E.R. 218. However, the implications for Hong Kong law of sections 9 and 10(1) of the Ordinance remain the subject of contention. They read as follows: -

This sub-section is made subject to exceptions by sub-sections (2) and (3) while sub-sections (5) and (6) deal with matters of definition. Sub-section (4) provides: -

The issues falling for determination in this appeal may therefore be reduced to the one question "Do claims available only by reason of the provisions of sections 9 and 10 of the Motor Vehicles Ordinance arise otherwise than by reason of a contract?"

13. The existence at the material time (as evidenced by a certificate of insurance) of a valid contract of insurance between the insolvent company being wound-up and an insured covering the risks described in section 6(l)(b) and in particular that risk giving rise to the demand by the injured person or the personal representatives of a deceased, is certainly a condition sine qua non of the insurer's liability but it is not apparent at first blush that the demand necessarily arises "by reason of" the contract as is contended on behalf of the Attorney-General. No more is it immediately apparent from its provisions that the demand arises rather "by reason of" the ordinance as is contended on behalf of the Official Receiver and was found by Jones J.

14. In support of the Attorney-General's submissions we were referred to sections 40 to 44 of the Employees' Compensation Ordinance (Cap. 282), which permit an injured employee direct recourse against his employer's insurers, and to section 2 of the Third Parties (Rights against Insurers) Ordinance (Cap. 273), which, though subject to the insolvency of the insured, is to like but more general effects.  When read together with the Motor Vehicles Ordinance all three enactments are said to be in pari materia and to form one cohesive system. Certainly the construction which has been placed on a word in other statutes with the same general subject matter is relevant "unless the context makes it clear that the word must have a different construction". Beaman v. A.R.T.S. Ltd. 1949 1 K.B. 550 at p. 567 per Somervell L.J. And for "word" may be substituted "language". Greaves v. Tofield (1880) 14 Ch.D. 563 at p. 571 per James L.J.

15. Section 44 of the Employees' Compensation Ordinance reads: -

And section 2 of the Third Parties (Rights against Insurers) ordinance: -

16. Having regard to the terms of these sections I am satisfied that any claim made pursuant to either would arise "by reason of a contract" and therefore be provable in the liquidation of an insolvent insurance company. Indeed, an employed driver could so prove for damages for injury sustained in the course of his employment and as a result of the use of a motor vehicle on a road. But the markedly different language found in sections 9 and 10 of the Motor Vehicles Ordinance cannot be overlooked or strained in an effort to obviate anomalies which are inevitable in the light of sections 263 and 264 of the Companies Ordinance, or to achieve consistency. The three ordinances, subject to differing conditions, make provision for an injured party directly to sue the insurers of an allegedly responsible tortfeasor; by which expression is comprehended a party in breach of statutory duty. Section 11 of the Motor Vehicles Ordinance specifically refers to the Third Parties (Risks against Insurers) Ordinance and the proviso to section 6(1) refers to the Employees Compensation Ordinance. Be that as may the relevant sections of the Motor vehicles Ordinance cannot, in my view, be construed as statutory modifications to policies of insurance which, as between the contracting parties, remain of full force and effect while section 34(1) of the Bankruptcy Ordinance, read in context, does not admit of the meaning "connected with or related to a contract."

17. It has none the less become apparent to me, on analysis, that whereas the words "arising otherwise than by reason of a contract -" postulate the exclusion of a causal relationship between a contract and a demand, one of the causes of the demands with which we are presently concerned is the existence of a contract of insurance albeit the terms of the legislation constitute another and, arguably, the critical cause. The word "solely" does not appear between "than" and "by" in section 34(1) of the Bankruptcy Ordinance. It is on this somewhat laconically stated ground that I too find that the material directions of Jones J. are unsustainable and that claims under sections 9 and 10 of the Ordinance, unliquidated at the commencement of the winding-up of an insolvent company, are prima facie admissible to proof. Accordingly I agree that this appeal should be allowed in the terms of an order or declaration to be the subject of further consideration.

Nazareth, J. :

18. I have had the advantage of seeing in draft the judgment of my Lord the Vice President, with whose conclusion I would respectfully agree.

19. The Employees' Compensation Ordinance (Cap. 282) and the Motor Vehicle (Third Party Risks) Ordinance (Cap. 272) are, as my Lord has clearly demonstrated, not in pari materia and do not avail the Appellant upon that basis.

20. Nonetheless for the reasons giver by my Lord the Vice President, I too think that there is a difference between demands arising "by reason of a contract" and "under a contract", and that the former expression embraces a demand that causally connected with a contract notwithstanding that the contract may not be the sole or even dominant factor, but only a contributory factor, as is clearly the case here. Having reached that conclusion, I do not think it necessary to consider whether such a demand or right is contractual or statutory; it is sufficient that it arises by reason of a contract.

21. Accordingly I, also, would allow the appeal and agree that counsel should be heard on the terms of the order to be made.

17th April 1986