Damian,
My understanding is that the distributor casing is electrically connected to the crankcase by virtue of its mounting plate. The crankcase is then 'earthed' to the car body with a broad copper strap.
The distributor will work even if it is completely insulated. All it is doing is interrupting a primary circuit through the opening and closing of the points. The collapsing primary field induces current in the high voltage circuit which is then distributed to the appropriate cylinder to fire the spark plug at the correct point in the timing cycle. The only bit that needs grounding is the condenser casing and it is only there in the first place to protect the points from arcing.
Each metal casing on the car should be at the same electrical 'earth' potential to minimise the risk of sparks and fire. This is why straps are used to connect parts that are insulated from each other - eg: engines and carburettors isolated on rubber mounts.
Chris