Hih Insurance

HIH Insurance - Liquidation and Breach of Duty by Directors

Background

There are few surprises when it comes to insurance, but when they do come; they nearly always bring bad news. Such was the demise of HIH Insurance Limited (HIH): both a surprise (to many) and very bad news for many policyholders.

On Thursday, 15 March 2001, HIH received approval from the NSW Supreme Court to place HIH into provisional liquidation. Tony McGrath of KPMG was appointed as provisional liquidator to HIH and 17 of its controlled entities. Provisional liquidation is a temporary form of administration that gives HIH time for the provisional liquidators to review HIH operations and assess the financial position.

HIH insurance is now in run-off, which means it is managing its outstanding claims and not writing any new business. This could take several years to complete; some have suggested as long as 10 years.

Facts about HIH Insurance

HIH comprised several separate government-licensed insurance companies, including HIH Casualty and General Insurance Limited, FAI General Insurance Company Limited (FAI), CIC Insurance Limited (CIC) and World Marine and General Insurances Limited (WMG).

HIH wrote many types of insurance in Australia, the USA, and the UK. In Australia, this includes compulsory insurance (such as workers' compensation and compulsory third party motor vehicle) and non-compulsory insurance (such as home contents and travel insurance).

According to the HIH 2000 Annual Report the company had gross premium revenue of $2.8 billion, total assets of $8.0 billion, total liabilities of $7.1 billion, with net assets of $900 million.

Affected Parties

Shareholders of HIH are likely to incur significant losses on their investment, perhaps their entire capital.

Immediately following the collapse of HIH, numerous reports appeared in the press about HIH policyholders not having their insurance contracts honored and their claims not paid. This section discusses how different policyholders were affected immediately after the collapse.

Prior to and after the collapse of HIH, a substantial number of policyholders with particular types of insurance had their policies taken over and honored by other insurers. The following sections:

* Explain which policyholders have had their policies taken over by other companies

* Identifies those policyholders with HIH and its subsidiaries that were at risk of suffering financial loss by not having their insurance contracts honored and claims paid, and

* Identifies policyholders that may need to take out new insurance cover

HIH collapse - breach of directors' duties - case note on ASIC v Adler [2002]

In ASIC V Adler [2002]; ASIC sought declarations against three directors of HIH Insurance Ltd (HIH). It was due to the fact that HIH had breached the directors duties contained in the Corporations Act 2001. ASIC also sought declarations that the three directors were liable as persons involved in HIH's insurance and its subsidiary HIH Casualty LTD's (HIHC) contraventions of the Corporations Act. ASIC also sought various civil penalty orders under the Corporations ACT 2001 against each director.

Facts

On 15 June 2000 a cheque for $10 million was paid by HIHC to Pacific Eagle Equity Pty Ltd (PEE) controlled by Mr. Adler. ASIC alleged that the payment was made at the instigation of Mr. Adler (a non-executive director and substantial shareholder of HIH) with the agreement and under the direction of Mr. Williams and with the assistance of Mr. Fodera (who were both executive directors of HIH). PEE subsequently became trustee of Australian Equities Unit Trust (AEUT). Control of AEUT was vested in Adler Corporation Pty Ltd (Adler Corporation) with two others. Subsequently, $10 million worth of units in AEUT were issued to HIHC which gave HIHC an entitlement to receive ninety percent of AEUT's distributable income. ASIC alleged that at the instigation of Mr. Adler, $3,991.856.21 (sourced from the $10 million payment by HIHC to PEE) was used by AEUT in the purchase of HIH shares on the stock market. ASIC alleged that the stock market was led to believe by Mr. Adler that the purchases of shares in HIH were made by Mr. Adler or family interests associated with Mr. Adler (as distinct from AEUT or HIH) in order to shore up the HIH share price. The HIH shares were subsequently sold by AEUT at a loss of $2,121,261.11. ASIC alleged that $3,859,750 (sourced from the $10 million payment described above) was used by AEUT to purchase at cost from Adler Corporation various venture capital unlisted investments (which had capital raising difficulties and questionable viability). ASIC alleged that the purchases of the unlisted investments were made without any independent analysis of the worth of those investments. AEUT subsequently suffered a loss on these investments of $3,859,750. ASIC alleged that $2,084,345 (sourced from the $10 million payment described above) was used by AEUT to make unsecured loans to corporations or funds associated with Adler Corporation or Mr. Adler. ASIC alleged that the unsecured loans were to the advantage of Adler Corporation or Mr. Adler and to the disadvantage of AEUT. ASIC alleged that Mr. Adler, Mr. Williams and Mr. Fodera failed to bring the $10 million payment by HIHC to PEE and the subsequent investments described above to the attention of the Board of HIH or HIH's Investment Committee so that neither body approved or authorised the relevant payment or investments as required by HIH's Investment Guidelines.

Directors' duties under the Corporations