FEDERAL COURT OF AUSTRALIA

Hedge, as Administrator of Goldfields Medical Fund Inc (No 2) [2002] FCA 1498

SOCIAL SECURITY – national health legislation – registered organisation – medical health insurance fund – administration – scheme of arrangement – merger – jurisdiction and powers of Court – orders giving effect to proposed course of action by administrator – implementation of scheme – relevant criteria for making orders – whether adequate notice – interests of contributors – interests of creditors and employees – public interest – competition effects – proposed application to scheme administration of s 1321 of Corporations Act providing for review of administrator decisions – jurisdictional provision – not able to be applied by court order to administration under the National Health Act 1953 – ancillary orders providing for review of administrator’s decisions – orders made under jurisdiction conferred by s 82ZE of National Health Act and s 39B(1A) of Judiciary Act 1903

COURTS – federal jurisdiction – judicial power – matter – orders giving effect to proposed course of action by administrator – implementation of scheme of arrangement – merger of medical health insurance funds – whether valid subject of federal jurisdiction – analogous to long established subjects of judicial power – ancillary orders – review of administrator’s decisions – source of jurisdiction - inappropriateness of purporting to apply by order jurisdictional provisions of Corporations Act not applicable to National Health Act.

National Heath Act 1953 (Cth) s 73BCC, s 82XB, s 82XZC(7), s 82 XZC(8), s 82XZE

Corporations Act 2001 (Cth) s 447A(1)

Judiciary Act 1903 (Cth) s 39B(1A)

Minister for Health (Cth) v Trustees of the Ancient Order of Foresters Friendly Society in Queensland (1985) 10 FCR 27 cited

R v Davison (1954) 90 CLR 353 cited

Huddart Parker & Co Pty Ltd v Mooreheard (1909) 8 CLR 330 cited

Federal Commissioner of Taxation v Munro (1926) 38 CLR 153 cited

R v Trade Practices Tribunal; Ex parte Tasmanian Breweries Pty Ltd (1970) 123 CLR 361 cited

R v Quinn; Ex parte Consolidated Foods Corp (1977) 138 CLR 1 cited

Pasini v United Mexican States (2001) 187 ALR 409 cited

Truth About Motorways Pty Ltd v Macquarie Infrastructure Investment Management Ltd (1999) 200 CLR 591 cited

Connolly v Connolly (1966) 115 CLR 166 cited

Attorney-General (Commonwealth) v Schmidt (1961) 105 CLR 361 cited

Secretary, Department of Health and Community Services v JWB and SMB (Marion’s case) (1992) 175 CLR 218 cited

PETER HEDGE in his capacity as Administrator of the Goldfields Medical Fund Incorporated (Administrator Appointed)

W288 of 2002

FRENCH J

29 NOVEMBER 2002

PERTH

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	W288 OF 2002

BETWEEN:	PETER HEDGE in his capacity as Administrator of the Goldfields Medical Fund Incorporated (Administrator Appointed) Applicant

JUDGE:	FRENCH J
DATE OF ORDER:	29 NOVEMBER 2002
WHERE MADE:	PERTH

THE COURT ORDERS THAT:

1. Pursuant to s 82XZE of the National Health Act 1953 (the “Act”), the scheme of arrangement set out in the Scheme of Arrangement Deed between Healthguard Health Benefits Fund Limited, Goldfields Medical Fund Incorporated (Administrator Appointed) (“GMF”) and the Applicant dated 2 October 2002 as amended by the Amendment Deed dated 21 November 2002 (together called the “Deed”) be given effect to in accordance with the terms of the Deed.

2. Pursuant to s 447A of the Corporations Act (as applied by s 82XB of the Act), the operation of s 82XZJ(3)(e) of the Act be varied and Part VIA of the Act operate so that, notwithstanding the order in paragraph 1, the administration of GMF end on the earlier of:

(a) when the Applicant has completed all his obligations under cl 13 of the Deed; or

(b) 6 months from the date of this order.

3. Any person affected by a decision of the Administrator under the Deed given effect to by these orders may apply to the Court pursuant to its jurisdiction under the Act and/or under s 39B(1A) of the Judiciary Act 1903 for such directions or other relief as the Court thinks fit provided that such application is made within 21 days of the Administrator’s decision or such further period as the Court allows.

4. The Applicant shall, in accordance with the terms of Schedule 2 of the Deed, within 1 month and 5 business days of the date of this order:

(a) cause to be published in a newspaper or newspapers circulating generally in each State and Territory of Australia in which GMF conducts business an advertisement substantially in the form of that set out in Schedule 3 of the Deed; and

(b) send to each known creditor of GMF at their last known address a notice substantially in the form of that set out in Schedule 3 of the Deed.

5. That the 28 day period prescribed in paragraph 2.2 of Schedule 2 to the Deed be the date on or before which creditors of GMF are to prove their debts or claims against GMF in accordance with the terms of Schedule 2 and after which any unproved debts or claims will be forever extinguished.

6. Such further or other orders as the Court thinks fit.

7. The costs of the Application be the costs and expenses of the administration of GMF.

8. There be liberty to apply.

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

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	W288 OF 2002

BETWEEN:

PETER HEDGE in his capacity as Administrator of the Goldfields Medical Fund Incorporated (Administrator Appointed)

Applicant

JUDGE:	FRENCH J
DATE:	29 NOVEMBER 2002
PLACE:	PERTH

REASONS FOR JUDGMENT ON APPLICATION

TO GIVE EFFECT TO SCHEME OF ARRANGEMENT

Introduction

1 On 4 October 2002, Peter Hedge, the Administrator of The Goldfields Medical Fund Incorporated (Administrator Appointed) (“GMF”) applied to the Court for an order that a proposed Scheme of Arrangement Deed dated 2 October 2002, between the GMF and Heathguard Health Benefits Fund Ltd (“Healthguard”) be given effect in accordance with the terms of the Deed.

2 The application came on for directions on 18 October 2002, and on 23 October 2002 directions were made. Those directions provided, inter alia, for notice to be sent to each contributor of GMF, and for any contributor wishing to be heard to file an appearance by 20 November. It was also directed that notice of the application be given in the Australian Newspaper, the West Australian Newspaper and the Kalgoorlie Miner Newspaper, including a requirement that any interested person wishing to be heard file an appearance by no later than 20 November 2002.

3 No contributor or other interested person having entered an appearance, the application was, in accordance with the directions given, listed for hearing on 22 November 2002. Judgment on the application was reserved until today.

4 Although the factual background and statutory framework are set out in the reasons for decision given in connection with the directions of 23 October 2002, it is convenient to reproduce them here to the extent necessary for these reasons to be self-contained.

Factual Background

5 The GMF has conducted a health insurance business out of Kalgoorlie in Western Australia for over 45 years. It is a registered organisation under the National Health Act 1953 (Cth) (“the Act”).

6 On 28 November 2001, the Private Health Insurance Administration Council (“PHIAC”), a body corporate established under the Act with prudential regulatory functions, appointed Peter Hedge, a Chartered Accountant and Registered Liquidator, as an investigator under s 82R of the Act to investigate the affairs of GMF. The appointment was based on the following grounds:

(a) Information provided to PHIAC by GMF’s actuary and by GMF raised serious concerns about the reported level of claims, decreasing reserves, liquidity, the carrying value of assets and whether or not the management of the business of GMF was in conflict with the actuary’s recommendations to preserve the financial stability of GMF;

(b) PHIAC’s review of financial information provided by GMF led PHIAC to suspect that GMF’s reserves may, or may in the near future, become insufficient to satisfy the capital adequacy requirements under the Act;

(c) PHIAC had been informed that GMF had lost several key executive staff including the Chief Executive Officer, the accountant and an experienced senior manager;

(d) PHIAC suspected that GMF may not have experienced internal managers to effectively manage the operations of the Fund in the interests of contributors.

Mr Hedge was appointed on 23 December 2001 as administrator of GMF under s 82XF of the Act.

7 Although GMF had been established and had operated for many years as a health insurer for contributors predominantly based in regional Western Australia, over the two years up to the appointment of Mr Hedge as investigator, the fund it conducted had grown by more than 400%. It now services approximately 70,000 contributors with more than 50% of its membership located in the States of Victoria, New South Wales and Queensland. Mr Hedge’s examination of its business and affairs led him to conclude that what he described as “the phenomenal growth in membership of the GMF fund” was attributable to uneconomic pricing decisions that resulted in the fund breaching capital adequacy standards prescribed under the Act. His examination also disclosed inadequate management and corporate governance and continued substantial losses and breaches of the capital adequacy standards.

8 The audited financial statements of GMF for the year ended 30 June 2002 disclosed a net loss of $8,309,386 against a net profit in the preceding year of $4,838,854. While total revenue had increased by over $7 million, benefits expenses had increased by more than $17 million. Salaries and employee expenses had increased by $1 million and professional services expenses increased by about $1.2 million. Asset writedowns represented $1.695 million As at 30 June 2002, the balance sheet showed net assets of $7,065,186 against a net asset position in the previous year of $15,374,572. Notes to the financial statements indicated that although the Fund was solvent at 30 June 2002, it had breached its capital adequacy requirement as defined by PHIAC under the Act by $4,550,000. A subsequent report to PHIAC from GMF showed that as at 31 August 2002 GMF’s solvency was $2.443 million in excess of the full solvency requirement. However its capital position was $3.399 million less than the full capital adequacy basis required by PHIAC.

9 On 12 September 2002, Mr Hedge provided PHIAC with a final report under s 82XZC of the Act. In that report he recommended, pursuant to s 82XZC(8)(a)(i) that the fund conducted by GMF be merged with the fund conducted by Healthguard in accordance with a Scheme of Arrangement Deed to be executed by Healthguard, GMF and Mr Hedge as administrator. PHIAC considered the report at a meeting of its board on 13 September 2002 and concluded that the course of action recommended by the administrator would be in the best interests of the contributors of the fund conducted by GMF. On 16 September, PHIAC announced that it had accepted the administrator’s recommendation to merge the GMF fund with that conducted by Healthguard. It issued a statement to all GMF contributors on that date. It foreshadowed that the administrator would be seeking approval from this Court for the merger in accordance with procedures laid down by the Act. On 4 October 2002, an application was filed in this Court by Mr Hedge accordingly.

The Amended Application

10 On the hearing of the application leave was sought to amend it in accordance with a Minute of Amended Application dated 21 November. The orders now sought are in the following terms:

“1. Pursuant to section 82XZE of the National Health Act 1953 (the “Act”) the scheme of arrangement set out in the Scheme of Arrangement Deed between Healthguard Health Benefits Fund Limited, Goldfields Medical Fund Incorporated (Administrator Appointed) (“GMF”) and the Applicant dated 2 October 2002 (the “Deed”) be given effect to in accordance with the terms of the Deed.

2. Pursuant to section 447A of the Corporations Act (as applied by section 82XB of the Act), the operation of section 82XZJ(3)(e) of the Act be varied and Part VIA of the Act operates so that, notwithstanding the order in paragraph 1, the administration of GMF ends on the earlier of:

(a) when the Applicant has completed all his obligations under clause 13 of the Deed; or

(b) 6 months from the date of this order.

3. Pursuant to section 447A of the Corporations Act (as applied by section 82XB of the Act), the operation of section 82XB(2)(b) of the Act be varied and Part VIA of the Act operates so that the administration of GMF is also regulated by section 1321 of the Corporations Act.

4. The Applicant shall, in accordance with the terms of Schedule 2 of the Deed, within 1 month and 5 business days of the date of this order:

(b) send to each known creditor of GMF at their last known address a notice substantially in the form of that set out in Schedule 3 of the Deed.

6. Such further or other orders as the Court thinks fit.

7. The costs of the Application be the costs and expenses of the administration of GMF.

8. There be liberty to apply.”

Statutory Framework – The National Health Act – Prudential Regulation after 1999

11 The conduct of health insurance business in Australia is regulated under the National Health Act 1953 (Cth). That Act prohibits any person, other than a registered organisation, from carrying on health insurance business (s 67). The regulator is PHIAC. That body was established in 1989. Its functions were initially largely advisory and recommendatory to the Minister. It was the Minister who had ultimate responsibility for the registration of health insurance funds and the making of applications for their judicial management or winding up.

12 The regulatory scheme was substantially altered by the Health Legislation Amendment Act (No 3) 1999 (No 159 of 1999). An overview of the changes was given in the Second Reading Speech for the Bill. It was said, inter alia, to address concerns of the government, consumers and the private health industry about the prudential regulation of the private health insurance industry which had been identified in a 1997 Industry Commission report. The Second Reading Speech went on:

“In 1989, the Private Health Insurance Administration Council, PHIAC, was established under the National Health Act 1953 to provide advice on the prudential regulation of the private health industry. In line with the Industry Commission recommendations, the government amended the act so that PHIAC now has an independent board. However, up until now PHIAC’s powers have been limited, in that it is essentially an advisory and administrative body and as such may only make recommendations. This bill will make essential regulation of the private health industry more efficient. The transfer of the function of approving registration and mergers from my department to PHIAC and the strengthening of deregistration provisions will make PHIAC’s roles consistent with other insurance regulators. This move from the government to an independent regulator will take any politics out of the equation and put independent expert decision-making in.” (Parl Deb H of R 11/3/1999 p 3731)

13 The essential features of the new prudential regulation provisions were set out in the Explanatory Memorandum for the Bill. It described the main items contained in the schedule to the Bill dealing with the prudential regulation of registered organisations as including the following:

- the repeal of minimum reserve requirements and their replacement with a scheme providing for solvency standards and capital adequacy standards

- empowering both the Minister and the PHIAC to appoint inspectors to examine the affairs of registered organisations where illegal or inappropriate conduct is suspected

- the repeal of the court ordered judicial management, compulsory transfer and winding up of funds provisions and their replacement with a new administration and winding up scheme

- empowering the PHIAC to appoint an administrator to either a fund or an organisation in difficulty, to have the administrator operate in the interests of contributors, and requiring the administrator to make a recommendation to PHIAC as to the most appropriate options for the fund or registered organisation

- requiring court approval before a fund or registered organisation in difficulty can be forced to comply with a scheme of arrangement or be wound up

14 Under the new system set out in Part VI dealing with health benefits organisations, the basic rule continues that only a registered organisation can carry on health insurance business (s 67). Organisations may apply to the PHIAC for registration as registered health benefits organisations (s 68). Applications for registration are to be referred by PHIAC to a Registration Committee which shall submit a report to PHIAC and recommend that registration be granted or refused (ss 71 and 72). PHIAC may, after considering the report of the Committee, grant or refuse the application (s 73(1)).

15 A new Division 3A was introduced dealing with the solvency standards for registered organisations. The purpose of the Division is to establish and require registered organisations to comply with standards of solvency in order to ensure that the health benefits fund conducted by each such organisation remains solvent (s 73BCA). PHIAC was required, as soon as practicable but, in any case, not later than 1 January 2001, to establish, in writing, a solvency standard for the purposes of the Division (s 73BCB). The solvency standard could vary according to the fund or class of fund or apply to a fund only in circumstances specified in the standard (s 73BCB(2)). The stated purpose of the solvency standard is set out in s 73BCC:

“The purpose of the solvency standard is to ensure, as far as practicable, that at any time the financial position of the health benefits fund conducted by a registered organization is such that the organization will be able, out of the assets of the fund, to meet all liabilities referable to the health insurance business of the organization as those liabilities become due.”

Every registered organisation is required to comply with the solvency standard as it applies in respect of that organisation (s 73BCD(1)). PHIAC is also empowered to give solvency directions to an organisation where it is satisfied that there are reasonable grounds for believing that the organisation may not be able to meet, out of the assets of the fund, all liabilities referable to the business of the fund as they become due.

16 A new Division 3B introduced provision for a capital adequacy standard for registered organisations. PHIAC was required, on the same day as it established a solvency standard, to establish in writing a capital adequacy standard for the purposes of that Division (s 73BCG). Every registered organisation is required to comply with the capital adequacy standard as it applies in respect of that organisation (s 73BCI). PHIAC is also empowered to give capital adequacy directions where it is satisfied that there are reasonable grounds for believing that the assets of a fund will not provide adequate capital for the conduct of the health insurance business in accordance with the Act (s 73BCJ).

17 The PHIAC continues under Division 2 of Part VIIAA of the Act. Its functions include the appointment of inspectors under s 82R to investigate the affairs of registered organisations (s 82G(db), the appointment of administrators of registered organisations, the receipt of reports of such administrators under s 82XZC and dealing with such reports under s 82XZD.

18 Part VIA dealing with the conduct and supervision of the affairs of registered organisations comprises five divisions. They are referred to in outline in s 82QA thus:

(1) Division 1 sets out the purpose of Part VIA and defines concepts used in the Part.

(2) Division 2 provides that the Minister or PHIAC may appoint an inspector to investigate and report on the affairs of a registered organisation and sets out the powers and duties of an inspector.

(3) Division 3 describes the circumstances in which, and the legal basis on which, a fund or a registered organisation can be placed under administration and sets out the duties and powers of an administrator.

(4) Division 4 describes the circumstances in which, and the legal basis on which, a fund or a registered organisation can be wound up and, to the extent that Commonwealth law affects those circumstances or that manner, sets out the relevant Commonwealth law.

(5) Division 5 contains provisions dealing with miscellaneous matters.

19 Section 82R provides for the appointment of an inspector to investigate the affairs of a registered organisation. Section 82W requires the inspector to make a report to the appointing authority, which is the Minister or PHIAC, as the case may be. Division 3 of Part VIA then deals with the administration of funds and registered organisations. The purposes of the Division, as set out in s 82XA, are to permit the business, affairs and property of a fund or organisation under administration to be administered in a way:

(a) that maximises the chance that the persons who are contributors to the fund under administration, or to the fund of the organisation under administration, as the case requires, continue to be covered for health insurance either by the fund to which they contribute or by another fund to which the business of the fund is transferred; or

(b) if it is not possible for that coverage to be maintained – that to the extent possible, safeguards the financial interests of those contributors in the event of an eventual winding up of the fund or organisation under administration.

20 Section 82XB provides, inter alia:

“(1) Subject to this Act, the provisions of the Commonwealth, State or Territory law that, but for this section, would relate to the administration of a registered organization, whether it is a company, an incorporated association or an unincorporated entity, cease, by force of this section, to apply to that registered organization.

(2) The administration of a registered organization is regulated instead, and the administration of a fund conducted by a registered organization is also regulated:

(a) by the provisions of this Division; and

(b) by the provisions of Divisions 6, 7, 8, 10, 11, 13 and 16 of Part 5.3A of Chapter 5 of the Corporations Act 2001 and of Division 7A of Part 5.6 of that Chapter, all applying, so far as they are capable of so doing, subject to such modifications as are set out in this Act or as are prescribed.

(5) In the application of the provisions of the Corporations Act 2001 referred to in subsection (2) in relation to the administration of a registered organization, those provisions apply as if:

(a) a reference to the company were a reference to the registered organization (whether the registered organization is a company under the Corporations Act 2001 or not); and

(b) a reference to the administrator were a reference to the administrator of the registered organization appointed under this Act; and

(6) The regulations may provide for different modifications according to the nature of the fund or registered organization that is to be, or that is being, administered.”

The power of PHIAC to appoint an administrator is conferred by s 82XD. Section 82XE sets out the qualifications for appointment of an administrator and s 82XF the grounds for such appointment. Subdivision 6 of Division 3 deals with the report by the administrator to PHIAC.

Statutory Framework – The National Health Act  - Schemes of Arrangement after 1999

21 Section 82XZC requires an administrator, appointed by PHIAC, to conclude an examination of the business, affairs and property of the organisation within three months of appointment and make a final written report to PHIAC. The administrator may recommend, in the report, the execution of a voluntary deed of arrangement. That term is defined in s 82Q primarily as a deed of arrangement agreed on by creditors in a meeting convened under s 82XZ. There is no such deed in this case. But the administrator may also recommend a scheme of arrangement. In that connection s 82XZC(7) provides:

“(7) If:

(a) the administrator has not proposed a voluntary deed of arrangement; or

(b) the administrator has proposed such a deed but:

(i) the creditors of the fund or organization under administration have resolved to reject the deed; or

(ii) the creditors of the fund or organization under administration have resolved to vary it and the administrator is not satisfied that, as so varied, it is, in the circumstances, still protective of the interests of the contributors to the fund concerned; or

(c) the administrator has proposed such a deed but, because of the operation of subsection (4), the administrator must not recommend that the Council approve the execution of the deed;

the administrator must, in the report to the Council:

(d) recommend a course of action listed in subsection (8) that, in the opinion of the administrator, is, in the circumstances, in the best interests of contributors to the fund concerned; and

(e) set out the reasons for that recommendation.”

Subsection 82XZC(8) provides:

“(8) The courses of action that the administrator might recommend that the Council approve are:

(a) subject to the Court’s making an order or orders in relation to the matter:

(i) that the conducting organization or the registered organization, as the case requires, implement a scheme of arrangement (which may involve the execution of a deed in the same terms as the voluntary deed that the creditors rejected) concerning the business of the fund or organization under administration; or

(ii) that the fund or organization under administration be wound up; or

(b) that the administration cease and that the business of the fund or organization under administration be resumed by the conducting organization or the registered organization, as the case requires.”

A scheme recommended under subs (8)(a)(i) may provide for the transfer to another registered organisation; on terms set out in the scheme, of the fund under administration or of the fund conducted by the organisation under administration (s 82XZC(9)(b)).

22 PHIAC, if satisfied that a course of action recommended by the administrator under s 82XZC(7) will be in the best interests of the contributors to the fund, must so inform the administrator. If the course of action is of a kind specified under s 82XZC(8)(a)(i) the PHIAC must direct the administrator to make an application in accordance with s 82XZE(1) to give effect to that course of action.

Statutory Framework – The National Health Act - The Jurisdiction and Powers of the Court

23 The provisions of this Act to which reference has been made above, are to be found in Pt VIA – Conduct and Supervision of the Affairs of Registered Organisations. By s 82ZE, which is also in Pt VIA, it is provided:

“The Federal Court of Australia has jurisdiction to hear and determine applications under this Part and to make any necessary orders in respect of those applications.”

24 The present application is made under s 82XZE which provides, inter alia:

“82XZE(1) If the Council informs the administrator that it is satisfied that a course of action of a kind specified in subparagraph 82XZC8(a)(i) is, in the circumstances, in the best interests of contributors to the fund concerned, the administrator must apply to the Court for an order or orders to give effect to the course of action.

(2) On an application for such an order or orders:

(a) the Council and any other person interested are entitled to be heard; and

(b) the Court may make such order or orders in respect of the course of action the subject of the application as it considers to be, in all the circumstances, in the interests of persons who are contributors to the fund concerned.

(3) An order under this section:

(a) is binding on all persons; and

(b) takes effect despite anything in the constitution or other rules of the registered organization concerned.

(4) For the avoidance of doubt, an order of the Court is not required:

(a) in order to give effect to a voluntary deed of arrangement – if the Council approves the execution of the deed; or

(b) in order to effect a termination of an administration that is recommended under paragraph 82XZC(8)(b) – if the Council accepts the recommendation.”

25 Reference should also be made to s 82XZI in subdivision 8 which applies s 447B of the Corporations Act 2001 as if the power there conferred to make application to the Court were a power conferred on PHIAC. The general provision, s 82XB, attracts the application of s 447A which appears in Division 13 of Part 5.3A of the Corporations Act 2001. That section confers power on the Court to make orders in relation to a company under administration with a view to executing a deed of company arrangement. Relevantly it provides:

“447A(1) The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.

(2) For example, if the Court is satisfied that the administration of a company should end:

(a) because the company is solvent; or

(b) because provisions of this Part are being abused; or

the Court may order under subsection (1) that the administration is to end.

(3) An order may be made subject to conditions.

(4) An order may be made on the application of:

(a) the company; or

(b) a creditor of the company; or

(d) in the case of a company that has executed a deed of company arrangement – the deed’s administrator; or

(e) ASIC; or

(f) any other interested person.”

The Proposed Scheme of Arrangement - Overview

26 The Scheme of Arrangement Deed is executed between GMF, Healthguard and Mr Hedge. Recital H of the Deed describes it as setting out the terms on which the proposed transaction will, subject to PHIAC’s approval under s 82XZD of the Act and the Court making orders in relation to the matter under s 82XZE of the Act and s 447A of the Corporations Act as applied by s 82XB of the Act, be effected by the parties.

27 The key aspects of the scheme of arrangement were described in Mr Hedge’s affidavit of 3 October 2002. Subject to an amendment to the Deed which has been made subsequently, those key aspects are:

(a) All GMF contributors will be transferred to Healthguard together with the liabilities associated with their policies.

(b) The assets of GMF will be transferred to Healthguard, excluding amounts estimated to meet GMF’s remaining liabilities and any other assets agreed by the parties. It is estimated that assets valued in excess of the estimated liabilities associated with the GMF contributors will be transferred to Healthguard at the time the GMF contributors are transferred.

(c) The balance of assets held by GMF are to be realised and the proceeds used to discharge GMF’s remaining outstanding liabilities. The balance of the proceeds will then be paid to Healthguard.

(d) Healthguard undertakes, unless otherwise agreed by PHIAC, to maintain GMF’s operations in Kalgoorlie, with trading continuing under the GMF brand.

(e) All GMF staff will be offered new employment contracts.

(f) Healthguard undertakes that at least two non-executive directors from the board of HBF and at least two non-executive directors residing in the Goldfields region will be appointed to the Healthguard board.

(g) Healthguard will convert GMF’s information technology systems to the “WHICS” health insurance management software system without adversely affecting the services to GMF contributors.

(h) Healthguard will accept each GMF contributor on terms no less favourable than the GMF policy held by the GMF contributor.

(i) Each GMF contributor that transfers to Healthguard will be deemed to have a continuous period of membership with Healthguard (including for the purposes of waiting periods).

(j) Premiums payable by and benefits offered to each GMF contributor under policies held will remain unchanged until 31 March 2003 unless requested earlier by PHIAC for solvency or capital adequacy reasons.

28 Mr Hedge contended that the merger of the GMF fund with the Healthguard fund should provide GMF contributors with established, experienced and proven management and a board of directors which will enable it to meet PHIAC’s requirements. The merger should also provide GMF contributors with a financially viable fund with improved capital reserves. He said he expected the merged fund to meet the prudential requirements under the Act. He stated his opinion that in all the circumstances the best interests of the contributors of GMF are served by merging the fund conducted by GMF with the fund conducted by Healthguard in accordance with the scheme of arrangement outlined in the deed. If the scheme of arrangement is not approved by the Court then, in Mr Hedge’s opinion, the administration will continue subject to PHIAC and the Act. He believes the fund would continue to be in breach of its prudential requirements under the Act. Under these circumstances PHIAC had indicated that it is likely that it would not be in a position to renew the fund’s registration and operating licence.

29 The scheme contemplated under the Deed involves a two step process for the transfer of GMF’s net assets and liabilities to Healthguard. In the first step, which occurs on the “Effective Date”, a defined “Base Amount” is paid to Healthguard when all liabilities of GMF for “Transferring Contributors” are transferred to Healthguard. In the second step, Mr Hedge would proceed to realise the “Balance Assets”, discharge GMF’s remaining liabilities and pay the “Realised Amount” to Healthguard. There are two principal reasons for structuring the scheme using this two step process. The first is that there are certain GMF assets designated “problem” assets which the parties consider would be better dealt with and realised by Mr Hedge as administrator, rather than transferred to Healthguard. These involve GMF’s interests in contracts to purchase three apartments at Mounts Bay Village in Mounts Bay Road, Perth, WA. A dispute has arisen with the vendor under these contracts which will need to be settled by the courts if it cannot be resolved by agreement. The second reason is that Healthguard is reluctant to assume all the liabilities of GMF in circumstances where it could not determine the extent of those liabilities. Mr Hedge said he was informed by Healthguard that it was particularly concerned about presently unknown and unforeseen liabilities emerging and claims being made against the merged fund after the transfer. He believed a procedure established in cl 13.4 and Schedule 2 to the Deed would enable GMF’s outstanding liabilities to be finally determined and discharged. This would achieve the finality and certainty necessary in the interests of the contributors of GMF and the merged fund.

30 There was a difficulty attending the proposed procedure with respect to resolution of outstanding liabilities. This was discussed in my reasons for judgment in the directions given on 23 October. Clause 13.4 of the Deed provides that:

“The procedures for the Administrator satisfying the outstanding liabilities of GMF is as set out in Schedule 2.”

Schedule 2 provided for the administrator to create and “admit a list of admitted claims by creditors”. Within one month of the Effective Date under the Deed, the administrator was, under Schedule 2, to place an advertisement in the form of that set out in Schedule 3, once in a newspaper or newspapers circulating generally in each State and Territory of Australia in which GMF conducts business and to send to each named creditor at their last address, a notice substantially in the form of that set out in Schedule 3. Such notice would require each creditor asserting a claim to notify the administrator in writing, within twenty eight days of the date of the advertisement, of the Asserted Claim. The administrator, under cl 2.6, was to determine whether all or part of an Asserted Claim should be entered on the Admitted List. There was provision under cl 2.10 for a creditor who received a notice from the administrator of the admission of none or all or part of a claim on the Admitted List to commence a “proceeding in a Court nominated by the Administrator appealing the Administrator’s decision”. Unless the creditor commenced such proceeding within a twenty one day period or any further period that the Court might allow, the administrator’s decision would be final.

31 I observed in my previous reasons that cl 2.10 lacked statutory support. No deed can confer jurisdiction on the Court nor limit its jurisdiction. The Act does not in terms authorise applications to the Court to resolve questions relating to or arising out of the discharge of the scheme administrator’s duties and powers. However it does authorise the Court to make orders “to give effect” to the relevant course of action (s 82XZE(1)) and to “make any necessary orders” in respect of applications under Pt VIA (s 82ZE). Under these provisions and s 23 of the Federal Court of Australia Act 1976 (Cth) the Court could reserve liberty to apply for such ancillary orders as are necessary to deal with disputes arising under the Deed. If there be jurisdiction to challenge a decision of the administrator, parties cannot be bound by the choice of court nominated by the administrator – see generally Minister for Health (Cth) v Trustees of the Ancient Order of Foresters Friendly Society in Queensland (1985) 10 FCR 27 (Pincus J). I observed at the directions hearing that it may be the case that the deed being made “binding on all persons” by virtue of s 82XZE(1) federal jurisdiction is also attracted in respect of disputes arising under the deed by virtue of s 39B(1A) of the Judiciary Act 1903 (Cth). I am satisfied that it is so attracted. I foreshadowed that this aspect of the Deed would require consideration when it came to the question of Court approval. It was doubtful that it could be approved if cl 2.10 remained in its original form.

32 A necessary aspect of the two stage process contemplated by the Deed was an extension of the administration for a further period of six months to allow Mr Hedge to complete his obligations under the Deed. Absent an order effecting such extension, the administration of GMF would come to an end, by virtue of s 82KZJ(3)(e), upon the Court making the orders sought in the application. It was for that reason that Mr Hedge sought the orders set out in par 2 of his application. In that respect he relied upon s 447A of the Corporations Act as applied by the Act.

Amendment of the Deed

33 On 21 November 2002, the Scheme Deed was amended to deal with the difficulty raised by cl 2.10 and some other minor matters. The amendment was made pursuant to cl 22.1 of the Scheme Deed which provides:

“This document can only be amended, supplemented, replaced or novated by another agreement signed by the parties.”

In terms that clause does not authorise amendment. Rather it imposes a requirement that amendment be by another written agreement. The Deed, evidencing an agreement however, there is no obstacle to the parties agreeing to amend it. I am satisfied that the terms of the amendment do not effect such a change in the Deed as to require further notice to be given to contributors or other interested persons.

34 The Amendment Deed begins with an interpretation clause which adopts the definitions in the Scheme Deed (cl 1.2) save for terms defined in cl 1.1. The term “authorisation” is defined in cl 1.1 deleting par (b) of the Scheme Deed definition which incorporates the expiry of a period within which anything could be prohibited or restricted by law if a Government Agency were to act in any way within that period. The Amendment Deed also includes reference to the Corporations Act in its definition section and to the original Scheme Deed. A number of mutual representations and warranties set out in cl 17.1 of the Scheme Deed are replicated in cl 3.1 of the Amendment Deed subject to a change in the terms of the representation in cl 17.1(c) as to the legal enforceability of the agreement. The change involves a qualification by reference to limitations upon the enforceability of the Deed by equitable principles and laws affecting creditors’ rights generally. There is provision for the giving of notices under the Amendment Deed (cl 4) and a repetition in cl 5 of the provision relating to the governing law of the Deed which appears in cl 24.1 of the Scheme Deed.

35 The substantive amendments to the Scheme Deed then follow in a schedule to the Amendment Deed. They are to take effect from 2 October 2002. The first amendment changes the transfer time from 8am to 5pm on 29 November 2002. The time for offers of employment to be made by Healthguard to each employee of GMF pursuant to cl 10.1 of the Scheme Deed is extended from one week to two weeks after lodgement of the first of the documents required in order to obtain Court Approval. There is a change of name of the person at the administrator’s office for the purpose of correspondence.

36 Importantly for present purposes, pars 2.9 and 2.10 of Schedule 2 to the Scheme Deed are changed. Schedule 2 to the Scheme Deed sets out, as noted earlier, the procedures by which the administrator will ascertain the balance of GMF’s liabilities which includes the admission of creditors and their claims. In the Scheme Deed cls 2.9 and 2.10 are in the following terms:

“2.9 Administrator’s Notices under this Paragraph

Any notice by the Administrator under this paragraph must:

(a) be in writing;

(b) include an explanation of the Administrator’s decision as reflected in the notice;

(d) nominate a court in which any proceeding by the recipient is to be commenced.

2.10 Declaration of Court

A Creditor who receives a notice from the Administrator under paragraph 2.9 may, within 21 days of the date of the notice or any further time the Court allows, commence a proceeding in a Court nominated by the Administrator appealing the Administrator’s decision. Unless the Creditor commences a proceeding under this paragraph within that 21 day period, or any further period the Court allows, the Administrator’s decision will be final.”

As a result of the amendments these clauses will now read as follows:

“2.9 Administrator’s Notices under this Paragraph

Any notice by the Administrator under this paragraph must:

(a) be in writing;

(b) include an explanation of the Administrator’s decision as reflected in the notice;

2.10 Declaration of Court

A Creditor who receives notice from the Administrator under paragraph 2.9 may, within 21 days of the date of the notice or any further time the Court allows, in a court of competent jurisdiction:

(a) if s 1321 of the Corporations Act applies to the Scheme, appeal against the Administrator’s decision under that section as applied; or

(b) commence a proceeding disputing the Administrator’s decision.

Unless the Creditor commences a proceeding under this paragraph within that 21 day period, or any further period the Court allows, the Administrator’s decision is final.”

There is provision under the existing terms of Schedule 2 of the Scheme Deed for the administrator to enter a claim on or to amend the Admitted List of Claims as appropriate in accordance with any notice served by him under par 2.9 or any order of the Court under par 2.10. Clause 2.12 makes provision for payment to the creditor or repayment by the creditor to the administrator as the case may be. Clause 2.13 seeks to apply Corporations Regulations 5.6.40 to 5.6.47 and 5.6.49 to the scheme as if the references therein to the liquidator were references to the administrator. Moreover, Subdivisions A, B, C and E of Division 6 of Part 5.6 of the Corporations Act are said to apply to claims made under the scheme as if reference to the liquidator were references to the administrator and references to the winding up were references to the scheme with such other modifications as are necessary to give effect to the scheme. It may be noted that the application of these provisions by cl 2.14 is in terms contractual but given binding effect by virtue of the operation of s 82XZE(1).

37 Mr Hedge exhibited the Amendment Deed to his third supplementary affidavit sworn 21 November 2002. In addition, he deposed to his compliance with the directions given on 23 October 2002. Prior to 30 October 2002 he caused to be sent to each contributor of GMF by normal prepaid post a notice in the form annexed to the affidavit and a copy of the application. A copy of the notice was also posted on the GMF website. A copy of the Explanatory Statement accompanied the notices sent to contributors. In addition, the affidavit exhibited copies of public notices advertised in the Australian Newspaper, the West Australian Newspaper and the Kalgoorlie Miner Newspaper on 29 October 2002.

38 By close of business on 20 November 2002 no notice of appearance had been lodged by any contributor of GMF or by any other interested person wishing to be heard in the proceedings.

39 In relation to competition issues, Mr Hedge’s solicitors, Messrs. Blake Dawson Waldron, sent a letter to the Australian Competition and Consumer Commission (“ACCC”) on 9 October 2002 informing the ACCC of the proposed merger and inviting the ACCC, should it have any view it might wish to express about the merger, to participate in the proposed Court approval pursuant to s 82XZE of the Act. The letter set out an explanation of the substance of the merger and the reasons for it. At the time of swearing the affidavit, the ACCC had not filed or served any notice of appearance in the proceedings.

40 Mr Hedge also disclosed in his affidavit that on 23 September 2002 and 2 October 2002 he was served with notices issued by the ACCC under ss 19, 30 and 32A of the Australian Securities and Investment Commission Act. These notices were in connection with inquiries the ACCC was making with respect to representations said to have been made by GMF prior to his appointment as administrator to the effect that GMF members who prepaid their premium would be protected from increases in premiums during the prepaid period. He exhibited copies of the notices to his affidavit and asserted that he had complied with them.

The Jurisdiction of the Court

41 No issue was raised concerning the Court’s jurisdiction which is perhaps not surprising given the absence of any contradictor. The statutory source of that jurisdiction, s 82ZE, is set out above. There is a question whether, in respect of applications of the kind contemplated by s 82XZE(1), the jurisdiction is of the kind which the Parliament is authorised to confer upon the Court pursuant to s 76 of the Constitution. On the face of it an application under s 82XZE(1) for “an order or orders to give effect to the course of action” proposed by the administrator and approved by PHIAC does not have the character of a justiciable controversy which is an important element of the concept of “matter” in respect of which federal jurisdiction may be defined or invested under Chapter III.

42 That concern may be raised in respect of many kinds of orders made by courts exercising federal jurisdiction such as sequestration orders upon a debtor’s petition or the approval of schemes of arrangement under the Corporations Act. Such orders have however long been accepted as judicial in character. R v Davison (1954) 90 CLR 353 concerned the constitutional inability of the Parliament validly to confer a judicial function upon a Registrar in Bankruptcy who was not a court for the purposes of Chapter III of the Constitution. It concerned a sequestration order made upon a debtor’s petition. Dixon CJ and McTiernan J observed that, for a very long time, voluntary sequestration “had been the subject of judicial order” (365). That was not to say that it could not also be done administratively. In considering the nature of the judicial power their Honours referred to the element emphasised by Griffith CJ in Huddart Parker & Co Pty Ltd v Moorehead (1909) 8 CLR 330 “that a controversy should exist between subject or between the Crown and a subject” (at 368). They referred also to the element emphasised by Palles CB in R v Local Government Board (1902) 2 IR 349, that the exercise of judicial power involved the determination of existing rights as distinct from the creation of new ones. They then observed (at 368):

“It may be said of each of these various elements that it is entirely lacking from many proceedings falling within the jurisdiction of various courts of justice in English law. In the administration of assets or of trusts the Court of Chancery made many orders involving no lis inter partes, no adjudication of rights and sometimes self-executing. Orders relating to the maintenance and guardianship of infants, the exercise of a power of sale by way of family arrangement and the consent to the marriage of a ward of court are all conceived as forming part of the exercise of judicial power as understood in the tradition of English law.”

Other examples they cited included the administration of enemy property, declarations of legitimacy, orders involved in winding up of companies and the grant of probate of wills or letters of administration.

43 That is not to say that such functions are uniquely judicial. Some things when done by a court have a judicial character but when done by an authority other than a court are administrative in nature. These are sometimes referred to as chameleon functions – Federal Commissioner of Taxation v Munro (1926) 38 CLR 153 at 175-9 (Isaacs J). See also R v Trade Practices Tribunal; Ex parte Tasmanian Breweries Pty Ltd (1970) 123 CLR 361 at 373 (Kitto J); R v Quinn; Ex parte Consolidated Foods Corp (1977) 138 CLR 1 at 6 (Gibbs J) and 9 (Jacobs J). A recent consideration, by the High Court, of functions bearing this dual character is to be found in Pasini v United Mexican States (2001) 187 ALR 409 at 412-414 and 424-427.

44 In Truth About Motorways Pty Ltd v Macquarie Infrastructure Investment Management Ltd (1999) 200 CLR 591, Gummow J discussed the scope of the judicial power in the context of a challenge to provisions of the Trade Practices Act 1974 (Cth) authorising any person to seek declaratory or other relief in respect of contraventions of the Act notwithstanding that such person had suffered no loss or damage and had no special interest. Supporting the validity of the provisions, his Honour referred (at 631) to the passage cited above from the joint judgment in R v Davison. He noted that following those observations the Parliament enacted s 92 of the Marriage Act 1961 conferring federal jurisdiction with respect to the making of declarations of legitimacy which were held to be within the authority of the Parliament in Connolly v Connolly (1966) 115 CLR 166 at 168. His Honour also referred to the jurisdiction conferred upon the High Court with respect to the administration of enemy property under the Trading with the Enemy Act 1939 (Cth) – Attorney-General (Commonwealth) v Schmidt (1961) 105 CLR 361 at 370. The welfare of the child of a marriage could also be a “matter” arising under the Family Law Act 1975 (Cth) – Secretary, Department of Health and Community Services v JWB and SMB (Marion’s case) (1992) 175 CLR 218.

45 The jurisdiction conferred on this Court by s 82ZE of the Act in its application to the present proceedings does not involve the ascertainment by the Court of existing rights and liabilities in a dispute between subjects or between subjects and the Crown. Rather, by virtue of the order made by the Court, the proposed Deed is made binding upon all persons. The rights and liabilities which come into existence do so by virtue of the statute and by virtue of the Court’s order. The Court must consider that the orders it makes in respect of the course of action the subject of the application are “… in all the circumstances in the interests of persons who are contributors to the fund concerned” (s 82XZE(1)(b)). It must also have regard to the effect of its orders upon other persons bound by them.

46 The jurisdiction conferred by s 82ZE in relation to applications which it encompasses under s 82XZE is novel. It is entirely a creature of statute. The character of the function it confers upon the Court is, however, sufficiently analogous to matters which have historically been accepted as judicial that it is properly regarded as a matter for the purposes of Chapter III. The Court, in my opinion, has jurisdiction to hear and determine the application.

Criteria for Orders

47 Before the Court can make an order pursuant to s 82XZE, in respect of the implementation of the proposed scheme of arrangement, it must be satisfied of the following matters:

1. That a proper opportunity has been provided for PHIAC and any other interested person to be heard on the application (s 82XZE(2)(a)).

2. That the orders proposed are, in all the circumstances, in the interests of persons who are contributors to the Fund (82XZE(2)(b)).

In addition the Court can and, in my opinion, should have regard to the effect of the proposed orders upon the interests of creditors of the Fund and, to the extent that it may be apparent, the wider public interest. The position of creditors is not expressly referred to in s 82XZE(1) but, given their right to be heard as “interested persons” and the binding effect of the orders “on all persons”, it is appropriate that their position be considered. It is also appropriate that the effect of the scheme upon employees of GMF be considered, although their interests are subordinate to the interests of contributors. The wider public interest resides in ensuring the reliability, security and, where possible, continuity of services in medical health insurance funds. The failure of a medical health insurance fund has the potential to impose a burden upon the community that extends beyond the interests of its contributors and creditors. On the other hand, the question whether a scheme involves adverse impacts upon the public interest by virtue of anti-competitive effects, may also be relevant.

Whether the Orders Sought Should be Made

48 The directions made on 23 October 2002 were intended to ensure that interested persons had an opportunity to be heard on the application. The interests primarily affected are those of contributors and individual notices were sent to them. Those of the creditors are substantially protected under the Deed by the proposed arrangements for dealing with outstanding liabilities. Given the changeability of the list of creditors, and the fact that GMF is not insolvent and unlikely, if the scheme is implemented, to become insolvent, it was appropriate to direct notice of the application by advertisement in three newspapers, local, state and national, and this has been done. I am satisfied therefore that reasonable steps have been taken to bring the application to the attention of creditors. I am also satisfied that PHIAC is aware of the application.

49 In considering the merits of the application the Court must form its own view of the proposed course of action in respect of which orders are sought under s 82XZE. It must itself consider that the scheme proposed is in the interests of persons who are contributors to the Fund concerned. It is not sufficient for the Court simply to rely upon the opinion of PHIAC to that effect. Nevertheless the Court may have regard to the fact that the administrator and the regulator both consider the scheme to be in the interests of the contributors. PHIAC has the relevant statutory responsibility, expertise and resources to enable weight to be given to its views. The same may be said, albeit in the context of the financial aspects of the proposal, about the opinion of the administrator. The fact that there has been no appearance to oppose the application is also relevant. It is not the function of the Court in considering the proposed scheme to suggest changes or improvements that might yield a better outcome from the point of view of contributors or creditors. It is not the responsibility of the Court to be satisfied that the proposed arrangement is the best of all possible arrangements that might be made.

50 I am satisfied, having regard to the current concerns about the operation of the GMF and the essential elements of the scheme, that it represents a reasonable way of properly protecting the interests of contributors, creditors and employees of the GMF and that orders should be made to give effect to it. There is no negative impact on the public interest. The ACCC has expressed no concern about anti-competitive effects and, on the face of it, the proposal which involves the rescue of what appears to be a failing Fund, involves no avoidable concentration of power in any relevant market.

51 Subject to consideration of the mechanism for dealing with disputed claims by creditors, I am prepared to make the orders proposed in par 1 of the amended application.

Ancillary Orders

52 There is a number of ancillary orders sought in the amended application which relate to the second stage of the scheme concerning the extension of the administration and the handling of outstanding creditor claims.

53 I consider that the powers of the Court under s 447A of the Corporations Act, which is applied to the administration of registered organisations by virtue of s 82XB of the Act, extend to authorise the order proposed in par 2 of the amended application. The extension of the administration is a necessary and desirable measure in order to enable that aspect of the scheme concerning resolution of outstanding liabilities to be implemented.

54 The third order in the amended application seeks to attract the application, to the scheme administration, of s 1321 of the Corporations Act which is in the following terms:

“A person aggrieved by any act, omission or decision of:

(a) a person administering a compromise, arrangement or scheme referred to in Part 5; or

(b) a receiver, or a receiver and manager, of property of a corporation; or

(ca) an administrator of a deed of company arrangement executed by a company; or

(d) a liquidator or provisional liquidator of a company;

may appeal to the Court in respect of the act, omission or decision and the Court may confirm, reverse or modify the act or decision, or remedy the omission, as the case may be, and make such orders and give such directions as it thinks fit.”

55 That section confers jurisdiction upon the Court under the Corporations Act in respect of matters arising, inter alia, in receiverships, administrations and company liquidations. It provides a species of review into the decisions of administrators, receivers and liquidators in the original jurisdiction of the Court notwithstanding the reference in the section to an “appeal to the Court”. I am not satisfied that it is open to the Court, by operation of s 447A or otherwise by ancillary orders, to attract a jurisdiction conferred in respect of matters under the Corporations Act to matters arising in the administration of a scheme under the Act. It is submitted for Mr Hedge that the Court has power under that provision, as applied by s 82XB, to make an order varying the operation of Part VIA of the Act “… so that the administration of GMF is regulated also by s 1321 of the Act.” But s 1321 of the Corporations Act is not merely a regulatory provision. It confers jurisdiction. In my opinion, I cannot make the order sought under par 3 and I decline to do so. I am however prepared to make an order which in my opinion will create an appropriate mechanism reliant upon the jurisdiction conferred on the Court under the Act and under the Judiciary Act. The order will be in the following terms:

56 The other orders proposed in the application are, in my opinion, appropriate and within power and will be made accordingly.

I certify that the preceding fifty six (56) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French.

Acting Associate:

Dated: 29 November 2002

Counsel for the Applicant:	Mr A Siopis

Solicitor for the Applicant:	Blake Dawson Waldron

Date of Hearing:	22 November 2002

Date of Judgment:	29 November 2002

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