Australia’s top firms get to grips with HIH inquiry

Like a ball of string, failed Australian giant HIH Insurance is slowly being unravelled by a royal commission that is unrivalled in Australian legal history for its scope and the number of players involved

There are enough silks – at least 17 – at the inquiry to make a parachute and more than double that number in other senior counsel. Most of the top-drawer Australian law firms have had a large role to play. Baker & McKenzie is acting for HIH auditor Arthur Andersen, which has again found itself at the centre of a controversial corporate collapse with a question mark over the diligence of its audits, and Corrs Chambers Westgarth, which is representing the Australian Prudential Regulatory Authority (APRA).
It seemed that when HIH collapsed in March last year, leaving close to A$5bn (£1.83bn) in debts, the only parties that did not see it coming were the auditor, which signed off on an annual report showing assets of nearly A$1bn (£366m) only nine months previously, and APRA, which seemed oblivious to the litany of bad news about HIH in the financial press throughout the year preceding the collapse.
Other firms playing key roles in the drama are: Blake Dawson Waldron, acting for liquidator KPMG; Arnold Bloch Leibler, a firm renowned for its ability in defending high-profile corporate prosecutions, acting for HIH chief executive Ray Williams; Clayton Utz, acting for the Australian Securities and Investments Commission; Gilbert + Tobin, acting for flamboyant former chief executive of FAI (an insurance company owned by HIH) and HIH director Rodney Adler; Freehills, acting for HIH chairman and Arthur Andersen partner Geoffrey Cohen; Phillips Fox, acting for four FAI directors and the Insurance Council of Australia; Adelaide firm Piper Alderman for HIH general counsel Robert Stitt QC and HIH director Percy Abbott; and Sydney firm Abbott Tout, acting for the Commonwealth Government.
The list of firms would have been even more extensive had Justice Owen not applied the razor to parties with an interest in HIH but no direct participation in the circumstances surrounding its collapse, such as shareholder groups.
HIH’s coverage in the Australian insurance sector was so extensive that there were few Australian firms not to have handled some work for HIH or FAI. As a result, the plum role of assisting the royal commission and the Australian government solicitors went to a dark horse – Adelaide litigation and insolvency specialist Fisher Jeffries. Fisher Jeffries cut its teeth in one of Australia’s other largest corporate collapses, the Duke group of companies.
There was a host of questions to be answered about who knew what and when about HIH, but Justice Owen and his three counsel assisting – Wayne Martin QC, Richard White SC and Norman O’Bryan SC – stated from the outset that they were not interested in a witch hunt. They chose to unravel first the area unfamiliar to most outside the insurance community – reinsurance.
David Lombe, a partner from Deloitte Touche Tomhatsu, was appointed by APRA to report on the HIH collapse. Soon after the commission’s commencement in December last year, Lombe reported that the causes of the collapse were to do with the UK and US arms of HIH, the price paid by HIH in 1999 for FAI, and HIH’s policy of chasing risky insurance lines. The Lombe Report also showed that HIH had greatly overvalued its assets in June 2000 by close to A$1.1bn (£403m). The group’s total net assets available for solvency purposes were also nearly A$155m (£56.787) below the minimum solvency requirements under Australian law.
But as the commission recommenced its hearings in 2002, it became clear that it was more intent on picking away at reinsurance than inquiring into these discrepancies or HIH’s famed willingness to cover risky insurance lines.
With Australia’s two largest law firms – Mallesons Stephen Jaques and Allens Arthur Robinson – representing two large global reinsurance players – Hannover Re and General Cologne Re respectively – the importance of this sector is apparent. Until the inquiry’s commencement, these two firms were conspicuous in their absence from the legal scrum surrounding the HIH players.
In the year preceding its collapse, HIH faced accusations saying that it did not have the funds to cover future claims. The company said that instead of having a healthy prudential buffer in the same way as other Australian insurance companies, it laid off most of its risk via reinsurance. But one of the commission’s first revelations was that some of HIH’s and FAI’s reinsurance deals were just shams to cover up the gaping holes in their accounts.
The inquiry heard that in the year leading up to its purchase by HIH, FAI struck reinsurance deals with side letters. These cancelled out the risk for the reinsurer via an undertaking from FAI that they would not make a claim under the deal. These reinsurance contracts were counted as assets of the company, but their true nature, and therefore the true financial position of the company, was kept from the auditors.
But while the commission has initially focused on the reinsurance shams, many questions remain about the real reinsurance deals struck by HIH.
In the lead-up to the inquiry, those involved with the collapse were quietly bemused by the deference shown by liquidator Tony McGrath to HIH’s reinsurers, and his unwillingness to pursue them. In one case heard in the New South Wales Supreme Court before Justice Hunter, McGrath raised the hackles of the court when he sought to suppress the names of HIH’s reinsurers and prevent leave being obtained to proceed against the reinsurers. He said that this was on the basis that he accepted on face value a denial of liability by those reinsurers.
But Justice Hunter said: “If one may take notice of the considerable publicity surrounding the collapse of the HIH group, it is evident that there is hardship being experienced in the broad community. It would be an extremely unfortunate situation if reinsurers sought to take advantage of that financial distress to decline liability.”
Given these denials by the reinsurers and the course of the HIH commission so far, the details of these reinsurance deals should make good reading.