Last week, United Medical Protection became the first Australian company to emerge successfully from provisional liquidation. Francis Wilkins examines the challenges facing the man who kept the insurer aliveDeloitte’s Corporate Reorganisation Group is very proud of David Lombe, partner and, until midnight on 14 November, provisional liquidator of the United Medical Protection Group (UMP). Lombe “has made corporate history,” Deloittes gushed recently, “by being the first provisional liquidator in Australia to successfully restructure and revive a company in provisional liquidation”. Lombe was appointed in May 2002 following the collapse of UMP, which was precipitated by the group’s under-pricing policies, the demise of its reinsurer HIH, and the crisis in the insurance industry worldwide.

UMP insured a majority of Australian practitioners and nearly all doctors in New South Wales, and the group’s collapse led to a crisis in the Australian medical indemnity market. With many practitioners threatening resignation — particularly those in high risk areas of practice such as obstetrics — the Commonwealth Government stepped in with a bail-out package. The states subsequently passed legislation limiting payouts on medical indemnity claims.

After nearly a year and a half’s work as provisional liquidator, Lombe applied to the NSW Supreme Court on 14 October 2003 for the dismissal of the winding up application in relation to UMP and its associated companies, and for the termination of his appointment. Justice Robert Austin, overseeing the case, needed to consider a large number of exceptionally complex circumstances. And as advisers to Lombe’s team, Tress Cocks & Maddox, point out, “There is no express power in the Corporations Act for the Court to make an order terminating the appointment of a provisional liquidator, nor was there a decided case as direct authority.” The UMP case has changed some of that.

In his 10 November 2003 judgement, Justice Austin noted the need to consider how UMP’s circumstances had changed since going into provisional liquidation, as well as the interests of creditors, contributories and the general public. However, he said, it is also “necessary for me to be satisfied not only that the companies are presently solvent, but that there are reasonable grounds for predicting that they will remain so”.

Satisfying the Court that is indeed the case required Lombe and the Deloittes team to meet a succession of challenges, the complexity of which they doubtlessly realised when they entered the fray in May 2002. It is not only UMP’s unprecedented rescue from the brink that will endear the case to corporate historians, but also what had to be done to achieve it.

To begin with, UMP’s collapse played out against — and was in part due to — the insurance crisis precipitated by the events of September 11. The industry was hurting worldwide and so when UMP’s reinsurer HIH went under, shopping around for an overseas reinsurer willing to put its faith in UMP was no easy task. Despite the tightness of the market , however, the team was able to negotiate affordable reinsurance.

The domestic medical indemnity crisis, brought on by UMP’s collapse, not only engaged doctors, the legal profession and state governments in a furious debate but raised the spectre of towns in rural Australia left without key medical services. Fearing they might be unable to obtain affordable insurance, neurosurgeons, obstetricians and others in areas likely to attract legal action were reluctantly beginning to see getting out as their only option. Getting its members to remain loyal to UMP might well have been essential to the insurer’s survival, but under these circumstances that also was no easy task. Once again, however, it was a challenge met, with more than 93% of UMP’s premium pool renewing in 2002, according to Deloitte.

In a separate issue, settlement was achieved in a legal action instigated by a group of doctors who were challenging a financial call that UMP had made on members in 2001.

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What would have been certain to Lombe and others during the provisional liquidation is that if UMP were to survive, it would emerge into a medical indemnity world very different from that from which it had retreated. The crisis prompted reforms at both state and Federal level, and UMP was faced with having to comply quick smart with the Australian Prudential Regulation Authority’s new regulatory framework. In fact, UMP ended up complying with the new regulations earlier than any other medical defence organisation. A succession of major corporate collapses had by this time focused attention on the need for good corporate governance and this, along with sound risk management programs, also needed to be high on the to do list.

The Commonwealth Government’s support was crucial and Lombe was able to negotiate the removal from the group’s balance sheet of $460 million in liabilities for claims incurred but not reported. Deeds of indemnity which allowed UMP to continue trading were negotiated although, according to Deloitte, “not one cent of the Commonwealth Government’s deeds of indemnity was drawn upon due to the efficient financial management of the group during provisional liquidation”.

Even with this support, trading under provisional liquidation required UMP to obtain Supreme Court approval for every action taken by Lombe, making it what Deloitte calls one of the “most restrictive” forms of insolvency administration.

The UMP Group emerges from the first successful restructure of a company in provisional liquidation with net assets of $78.9 million and — more importantly — the confidence of the Court that those assets will cover the company’s debts. One member of the group, Australasian Medical Insurance Ltd, has not yet reached APRA-prescribed minimum capital requirements, although according to Deloitte, the company is “well on track” to meet the 2008 transitional deadline for medical indemnity insurers.

“Sadly, it is uncommon for a company doctor to cure a patient so seriously ill as this one was in May 2002,” a clearly impressed Justice Austin said in his judgement. “Mr Lombe and his team appear to have beaten the odds.”

Last words should probably go to David Lombe himself, who believes a provisional liquidator has to have the right approach and attitude if they are to be successful. “If you come to the job with the mindset that you’re not looking to close down the company, it gives you the opportunity to work towards [reviving it],” he said. “You need to be inventive — don’t have a death wish and say, ‘Oh, let’s put it into liquidation’.”

Lombe believes while UMP has shown that the right team can snatch a company back from the brink — which itself sends an optimistic message to an uncertain market — the case does have broader implications.

“It’s a most significant decision,” he said. “It’s creating Australian law in the way the company was allowed to trade in provisional liquidation. . . There’s a lot of new law that’s been set here.”