Court name
Court of Appeal of Turks and Caicos Islands
Case number
CL-AP 10 of 2006

Magellan Reinsurance Company v. New Hampshire Insurance Company (CL-AP 10 of 2006) [2007] TCACA 3 (02 February 2007);

Law report citations
Media neutral citation
[2007] TCACA 3
Coram
Zacca, P
Mottley, JA
Ground, JA

IN THE COURT OF APPEAL

TURKS & CAICOS ISLANDS

CIVIL APPEAL NO. CL-AP-10/2006

BETWEEN:

MAGELLAN REINSURANCE COMPANY

Appellant

- and -

NEW HAMPSHIRE INSURANCE COMPANY

Respondent

BEFORE:

The Rt. Hon. Edward Zacca                               -          President

The Hon. Elliott Mottley                                  —          Justice of Appeal

The Hon. Richard Ground                               —          Justice of Appeal

Mr. Carlos Simons QC and Mr. Andrew Clutterbuck for the appellant; and

Mr. Martin Green for the respondent.

Heard: 7th & 8th September 2006; 2nd February 2007

JUDGMENT

GROUND J.A.

INTRODUCTION

1.             This matter came before us on appeal from an order of Gardner CJ, made on 7th April 2006, that the appellant company ('Magellan') be wound up. We heard the matter on 7th September 2006, and at the conclusion of the hearing we reserved our judgment to the following day, when we allowed the appeal and set aside the winding-up order. We promised to give written reasons, which we now do.

2.             The winding up order was made on the respondent company’s Petition, which itself was based upon a statutory demand of 30th September 2003. The statutory demand was founded on a 'Contractual Reimbursement Insurance Reinsurance Agreement’ of 17th January 1997 ("the reinsurance agreement’), under which the respondent (‘New Hampshire’) ceded all of its obligations in respect of certain business to Magellan, in return for 100% of the premiums received for the said business, less returns and cancellations and an 11.75% ceding commission. By the reinsurance agreement Magellan was obliged to establish a trust account (the ‘trust account’) into which it was required to deposit an amount equal to 100% of the total unearned premium reserve plus the outstanding loss reserve as determined by New Hampshire at the end of each calendar year. The statutory demand was based upon an alleged failure to comply with that requirement, and it claimed that Magellan owed the sum of $1,400,459.45, which was described as “shortfall in payment to trust account required pursuant to reinsurance agreement of 17th January 1997.”

3.             The Petition was presented on 16th August 2004. There were then various delays which are not material for the purposes of this judgment, but the effect of which was that the Petition did not come on for hearing until the 28th February 2005. It was then adjourned to 2nd March 2005, when the learned Chief Justice refused Magellan’s application for a further adjournment and made a winding-up order. That was then appealed to this court on various grounds, and that appeal was allowed, this court holding that Magellan should have been granted an unconditional adjournment: see our Judgment of 19th August 2005.

4.             At the hearing of the first appeal Magellan had also sought to argue that New Hampshire has no locus standi to present a winding up petition under section 94 of the Companies Ordinance, not being a creditor, the argument being that Magellan’s liability to pay into the trust account was not, on its true construction, a debt due to New Hampshire. We declined to entertain that point on the first appeal, on the ground that it was not taken or argued before the Judge below. In those circumstances we thought it proper not to consider it further, but to leave it in the first instance to the Judge on the rehearing of the Petition.

5.             The matter then went back before the learned Chief Justice, who, on 7th April 2006 again made a winding up order. He held, after full argument, that New Hampshire was a creditor and thus within the definition of those able to serve a statutory demand under s.

93 of the Companies Ordinance, and to apply to wind up under section 941. He then conducted an evidential inquiry into the amount owed to the trust account, and found that a significant sum was due and owing by Magellan to the trust account, and that there was “no bona fide dispute as to whether any sum is owing2”. He also held that, on the evidence called before him, Magellan was unable to pay its debts, and had been for some time3. Magellan appeals against the first limb of the learned Chief Justice’s findings only, so that the appeal is limited to the narrow question of whether New Hampshire is a creditor of Magellan and so able to petition under section 94.

6.             On this question the learned Chief Justice held:

“15. I note that the word “creditor” is defined in Osborne’s Concise Law Dictionary (10th Ed.) as simply a person to whom a debt is owing. Similarly Black’s Law Dictionary (17th Ed.) as one to whom a debt is paid. I see no reason to interpret the word differently in ss. 93 and 94 Companies Ordinance. I am quite satisfied that the word was not intended to be interpreted as “judgment creditor.” Had that been the intention the Ordinance would have said so. Also it is quite clear from ss.93 (a) that a creditor having an equitable interest in a debt is included.

16. Here I cannot see how P [New Hampshire] can be regarded other than as a company to whom R [Magellan] owes a debt and therefore as a creditor of R. R had agreed to pay a sum determined by P as owing, which R was obliged to pay even if disputed. That determination makes R a debtor of P. They had agreed a method of payment by which R was required to pay that sum into a Trust account, from which P was entitled to draw without notice to R. P clearly has an equitable interest in the monies following its demand and I am unable to see how this arrangement for payment can affect P’s position as a creditor of R. This accords not only with common sense but also justice, as I consider that it would be inequitable if a company, who had agreed with a reinsurer that payment should be made via a trust fund, and who was not paid because the reinsurer had become insolvent was obliged to incur the delay and expense of proving loss in a writ action. Similar sentiments were expressed by Lawrence J. Steel Wing Company at page 358.”

1 See Judgment of 7th April 2006, paragraph 17.

2 See ibid, paragraph 36.

3 See ibid, paragraph 42

THE FACTS

7.             The liability to pay into the trust account is established by Article VIII of the reinsurance agreement. That Article provides:

“ARTICLE VIII - TRUST ACCOUNT

The Reinsurer [Magellan] will provide the Company [New Hampshire] with a Trust Agreement acceptable to the Company and its regulatory authorities. The Reinsurer shall be required to deposit an amount equal to 100% of the total unearned premium reserve plus the outstanding loss reserves as determined by the Company at the end of each calendar quarter.”

For these purposes "unearned premium reserve’ is defined in Article IV of the reinsurance agreement as “the premium represented by the unexpired portion of the

Policies in force as of any specified date, as determined by the Company [New Hampshire].” "Outstanding loss reserve’ is defined as “losses reported to the Company which have been reserved but are unpaid at any specific date."

8.             Pursuant to Article VIII, Magellan entered into a trust agreement of 11th April 1997 with Texas Commerce Bank NA, by which it established a trust account with that Bank. New Hampshire was a party to the trust agreement, the recitals of which set out its purpose:

"‘WHEREAS, the Grantor [Magellan] and the Beneficiary [New Hampshire] have entered into the reinsurance agreements listed in Exhibit A hereto4 (the “Reinsurance Agreements”);

WHEREAS, the Beneficiary desires the Grantor to secure payments of all amounts at any time and from time to time owing by the Grantor to the Beneficiary under or in connection with the Reinsurance Agreements;

WHEREAS, the Grantor desires to transfer to the Trustee for deposit to a trust account (the “Trust Account”) assets in order to secure payments under or in connection with the Reinsurance Agreements:”

9.             New Hamsphire had the right to make withdrawals from the trust account without notice to Magellan, by virtue of section 2 of the trust agreement, which provides:

4 The only agreement listed in Exhibit A is the reinsurance agreement.

“(a) Without notice to the Grantor, the Beneficiary shall have the right, at any time and from time to time, to withdraw from the Trust Account, upon written notice to the Trustee (the “Withdrawal Notice”) such Assets as are specified in such Withdrawal Notice. ... The Beneficiary need present no statement or document in addition to a Withdrawal Notice in order to withdraw any Assets; nor is said right of withdrawal or any other provision of this Agreement subject to any conditions or qualifications not contained in this Agreement.

(d) The Trustee shall have no responsibility whatsoever to determine that any Assets withdrawn from the Trust Account pursuant to this Section 2 will be used and applied in the manner contemplated by Section 3 of this Agreement."

10.          The application of any assets so withdrawn is, however, constrained by section 3 of the trust agreement, which provides:

“The Beneficiary hereby covenants to the Grantor that it shall use and apply any withdrawn Assets, without diminution because of the insolvency of the Beneficiary of the Grantor, for the following purposes only

(i)            to pay or reimburse the Beneficiary for the Grantor’s share under the Reinsurance Agreements regarding any losses and allocated loss expenses paid by the Beneficiary but not recovered from the Grantor, or for unearned premiums due to the Beneficiary, if not otherwise paid by the Grantor in accordance with the terms of the Reinsurance Agreements;

(ii)           to make payment to the Grantor of any amounts held in the Trust Account that exceed 102% of the actual amount required to fund the Grantor’s entire Obligations (as hereinafter defined), and

(iii)          where the Beneficiary has received a Termination Notice (as hereinafter define) pursuant to Section 10 of this Agreement and where the Grantor’s entire Obligations remain unliquidated and undischarged ten days prior to the termination Date (as hereinafter defined), to withdraw amounts equal to such Obligations and deposit such amounts in a separate account, in the name of the Beneficiary, in any United States bank or trust company, apart from its other assets, in trust for the uses and purposes specified in subparagraphs (i) and (ii) of this Section as may remain executory after such withdrawal and for any period after such Termination date. For the purposes of this subparagraph (iii), the phrase “the Trust Account” in subparagraph (ii) of this Section shall be deemed to read “the separate account” established pursuant to this subparagraph (iii). ”

11.          In our judgment, it is clear from those recitals that the assets in the trust account are there as security for any sums that may become owing by Magellan to New Hampshire under the reinsurance agreement. Not only is this clear from the express terms of the recitals, but it is born out in practical terms by the fact that the amount to be paid into the trust account is calculated by reference to reserves rather than losses in fact paid. It is further reinforced by the terms of the trust agreement itself, which provides that any interest or dividends earned on the sums deposited are to be paid to a separate account established by Magellan, and from which Magellan has an unrestricted right to withdraw5.

12.          In coming to his conclusion, the learned Chief Justice attached weight to New Hampshire’s right to draw down on the trust account without notice to Magellan, conferred by section 2 of the trust agreement. However, as between New Hampshire and Magellan, the use of any funds so withdrawn is restricted by the terms of section 3 of the trust agreement to sums actually due under the reinsurance agreement. The right to the funds is, therefore, dependent upon the contingency of them being in fact due, which in the normal course of events would mean that New Hampshire would have had to have paid the underlying claim. The sums due to the trust account may, therefore, be greater than those which eventually become due to New Hampshire. It is, of course, open to New Hampshire to assert the amount actually due under the reinsurance agreement as a debt from Magellan, but that is not how the Petition was framed.

13.          We therefore find that the learned Chief Justice was wrong when he considered that the trust agreement represented an agreed “method of payment” of sums due to New Hampshire under the reinsurance agreement. Rather, it represented a method of securing those sums.

5 See section 5 of the trust agreement.

THE LAW

14.          The relevant sections of the Companies Ordinance provide:

“93. A company shall be deemed to be unable to pay its debts if—

(a)           a creditor by assignment or otherwise to whom the company is indebted at law or in equity in a sum exceeding $500 then due, has served on the company by serving or having served at its registered office a demand under his hand requiring the company to pay the sum so due, and the company has for the space of three weeks succeeding the service of such demand neglected to pay such sum or to secure or compound for the same to the reasonable satisfaction of the creditor; or

(b)           execution or other process issued on a judgement, decree or order obtained in the Court in favour of any creditor at law or in equity in any proceedings instituted by such creditor against the company, is returned unsatisfied in whole or in part; or

(c)           it is proved to the satisfaction of the Court that the company is unable to pay its debts as they fall due in the ordinary course of business.

94. Any application to the Court for the winding up of a company shall be by petition which may be presented by the Attorney General, the company, or by any one or more than one creditor or contributory of the company, or by all or any of the above parties, together or separately; and every order which may be made on any such petition shall operate in favour of all creditors and all the contributories of the company in the same manner as if it had been made upon the joint petition of a creditor and a contributory:”

15.          It is common ground that section 94 contains an exclusive list of those entitled to petition, and that the only relevant category for the purposes of this case is that of creditor. If New Hampshire was not a creditor, then it had no locus standi to present its Petition, and the winding up order made upon it must be set aside. We take the law in this respect to be authoritatively stated in Mann v Goldstein (1967) Ch. D. 769 at 771 per Ungoed-Thomas J:

“The presentation of a petition is governed by statutory provision. Section 224 of the Companies Act, 1948, provides that an application to wind up a company shall be by petition presented, so far as material for present purposes “...by any creditor or creditors...” The section seems to me plainly, on the face of it, exhaustive, so that a person not within its ambit cannot petition. This conclusion is in accordance with the note in Buckley on the Companies Act (13 ed (1957), p. 462) based on the observation of Wynn-Parry J. in In re H. L Bolton Engineering Co. Ltd. Of course, a person not named in section 224 as a person entitled to present a winding-up petition, does not become so named because the company is insolvent. Therefore, so far as material to our case, if the defendants are not creditors they are not entitled to present or advertise their petitions or apply for a winding-up order; they have no locus standi, and their petitions are bound to fail even though the company be insolvent.”

16.          ‘Creditor’ is not defined in the statute, although it was accepted that it included a creditor both “at law and in equity”, following the wording of section 93(a) of the Ordinance (supra).

THE ARGUMENTS

17.          It is apparent that the Chief Justice considered that New Hampshire’s beneficial interest in the trust account was sufficient to constitute it a creditor. His reference to s. 93(a) suggests that he may have regarded New Hampshire as a “creditor ... to whom the company is indebted ... in equity,” and considered that that equates with a person “having an equitable interest in a debt”. Magellan argues that this is based upon a misconception of the meaning of “indebted in equity”, and that applying ordinary trust principles a person having an equitable interest in a debt is neither able to sue personally for it, nor petition on it.

18.          Counsel for New Hampshire, in his written submissions, does not base his argument on any beneficial interest in the debt, and does not seek to support the Chief Justice’s reasoning on this point:

“6. In fact, in this case, the Petitioner is of course a beneficiary of the trust although for the reasons already stated, it would not affect the position in the slightest were it not.”

19.          Given that New Hampshire disclaims any reliance on its position as beneficiary of the trust established by the trust account as entitling it to petition, we can deal with that aspect of the Chief Justice’s judgment very briefly. We accept the argument of Magellan that a beneficiary under a trust cannot petition for a debt owed to the trust, although in the case of a sole beneficiary he might be able to collapse the trust under the rule in Saunders v Vautier and then petition in his own right. We also accept that the meaning of a creditor in equity was correctly explained in Re the Law Court Chambers Company Ltd. (1869) 61 LT 669 at 671:

“to establish the position of creditor in equity, there must be the relationship existing between the person who says he is the creditor and the alleged debtor, under which the debtor could be compelled, in equity, to pay the alleged creditor the equitable debt;”

That does not assist New Hampshire in this case, who does not maintain that Magellan could be compelled in equity to pay the sum owed to the trust account directly to it.

20.          The argument that New Hampshire advances (both before this court and below), is a quite different one. It says that a debt is an obligation to pay, and that the obligation should not be confused with the person to whom the money is to be paid. Normally that will be the same person, but it need not be. In this case the obligation is a contractual one arising under the reinsurance agreement, and the obligation is owed to the other contracting party, New Hampshire, and that is not altered merely by the fact that the obligation requires actual payment to be made to a third party, the Bank. Mr. Green argues that the creditor is the person to whom the obligation is owed, not the person to whom the money is to be paid. He maintains that the question of whether or not a person to whom an obligation is owed is the person who is to receive the money is irrelevant, “as is the question of whether or not he has any beneficial interest in the debt”.

21.          Mr. Green relies upon Re a debtor (No. 68/SD/97) [1998] 4 All ER 779, where it was held that a legally aided person, who was the beneficiary of a costs order, had locus to serve a statutory demand to enforce that order notwithstanding that the costs were, by operation of law, payable directly to the Legal Aid Board. That case does not support the argument which Mr. Green seeks to make. It was (and is) settled law in England that, by virtue of the various statutory provisions, the legally aided beneficiary of a costs order is not the beneficial owner of the debt created by the order.6 All that Re a debtor decides is that a person with a legal, but no beneficial interest in the sum owed may serve a statutory demand. The analogous person in the context of the case at bar is the trustee of the trust account. New Hampshire asserts a beneficial but no legal interest in the debt, and is thus in the position of the Legal Aid Board, who require special statutory powers to enable them to enforce such debts in their own right. Another way to look at Re a debtor (No. 68/SD/97) is to regard the Legal Aid Board’s claim to the sum owed as a form of statutory garnishment. All the case really says is that the original creditor can still serve a statutory demand on a garnishee to enforce a debt notwithstanding that the debt has been garnished by a third party garnishor. The corollary is that the garnishor cannot petition to wind-up on the basis of the garnished debt, and the creditor remains the person to whom the debt was originally payable.7 None of that helps New Hampshire.

CONCLUSIONS

22.          Despite the industry of counsel, no case directly on the point was put before the court, and it seems to be a matter of first impression. Treating it as such, we do not accept New Hampshire’s argument, that a creditor is someone to whom an obligation to pay money is owed, irrespective of the questions to whom and for what it is to be paid. We are unable to accept it for two reasons. First, we consider that a creditor is someone to whom a debt is primarily payable. We have inserted the word ‘primarily’ in order to recognize that, by operation of law or the process of execution, a debt may be attached by a third party. That does not alter the fact that the obligation as between the debtor and the creditor was framed in terms of payment by the debtor to the creditor. Similarly the person to whom a sum of money is owed and payable may direct payment to a third party, without assigning the debt. We think that there is no doubt that in such a case he would remain the creditor. But neither of those is the case here, as the money never was payable to New Hampshire.

6 “In my judgment this means that the assisted person never obtains the slightest entitlement as beneficiary to a single penny payable by virtue of an order in his favour for costs made after his legal aid certificate has been granted. Any order for costs is only made in the name of the assisted person for the purposes of identification and taxation. The money must be paid to the solicitor or to the Law Society; the assisted person can neither sue, nor give a good receipt for the money ...” per Templeman LJ in Re a debtor (Np. 5883 of 1979), Debtor v Law Society (1981) Times, 20 February, [1981] CA Transcript 35.

7“A garnishee order does not operate to transfer the debt and does not constitute the garnishor a creditor either at law or in equity of the garnishee.” In re Steel Wing Company. Limited [1921] 1 Ch. 349.

23.          Second, and more fundamentally, we do not consider that an obligation to provide security for a debt which may become payable is itself a debt, so that we doubt if New- Hampshire could petition even if the money were payable directly to it to hold in escrow as security for Magellan’s liabilities. If there is a debt which has or may become due directly from Magellan to New Hampshire, then that debt itself could in principle found a Petition, but that is not, for whatever reason, how New Hampshire puts its case.

24.          We therefore considered that New Hampshire was not a creditor of Magellan for the purposes of section 94 of the Companies Ordinance. For that reason we allowed the appeal and set aside the winding up order. We awarded Magellan its costs here and below, and allowed costs for two counsel on the appeal.

Dated this 2nd day of February 2007

_________________________

Ground JA

I agree:

_____________________

Zacca P

I agree:

______________________

Mottley JA