On 4th Dec 2013 the High Court of Australia upheld the purported power of the liquidator of the landlord company (Willmott Forests Limited (in receivership and liquidation)) to disclaim the leases granted by the company and that the result was to extinguish tenant's estate in the land. This meant that the liquidator of the lessor company could sell the land, including the forests planted and owned by the tenant, free of the estate of the tenant in the land and the trees, and leaving the tenants with an unsecured claim on the insolvent company for the losses resulting.
Yesterday (23rd Dec 2013), the Supreme Court of New Zealand ruled in BFSL 2007 Ltd v Steingrad  NZSC 156, that insureds and insurers could not pay defence costs covered under liability indemnity insurance contracts safely and securely because the insurer could become liable to pay these amounts additionally and on top of the total liability limit of the policy of insurance.
The decision in Willmott means that tenants have no security of tenure in Australia whatsoever, their estates and interests in the land they have leased can be extinguished as a matter of routine on the insolvency of the corporate landlord for the commercial advantage of other parties. This means any lease with a rent that is below market rent could be disclaimed, leaving the tenant to increase the rent to market rent. The insolvent landlord can thereby effectively confiscate any improvements made by the tenant, make the tenant pay again for future use of the land it has already paid for and/or use the threat of eviction to jack the rent up or otherwise renegotiate the bargain to whatever the tenant can be made to pay using this form of unconscionable leverage.
If there is a case where a tenant could lose its estate in the land with more inequitable consequences, it would be hard to imagine. The tenants had paid for 25 year leases entirely up front, and had paid for the land to be planted with trees, in the understanding that their leasehold interests in the land and the trees would be legally protected and that practically nothing could deprive them of the right to the benefits of the harvested trees when they were ready to harvest within the life time of their lease of the land. The liquidator has now disposed of the land on the basis that the leases are extinguished, leaving the buyers with the rights to harvest the tenant's trees without paying the tenants who planted the trees anything whatsoever. The proceeds of the sale of the land and the trees go into the general corporate estate for the payment of creditors according to their security interests, with the tenants entitled to compensation as unsecured creditors of the insolvent landlord (i.e. fat chance of recovering anything).
The decision in BFSL 2007 Ltd v Steingrad  NZSC 156 is likely to have fairly modest impact because the insurance market has responded to the confusion this case has generated by redrafting insurance contracts to operate as they had always intended them to operate, however that such actions have become necessary is of concern. I briefly explain and analyse the issue below.
The Law Reform Act 1936 provides a statutory charge over 'all insurance moneys that are or may become payable in respect of that liability' in favour of the person the insured is liable to pay damages or compensation and that the insurer indemnifies the insured for.
Somehow, the majority of judges of the Supreme Court of New Zealand do not understand the nature of a charge or security interest in the modern parlance. A security interest is a claim over property to use it or its proceeds to pay a liability. Necessarily the security interest is separate from the property it attaches to. If the property the security attaches to realises less than the security, the property and its new owner is not then liable for any shortfall, rather the new owner takes the property free of the security interest that was realised.
In this case the property the security interest attaches to is the 'all insurance moneys that are or may become payable in respect of that liability' (emphasis added). This necessarily excludes all insurance moneys under the insurance contract that are paid or payable in respect of other benefits under the policy such as defence costs. So whatever is paid out or payable out of the policy that is for the insured's liability for damages or compensation to the judgement or settlement agreement creditor is the property the security interest attaches to. This money can then go safely from the insurer to the insured's judgement or settlement agreement creditor: to the extent it becomes part of the insured's estate, the judgment or settlement agreement creditor can still get this ahead of the insured's other creditors since this security interest ranks ahead of all others.
However the majority of judges of the Supreme Court of New Zealand think that the security interest attaches to 'all insurance moneys that are or may become payable in respect of that
They are also very confused about the effect of security interests. They seem to think that if person A's claim on person B is security for A's liability to person C, that person C could potentially recover more from person B than person B owed person A. For example, suppose person A owes person C $1 million, and person B owes person A $100,000. Suppose that C has a legal right to realise the security interest by making B liable to C. Although the security interest secures a debt of $1 million, the security can only realise the value of the property that the security attaches to, namely the debt of $100,000. Payment of $100,000 from B to C exhausts the property the security interest attaches to, and B's liability to C is fully discharged.
Even though Sec 9 (4) allows the secured party to proceed and recover against the insurer directly, the realisation of security interests over debts can never realise or recover from the debtor's debtor more than the other debtor owes the debtor under the debts that the security interest attaches to. Neither can the secured party recover more than the amount secured. Sec 9 (4) only refers to the secured amount as a limit, but in reality both limits go without saying! Somehow the majority of the judges of the Supreme Court of New Zealand think the subsection reads:
Somehow they think that the subsection does something other than realise a security interest limited to the realisable amount of the collateral the security interest attaches to, they think it makes the insurer fully liable for the liability of the insured (note that the 'extent of the charge' is the 'amount of his [the insured's] liability' refer subsection (1)).
Subsection (7) is also apparently redundant, although the majority of judges on the Supreme Court of New Zealand appear to think it vitally necessary to limit the liability they think is being imposed on the insurer by subsection (4).
The intention and effect of section 9 is that the compensation and damages payments of insurance contracts can be protected and can be beneficially enjoyed by the persons the insured is liable to pay compensation or damages to. This was ever and is only ever relevant when the solvency of the insured is in doubt, and the other creditors of the insured could otherwise take security over the compensation or damages payments or share in them. There is no requirement to hold sufficient liability cover to pay all liabilities in full, nor is there anything restricting limits or other benefits or payments from insurance policies that also indemnify the insured against liabilities to pay damages or compensation.
There is really only one situation where the section would have the effect of restricting the payments under the insurance policy and that is where there are multiple compensation or damages claims that the insurer has notice of pursuant to subsection (6), and the ones that have the earlier dates of cause of action are yet to be determined, or where multiple compensation or damages claims have the same date of cause of action and any of them are not yet determined, all because of the ranking rules of subsection (3). All other benefits, including defence costs claims, can be administered and paid safely by the insurer. At least they could until yesterday: unless your insurance contract has been restructured or updated to get around this needless issue you better hope there are no claims to defend and no other benefits to pay.
Why complain about the performance of the Royal courts? There is a better alternative: rather than a rational hierarchy of royal courts with compulsory jurisdiction and avoidance of overlapping jurisdiction, which is an instrument of imposition of Royal power on subjects, we can have free choice of tribunals and competition, a society where dispute resolution does not have a single source of authoritative answers. Such a tribunal market implies a customary law system, where custom rather than binding precedents or legislation provides the definition and content of our laws. Such a legal system can produce much better dispute resolution services and much better legal security so that our institutions can't be turned upside down by a panel of people deciding that damages and compensation creditors can suddenly jump ahead of others because they need a boost. These decisions also show that the rule of law is indeed a myth.