Collapsed Australian insurance company HIH is preparing to sue Lloyd's managing agent Limit over alleged unpaid reinsurance contracts.

The Supreme Court in Sydney has ruled that HIH can take legal action against Limit Syndicate 386 for an estima-ted £21.8m (A$54m).

At the heart of the case is whether HIH should have paid out its own insurance clients before it was entitled to be reimbursed by the Lloyd's syndicate.

Judge Justice Clifford Einstein rejected Limit's application for a stay in pro-ceedings and its argument that the case should go to the international court of arbi-tration.

He said it should proceed because its eventual outcome could affect the recovery of uncollected amounts from other reinsurers, estimated at more than A$210m.

The court heard that in total, HIH could recover a pos-sible A$650m from reinsurers.

If the failed insurer success-fully sues Syndicate 386, one of the joint liquidators for HIH, the decision could set a precedent for future insuran-ce company insolvencies.

Limit, which is a wholly-owned subsidiary of QBE Insurance Group, said it could not comment on ongoing legal proceedings.