Application of Advance Life Insurance Ltd (ACN 003 182 670) & Anor [1997] FCA 83 (18 February 1997)

CATCHWORDS

LIFE INSURANCE - transfer of life insurance business from one life insurance company to another - application to Court for confirmation of scheme - discussion of relevant statutory provisions and of circumstances of instant case - important public functions of Insurance and Superannuation Commissioner and of Court emphasised.

Life Insurance Act 1995 , ss 3, 7, 8, 29, 190, 191, 192, 193, 194 and 195, and the Schedule.

Insurance and Superannuation Commissioner Act 1987 , s.4.

The Application of Advance Life Insurance Limited

(ACN 003 182 670) & Anor

No. NG 987 of 1996

CORAM: SHEPPARD J

PLACE: SYDNEY

DATE: 18 FEBRUARY 1997

IN THE FEDERAL COURT OF AUSTRALIA )

)

NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 987 of 1996

)

GENERAL DIVISION )

LIFE INSURANCE ACT 1995 (Cth)

THE APPLICATION OF ADVANCE LIFE INSURANCE LIMITED

(ACN 003 182 670)

and

TOWER LIFE AUSTRALIA LIMITED

(ACN 050 109 450)

MINUTES OF ORDER

CORAM: SHEPPARD J

PLACE: SYDNEY

DATE: 18 FEBRUARY 1997

THE COURT ORDERS THAT:

1. The Scheme for the transfer of the life insurance business of Advance Life Australia Limited to Tower Life Australia Limited, which is in the form of the document annexed to these orders, be confirmed, pursuant to section 194 of the Life Insurance Act 1995 (Cth).

2. The costs of the Insurance and Superannuation Commissioner in these proceedings be assessed or if assessment cannot be agreed upon that those costs be taxed and when so taxed be paid by the Applicants to the Insurance and Superannuation Commissioner or to his solicitor.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA )

)

NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 987 of 1996

)

GENERAL DIVISION )

LIFE INSURANCE ACT 1995 (Cth)

THE APPLICATION OF ADVANCE LIFE INSURANCE LIMITED

(ACN 003 182 670)

and

TOWER LIFE AUSTRALIA LIMITED

(ACN 050 109 450)

CORAM: SHEPPARD J

PLACE: SYDNEY

DATE: 18 FEBRUARY 1997

REASONS FOR JUDGMENT

HIS HONOUR: By their application in this matter, Advance Life Insurance Limited and Tower Life Australia Limited seek an order pursuant to s.193 of the Life Insurance Act 1995 ("the Act") that the scheme which is substantially in the form of a document which is annexed to an affidavit of Mr Martin and Mr Clemans for the transfer of the life insurance business of Advance Life Insurance Limited to Tower Life Australia Limited be confirmed.

Section 193 of the Act is to be found in Part 9 thereof. Part 9 deals with transfers and amalgamations of life insurance business. Section 190 of the Act provides that no part of the life insurance business of a life company may be transferred to another life company or amalgamated with the business of another life company except under a scheme confirmed by the court. A scheme must set out the terms of the agreement or deed under which the proposed transfer or amalgamation is to be carried out and particulars of any other arrangements necessary to give effect to it. The Court referred to is the Federal Court of Australia; s.8 of the Act and the dictionary contained in the Schedule thereto.

By s.191, an application for confirmation of a scheme may not be made unless a copy of the scheme and any actuarial report on which the scheme is based have been given to the Insurance and Superannuation Commissioner in accordance with the regulations. The Insurance and Superannuation Commissioner is appointed pursuant to the Insurance and Superannuation Commissioner Act 1987 , s.4. It will later be seen that there was correspondence with a body called the Insurance and Superannuation Commission. I was not referred to any statute providing for the constitution of such a body and I have found none. So far as I can tell, the Commission exists as a matter of administrative convenience. Nothing, however, turns on this.

Notice of intention to make the application has been published by the applicant in accordance with the regulations and an approved summary of the scheme has been given to every affected policyholder of Advance Life. Subsection 191(5) enables that last provision to be dispensed with in an appropriate case. It was dispensed with in part in the present case in relation to the policyholders of Tower Life Australia by order of this Court made on 22 January 1997.

Section 192 of the Act provides that, when a copy of a scheme has been given to the Commissioner for the purpose of para. 191(2)(a), the Commissioner may arrange for an independent actuary to make a written report on the scheme. The Commissioner did not see fit to do that in this case. That is a matter which I regard as significant. I shall say more about it in a moment.

Section 193, the section pursuant to which this application is made, provides that any of the companies affected by a scheme may apply to the Court for confirmation of the scheme. An application for confirmation must be made in accordance with the regulations and the Commissioner is entitled to be heard. The Commissioner has been represented throughout this hearing.

By s.194, the Court may confirm a scheme without modification or confirm the scheme subject to such modifications as it thinks appropriate. It may of course refuse to confirm the scheme. Section 195 deals with the effect of a confirmation. It provides that, when a scheme is confirmed it becomes binding on all persons. It has effect in spite of anything in the articles of association of any company affected by it. The company on whose application the scheme was confirmed must cause a copy of the scheme to be lodged at an office of the Australian Securities Commission in every State and Territory in which a company affected by the scheme carried on business.

The object of the Act is stated in s.3 which provides that the object of the Act is to protect the interests of the owners and prospective owners of life insurance policies in a manner consistent with the continued development of a viable, competitive and innovative life insurance industry. The Act is thus intended to protect the interests of policyholders. That is one of its principal purposes. It must be the principal concern of a court dealing with an application such as this. The Court's role is an important and responsible one. Care must be taken so far as it can be to endeavour to see that the scheme will protect the interests of policyholders so that they will be properly safeguarded.

The facts of the matter may be briefly stated. On 21 November 1996, an agreement was entered into between Advance Life Insurance Limited, which was described as the vendor, Advance Bank Australia Limited, which was described as Advance, and Tower Life Australia Limited, which was described as the purchaser. By clause 2 of the agreement, the vendor, that is Advance Life, agreed to sell and the purchaser, that is Tower, agreed to purchase the property which is defined in the agreement to mean "all the vendor's", that is to say Advance Life's, rights, title and interest under the contracts of insurance, including the goodwill owned by it in the life insurance business represented by the contracts, i.e. the policies referred to in clause 1.1 of the agreement.

The agreement was to have effect on and from a date described as "the effective date" which has the meaning given to it in the scheme which has been proposed. Clause 2.2 provided that by virtue of the scheme Tower is to assume on and from the effective date all liabilities of Advance Life referable to the contracts of insurance.

Clause 2.3 provides that the "underlying assets" must be transferred to Tower Life on completion free from any mortgage, charge, lien, pledge or other encumbrance by Advance Life. The underlying assets are a reference to assets of the number 2 and number 3 statutory funds of Advance Life, sufficient in value to support the liabilities under the contracts of insurance on the basis set out in the actuarial report which is to be referred to. Statutory funds are provided for in s.29 of the Act. It is there provided that a statutory fund is a fund that is established in the records of a life company and relates solely to the life insurance business of the company or a particular part of that business. Detailed requirements in relation to statutory funds are provided for in succeeding sections. I do not find it necessary to refer to the detail of these.

The scheme, confirmation of which is sought, has undergone some amendment, although not significant amendment, since it was first proposed in the application which has been made. The final form of it is annexed to short minutes of order which have been handed to me, they being the orders which I am asked to make in this application. The scheme is expressed to be a scheme under Part 9 of the Act, for the transfer of the remaining life insurance business carried on by Advance Life to Tower. Reference is made to a joint report on the scheme which has been prepared by an actuary appointed by Tower, Mr Clemans, and an actuary appointed by Advance Life, Mr Martin.

In background information, the scheme says that Tower is a life insurance company incorporated in New South Wales, registered under the Act. As at September 1996 it had assets of approximately $1,450,000,000. It is part of the Tower Group of Companies, of which the ultimate holding company is Tower Corporation, a mutual life insurance company in New Zealand. Advance Life is a life insurance company, also incorporated in New South Wales, and registered under the Act to carry on life insurance business. It is part of a group of companies known as the Advance Bank group.

The scheme says in clause 2.4 that the life insurance business to be transferred is all of Advance Life's remaining business and is held in its statutory funds the detail of which is provided. Clause 3 provides that the transfer is to take effect at 12 a.m. (sic), Sydney time, or such other time as the Court determines on Wednesday, 19 February 1997, that is tomorrow, or such other date as the Court determines, described as "the effective date". That is the date referred to in clause 2 of the agreement. There are detailed provisions in clause 4 about the transfer of the life insurance business to Tower, and more detailed provisions about the management of certain scheme policies, and other provisions to which I need not refer.

Clause 7 provides for a joint report on the scheme by the two actuaries to whom I have referred. It is said, amongst other things, that the actuaries conclude that the Advance Life Scheme policy holders have been protected and that the transfer is in their general interests. The actuaries are also said to be satisfied that the rights and benefits of Tower policy-owners will not be affected. The report to which I have referred is annexed firstly to an affidavit sworn by Mr Martin and Mr Clemans jointly on 16 December 1996. Because the report underwent some amendment, a further affidavit annexing a copy of the amended report was filed; that affidavit was sworn on 13 February 1997.

In their first affidavit Mr Martin and Mr Clemans say that each is a Fellow of the Institute of Actuaries of Australia and is duly qualified to practise as an actuary. Upon instructions of Advance Life and Tower they jointly prepared a report "for" the scheme; the original report is annexed to the affidavit. Their opinion, expressed in paragraph 5 of their affidavit was:

"On balance we conclude that the reasonable benefit expectations of the Advance Life Scheme policy-owners have been protected, and that the transfer is in their general interests. We are also satisfied that the rights and benefits of Tower policy-owners will not be affected."

The report is detailed and it is not necessary to refer to it fully. There is background information given in part 2 of it; that is in accordance with the background information to which I have referred. Reasons for the merger are dealt with in section 3 where it is said that Advance Life is seeking to make the transfer for a number of reasons, namely:

"(a) The financial services division of Advance Bank wishes to rationalise its business so that it can focus on its core products where it enjoys a competitive advantage, with the objective of enhancing the longer term profitability of the division. As the life insurance business of Advance Life does not form part of this core product range, Advance Bank is looking to divest itself of this business.

(b) At the time of this report the Advance Life Scheme Policy Owners represent the only remaining life insurance portfolio of Advance Life. All other portfolios have terminated.

(c) The transfer of the Advance Life Scheme Policies to [Tower] enables Advance Bank to realise its capital investment in Advance Life and provides an appropriate means for meeting the ongoing benefit and security expectations of these remaining Advance Life Scheme Policy Owners."

On page 15 of the report, the two actuaries deal in detail with the effect on Advance Life scheme policy-owners, and at pages 16 and 17 with its effects on Tower policy-owners. Their conclusions are stated in the summary in section 13 of the report and also in section 14. I do not refer to the entirety of the summary but amongst other things it is said that the costs of the transfer of assets are to be borne by the shareholders of the two life companies and will not be a charge on policy-owners. A guarantee that the policy charges will not be increased will be maintained. The report adds there will be no meaningful changes in policy conditions other than those which are mentioned. These are not of significance.

It is then said that the transfer to Tower will allow Advance Life assets to be part of larger overall statutory funds, with an improvement in investment security, stability and possibly investment performance. The benefit expectations of Tower scheme policy-owners are said not to be adversely affected and it is said that the appointed actuary of Tower, that being Mr Clemans, is of opinion that the amount of the purchase price paid by Tower will be available to be regarded as an asset in tests of solvency. The transferred assets will enable surplus to be built up to recover the purchase price over approximately five years.

The report concluded:

"We conclude that the benefit expectations of the Advance Life scheme policy-owners will only be marginally affected and that this is much outweighed by the favourable aspects of the transfer, including the improvement and investment stability and the longer term outlook for investments and the range of new investment options that will now be available. Also, the rights and benefits of the Tower policy-owners have not been affected and there is no material change in their security position. Indeed, their security should be enhanced in the future."

I should next refer to some of the provisions of the Life Insurance Regulations. Regulation 9.01 provides that, for the purposes of para. 191(2)(a) of the Act, a copy of the scheme and of each actuarial report on which the scheme is based, must be given to the Commissioner before a notice of intention to apply to the Court for confirmation of the scheme is published in accordance with regulation 9.02. Regulation 9.02 deals with notice of intention to apply for confirmation of a scheme. It requires publication in the Gazette and in newspapers as provided for. I interpolate here to say that I am satisfied that the requirements of that regulation have been met. Regulation 9.02(2) provides that a notice under sub-regulation (1) must state that an affected policy-owner may get a copy of the scheme from a place within the times and for the period set out in sub-regulation (4) and give the address of each place at which a copy of the scheme may be obtained, and the notice must be published before the scheme is released for public inspection. Regulation 9.03 deals with applications for confirmation of schemes. I do not need to refer to the detail of that regulation.

On 6 December 1996, Tower wrote to the Insurance and Superannuation Commission, not the Commissioner, advising it that it wished to purchase the remaining insurance investment portfolios of Advance Life Insurance. It referred to the agreement for sale and said that a scheme of transfer had been drawn up and that Mr Martin and Mr Clemans had drawn up an actuarial report examining the scheme and commenting on its suitability, fairness and security. The letter stated that neither was an employee of the companies but that Mr Martin was associated with Advance Life and Mr Clemans was associated with Tower.

The letter said that the actuaries wished to present the scheme for confirmation by the Court in mid to late January. Enclosed with the letter were a copy of the scheme, a copy of the joint actuarial report of the two actuaries, a proposed notice of intention to make the application, a proposal to advertise in the Gazette, the Australian and the Sydney Morning Herald, and a summary of the scheme. There was some detailed reference to what the scheme involved to which I need not refer.

The letter was replied to by the Commission on 12 December 1996 in a letter which said:

"I refer to your facsimile received on 6 December providing your proposed notice of intention and informing policyholders of the intention to apply to the court for confirmation of a scheme of transfer of life insurance business. I am satisfied that the notice of intention is sufficient to provide reasonable opportunity for all policy-owners to view the notice of intention."

That was not the only communication which was received as a consequence of the letter of 6 December. This emerged in the course of the hearing yesterday when a further letter from the Commission, dated 24 December 1996, was annexed to an affidavit sworn yesterday. A number of matters were raised in relation to the joint actuarial report. I do not need to go to the detail of these, but I should mention that the letter was answered by letter from Tower dated 2 January 1997, apparently to the satisfaction of the Commission.

By facsimile dated 8 January 1997, Tower sent a proposed scheme summary to the Commission. By letter dated 17 January 1997, the Commissioner said that he approved the summary.

As I have mentioned, notice to the policyholders of Tower was dispensed with by an order of this Court but notice had to be given to the Advance Life policy-owners. What happened was that a letter was prepared, dated 20 January 1997, and signed by the National Manager, Policy Administration, of Tower. The letter as I understand the evidence was not shown to the Commission. The letter said:

"You will recall we wrote to you recently to tell you about the transfer of your Advance Rollover Annuity/Bond to Tower Life Australia Limited (Tower Life).

The Insurance and Superannuation Commission has approved the Scheme of Arrangement for this to take place and the Scheme will be presented to the Federal Court for confirmation in early February.

To assist you in understanding the Scheme a summary is enclosed. This summary, although technical in nature, spells out the key features of the Scheme. Please take a few minutes to read the summary and, if you have any questions, please contact our Customer Services Centre, Toll- free, on 1800 226 364. If you have questions regarding your policy, please continue to contact Advance on 1800 819 935 until we confirm the Federal Court Approval.

If you would like to review the Scheme document itself, it is available for inspection at the addresses listed at the end of the summary.

Upon approval it will be necessary to change your policy number. In our next correspondence we will advise of your new policy number and any administration procedures you need to know.

Please place this letter with your policy document as a reminder of the change."

With the letter was the summary which has been referred to. Towards the end of the summary in para. 18, was a statement that any person who in the Court's opinion was likely to be affected by the scheme was entitled to be heard by the Court on the application for the scheme's confirmation. Any person who wished to appear before the Court was requested to advise Phillips Fox as soon as possible. It was said that Phillips Fox would also be able to advise as to the date set for Tower's application. Phillips Fox are the solicitors for Tower.

I raised yesterday the undesirability of including a notice of that kind at the end of a document which although consisting of only four pages, is complex, especially to people who may not be well educated or well versed in financial affairs. It seems to me that if that statement was to be made, as indeed it should have been, it should have been included in the letter itself so that it would have appeared prominently to enable policyholders to understand that if they were troubled about the matter they could come to the Court. They were given that notice but how many of them would have read it in the place in which it is to be found I do not know. I think that is an unfortunate aspect of the matter. I do not propose to say any more about it except that I think in future care should be taken to see that notices of that kind appear in a prominent place in the documentation which is sent to policyholders.

There is a more serious problem arising on the face of the letter of 20 January. It is the statement in it that the Insurance and Superannuation Commission has approved the scheme of arrangement. There is a question about the correctness of that statement. The Commissioner approved the form of the summary but there is nothing in any document emanating from him or from the Commission which says that the scheme itself was approved. The matter is important because the statement about approval appears prominently in the letter which was the first document which a policyholder receiving the documents would read. If the Commissioner had approved the scheme, it would be important for policyholders to know this. It would provide them with reassurance and, appearing as it does in the second paragraph of the letter, it would tend to give readers the impression that the matter was a foregone conclusion. The statement has a tendency to lead readers to conclude that the Commissioner had pre-empted matters so that the application to the Court was no more than a formality.

There is no provision in the Act or the regulations providing for the approval of the Commissioner or the Commission of a scheme of arrangement. It is something which is not dealt with no doubt for the reason that approval is a matter to be considered by the Federal Court when it comes to consider whether or not a scheme should be confirmed. I asked to be provided with evidence of the approval. There is no document in writing evidencing it; no production of any minute of the Commission; or any other record; and certainly no letter or communication in writing to Tower about the matter. However Ms Vamos, who has sworn a number of affidavits in this matter, swore a further affidavit yesterday in which she referred to the facsimile received from the Commission on 24 December 1996. She said that, on receipt of this facsimile, she telephoned the Commission and spoke with Mr Tony Jellic, to whom she said words to the following effect:

"We have received your facsimile. It only mentions the joint actuarial report and the scheme summary document. I assume therefore that the Commission is prepared to approve the scheme."

Mr Jellic is said to have replied:

"That is correct. The Commission approves the scheme."

That is apparently the basis for the statement in the letter. Mr Jellic has not given evidence and Ms Vamos has not been cross- examined; so apparently the Commissioner and the Commission were satisfied that the approval which is referred to was granted.

On the basis that there is no other evidence apart from that of Ms Vamos, and no cross-examination of her, I find that the Commission did approve it, because that is the only evidence I have. There was a statement made yesterday on behalf of the Commission which suggested that Mr Jellic had no recollection of such a conversation but he has not come here to tell me that and so I must accept the evidence as it is. I have no other choice. So there is a basis for the statement which is made in the letter. Nevertheless, I am left with a feeling of concern about it simply because it is not a matter provided for in the legislation and it is not something which I would have expected in the circumstances the Commissioner or the Commission to do.

Notwithstanding some misgivings which I have about that matter, I have reached the conclusion that I should confirm the scheme. There are a number of reasons why I take that view. I am satisfied by the actuarial evidence that the scheme will operate in the best interests of the policyholders of Advance Life. I am strengthened in that view by the fact that the Commissioner himself, although he could have placed actuarial evidence before the Court if he had thought it appropriate (see s.192), has decided not to do so. I have assumed that that is because the Commissioner is satisfied with the accuracy of the actuarial evidence which there is. I count that as a very important circumstance because I have relied on the Commissioner to have made an appropriate investigation of the matter. I would have expected him, if he had thought the position otherwise, to have placed evidence before the Court.

Other reasons which have persuaded me to take the course I have foreshadowed are that Advance has terminated its life business. If the policies are not transferred to Tower, the policyholders are likely to become increasingly isolated. Furthermore, they are likely to be advantaged by being part of a larger organisation with increased funds to invest providing opportunities for greater flexibility and diversity. The reserves which are required will be satisfactory and the costs of administration are likely to be less than they would be if the policyholders remained where they are.

It seems to me that all those factors taken together outweigh any anxiety I have concerning the way in which this notice was sent, but I have highlighted the matter because I regard it as important and I wish again to emphasise the care with which these applications need to be looked at, not only by the Court but also by the Commissioner. Both the Commissioner and the Court have important public functions to perform in relation to this matter. That should be understood. The duties to the best of the ability of the two should be properly discharged. I point out, however, that the Court is a court. It conducts its business as a court. It has no power to call its own evidence. It relies on a person such as the Commissioner, especially in the absence of any representation by policyholders, to do his part in protecting them from what might prove, in a different set of circumstances, to be a disadvantageous move.

In all the circumstances therefore I am satisfied that the scheme should be confirmed. I propose to make the orders which were submitted to me in the short minutes and I do so. I make orders in terms of the short minutes of order which I have initialled and dated and placed with the papers.

I certify that this and the seventeen (17) preceding pages are a true copy of the reasons for judgment herein of the Honourable Justice Sheppard.

Associate

Dated: 21 February 1997

APPEARANCES

Counsel for the Applicant: Mr A.J. Meagher SC

Solicitors for the Applicant: Phillips Fox

Solicitor for the Insurance

Superannuation Commission: Ms J. Noonan

Dates of Hearing: 17 February 1997

Place of Hearing: Sydney

Date of Judgment: 18 February 1997