Discover Reinsurance Company v PEG Reinsurance Company Ltd

• Jurisdiction: Bermuda
• Judgment Date: 01 March 2007
• Date: 01 March 2007
• Docket Number: Commercial Jurisdiction 2006 No. 351
• Court: Supreme Court (Bermuda)

In The Supreme Court of Bermuda

Kawaley, J

Commercial Jurisdiction 2006 No. 351

BETWEEN:

Discover Reinsurance Company

Petitioner

and

P.E.G. Reinsurance Company Ltd.

Respondent

Mr R Attride-Stirling and Ms K George for the Petitioner

Mr N Hargun for the Respondent

The following cases were referred to in the judgment:

Chesapeake Insurance Co Ltd v The Mutual Fire, Marine and Inland Insurance Co (in rehabilitation)BDLR [1991] Bda LR 42

Brinds Ltd v Offshore Oil NLUNK (1986) 2 BCC 98,916

IPC Mutual Holdings Ltd v FriedbergBDLR [2004] Bda LR 27

Alipour v AryUNK [1997] 1 BCLC 557

Eagle Star v Yuval [1978] 1 Lloyds Law Rep 357

Strike out application — Application to discharge the appointment of the joint provisional liquidators — Reinsurance company — Insurance creditors' right of access to the court — Dispute over existence of debt — Arbitration proceedings — Equitable estoppel claim — Material non-disclosure — Petitioner's status as creditor — Informal application for stay under article 8 of the UNCITRAL Model Law

RULING of Kawaley, J.

Introductory

1. The following review of the background to the present strike-out application is substantially taken from my December 4, 2006 Ruling on the Company's application to discharge the appointment of the Joint Provisional Liquidators.

2. On November 15, 2006, on the Petitioner's ex parte application, I appointed Messrs. Peter Mitchell and Geoffrey Hunter as Joint Provisional Liquidators (‘JPLs’) of the Respondent company. The JPLs have commenced proceedings in the United States against, inter alia, several of the Company's directors to preserve a cause of action in respect of a possibly unlawful dividend, which they claim is potentially a significant asset in the event of the Company ultimately being unable to pay its actual and contingent debts to the Petitioner in full.

3. The Petitioner's application disclosed that it was arguably an admitted creditor in an amount of nearly $1 million in respect of certain paid losses which were reinsured by the Company. The application also made out a strong case of balance-sheet insolvency, combined with a strongly arguable case for the urgent appointment of the JPLs to file a claim against the Company's parent in respect of an allegedly unlawful dividend before a limitation period expired.

4. On November 20, 2006, the Company filed a Summons seeking to: (a) discharge the November 15, 2006 Order appointing the JPLs (‘the JPL Appointment Order’); and (b) seeking to strike-out the Petition as an abuse of the process of the Court. On the afternoon of November 22, 2006, Mr. Hargun sought to move his application substantively, and I refused an application by Mr. Attride-Stirling for an adjournment because it seemed obvious, in light of the submissions made by the Company, that the Petitioner ought to have given notice of the original ex parte application.

5. After hearing argument which continued over to the following day, it became clear that further evidence was required to fairly adjudicate the merits of the strike-out application. Even if the admission of liability relied upon by the Petitioner was not an admission, it seemed likely that this issue might be resolved, one way or another, at the resumed arbitration hearing scheduled for December 8–9, 2006. Since the affidavit evidence as to the Company's solvency was controversial, it seemed likely that oral evidence might be required to resolve this important factual controversy. I therefore adjourned the strike-out application to a date to be fixed and directed that the parties be at liberty to adduce further affidavit evidence, which was anticipated to be filed as soon as practicable after the conclusion of the pending arbitration proceedings between the parties.

6. Against this somewhat unusual background of a hotly disputed Petition, the viability of which in large part depends on the outcome of pending proceedings between the Company and a petitioner which is seemingly the only unsecured insurance creditor of the Company, on November 24, 2006 I varied the JPL Appointment Order. I did so in order to empower the directors to not only instruct Counsel to defend the present contested winding-up proceedings, but also US Counsel to pursue the pending arbitration and court proceedings against the Petitioner. I declined to summarily strike-out the Petition.

7. At this initial interlocutory stage, however, in considering whether the Petitioner in the present case has sufficiently demonstrated a prima facie case for the existence of an undisputed petition debt, I adopted the following approach. In my view, the Petitioner was undeniably a policyholder whose right to petition is materially affected by section 34 of the Insurance Act. This has been held to prohibit a single contingent insurance creditor of an insurance company from seeking the winding-up protection of the Court. Although this point was not considered in the Court of Appeal decision which established this principle1, the result is to materially restrict the insurance creditors” right of access to the Court. The Court is required as a matter of general principle to seek to apply the law in a manner which does not contravene constitutional rights. In my view, in these circumstances, I am entitled at this stage (and, subject to argument, on the effective hearing of the Petition2) to lower the usual evidential threshold for proof of an undisputed presently due petition debt. The Petitioner is admittedly a contingent creditor who could conceivably be owed in excess of $10 million.

8. On December 4, 2006, I ruled: ‘The JPL Appointment Order is accordingly varied to substantially limit the role of the JPLs to (a) preserving the Delaware action, a potential asset for the liquidation estate, and (b) approving the Company's necessary operating expenses, pending the determination of the Company's strike-out application or further order.’ The Respondent is in run-off, and so no question of damage to its trading interests arose.

9. On December 15, 2006, I adjourned the Petition to January 26, 2007 for Mention and indicated that the status of the Petitioner as a creditor needed to be decided on the hearing of the Company's strike-out application. On January 26, 2007, the Petition was adjourned again with the Petitioner complaining that the Company was taking no steps to fund the completion of the arbitration proceedings. By this juncture it was clear that the Company was, absent financial support, commercially insolvent. Evidence filed by the JPLs indicates that the Petitioner is the principal unsecured creditor. I indicated that rather than making a winding-up order summarily, I would further adjourn the

Petition and draw appropriate inferences against the Company if they had not pursued the arbitration proceedings before the effective hearing of the present application.

10. By the time the Company's present application was heard, Mr. Hargun indicated that the Respondent was not minded to pursue the arbitration unless the present proceedings were dismissed, and was unable to do so without financial support from its shareholders.

Strike-out grounds

11. The Petition was presented on December 14, 2006. For present purposes, the Petition is based on an allegedly admitted debt of some $991,085.00 said to be due under a Reinsurance Agreement. By Summons dated November 20, 2006 (paragraph 3), the Respondent sought an Order : ‘that the Petition of Discover Reinsurance company be struck-out as an abuse of process.’

12. The First Dresback Affidavit in support made the following key assertions: (a) the Petition debt was disputed and had yet to be determined in pending arbitration proceedings, (b) the Company was solvent, and (c) the Company proposed to close its case in the arbitration proceedings on December 8, 2006. In the Company's Written Submissions dated November 22, 2006 filed in support of the present application when it was initially heard in November, the abuse of process complained of was that (a) the Petition was based on a disputed debt, (b) no arbitration award had been made, and (c) the Respondent had cross-claims in the arbitration proceedings which had to fail for the Petitioner's status as a creditor to be made out3.

13. In the Company's oral and Written Submissions tendered on February 19, 2007, the additional argument was made, without a formal application being made, that the Company was entitled as of right to a mandatory stay of the winding-up proceedings under Article 8 of the UNCITRAL Model Law4.

Law applicable to Petitioner's creditor status

14. It is well settled that when the existence of a debt is disputed in good faith on substantial grounds, a winding-up petition may be struck-out as an abuse of the process of the Court. The Court should ordinarily resolve the dispute as to the existence of the debt in the winding-up proceedings save to decide whether or not there is a substantial dispute as to its existence Where the respondent company asserts a cross-claim which does not affect the existence of the petition debt, it is also well settled that the court has a discretion, assuming insolvency has been made out, to either (a) make a winding-up order or (b) adjourn or dismiss the petition so that the cross-claim can be established in separate proceedings.

15. Mr. Hargun was forced to concede that this Court was, in addition, bound by a further principle established by a case on which Mr. Attride-Stirling relied, the Privy Council decision in Brinds Limited v Offshore Oil N.L. & OthersUNK(1986) 2 BCC 98,916. This case holds significantly as follows:

‘It is a matter for the discretion of the judge whether a winding-up order should...