FEDERAL COURT OF AUSTRALIA

The Application of Commonwealth Life Ltd & Anor [2003] FCA 501

COMMONWEALTH LIFE LTD v THE COLONIAL MUTUAL LIFE ASSURANCE SOCIETY

N 539 of 2003

SACKVILLE J

SYDNEY

20 MAY 2003

THE COURT ORDERS THAT:

1.                  An order in accordance with Section 191(5) of the Life Insurance Act 1995 (Cth), that the requirements of paragraph (c) of sub-section 191(2) of the Life Insurance Act 1995 (Cth) be dispensed with in so far as it requires an approved summary of the scheme to be given to:

(a)    holders of policies issued by The Colonial Mutual Life Assurance Society Limited; and

(b)   holders of policies issued by Commonwealth Life Limited (“CLL”) for whom CLL has no record of a current mailing address.

2.                  An order in accordance with Section 191(5) of the Life Insurance Act 1995 (Cth), that the requirements of paragraph (c) of sub-section 191(2) of the Life Insurance Act 1995 (Cth) be dispensed with in so far as it requires an approved summary of the scheme to be given, 15 days prior to the filing of the Application, to holders of policies issued by CLL on or after 17 March 2003.

3.                  An order that costs be reserved.

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

REASONS FOR JUDGMENT

1                     Commonwealth Life Ltd (“CLL”) and Colonial Mutual Life Assurance Society Ltd (“CMLA”) have applied for an order pursuant to s 193 of the Life Insurance Act 1995 (Cth) (“the Act”) for an order confirming a scheme for the transfer of the life insurance business of CLL to CMLA.  Both CLL and CMLA are registered as life insurance companies under the Act. The Commonwealth Bank of Australia (“CBA”) is the ultimate holding company of CLL and CMLA.

2                     The Colonial Group, including CMLA, was acquired by the Commonwealth Banking Group in June 2000 and since that date has gradually been incorporated into the latter Group. The objective of the scheme is said to be to integrate and consolidate the life insurance business of CLL and CMLA, with no material change to policyholder benefits and entitlements.

3                     It is intended that, subject to Court approval, the scheme will take effect on 1 July 2003. The effect of the scheme is that the life insurance business of CLL will be transferred to CMLA. CMLA will assume all the rights and benefits and all the obligations and liabilities of CLL in respect of CLL’s life insurance business.

4                     The applicants have filed a notice of motion seeking an order under s 191(5) of the Act, that the requirements of s 191(2) be dispensed with, insofar as that subsection requires an approved summary of the scheme to be given to

·        the holders of policies issued by CMLA; and

·        the holders of policies issued by CLL for whom CLL has no record of a current mailing address.

The principal motivation for the application, so it appears, is that there are approximately 534,500 policies issued by CMLA referable to the statutory funds affected by the scheme. I have been told that the cost of providing a summary of the scheme to each such policyholder would exceed $800,000.

5                     Section 191 of the Act provides as follows:

“Steps to be taken before application for confirmation

(1)               In this section:

affected policy owner means the owner of a policy that is referable to a statutory fund affected by a scheme.

approved summary means a summary approved by APRA.

(2)               An application for confirmation of a scheme may not be made unless:

(a)               a copy of the scheme and any actuarial report on which the scheme is based have been given to APRA in accordance with the regulations; and

(b)               notice of intention to make the application has been published by the applicant in accordance with the regulations; and

(c)                an approved summary of the scheme has been given to every affected policy owner.

(3)               Without limiting the provision that may be made by the regulations for the purposes of paragraph (2)(b), the notice referred to in that paragraph must include, in relation to each company affected by the scheme, details of the place and time at which an affected policy owner may obtain a copy of the scheme.

(4)               An affected policy owner is entitled, on his or her request, to be provided by the company with one copy of the scheme free of charge.

(5)               The Court may dispense with the need for compliance with paragraph (2)(c) in relation to a particular scheme if it is satisfied that, because of the nature of the scheme or the circumstances attending its preparation, it is not necessary that the paragraph be complied with.”

It will be seen that s 191(5) of the Act refers to the nature of the scheme or the circumstances attending its preparation as a basis for finding that it is not necessary that s 191(2)(c) be complied with.

6                     Dr Flick SC, who appears for the applicants, submits that it is appropriate to make the order because both the nature of the scheme and the circumstances attending its preparation make it unnecessary to give an approved summary to each of the CMLA policyholders. Dr Flick contends that the nature of the scheme is such that no change is proposed to the benefits and entitlements of the CMLA policyholders. He also relies upon the following circumstances attending the preparation of the scheme:

• No less than four actuaries, including an independently retained actuary, have considered the scheme and expressed the view that CMLA policyholders will not be adversely affected by the scheme and will experience no changes in their contractual benefits and entitlements.
• The regulatory authority, the Australian Prudential Regulation Authority (“APRA”), has considered the scheme and stated in writing that it has no objection to CMLA applying to the Court for dispensation in respect of what is said to be the requirement to mail information to existing CMLA policyholders (although APRA’s letter gives no reasons for its conclusion).  Dr Flick points out that the Australian Prudential Regulation Authority Act 1998 (Cth), s 8(1) establishes APRA for the purpose of regulating bodies in the financial sector in accordance with other laws of the Commonwealth that provide for prudential regulation: see Re Royal & Sun Alliance Ltd (2000) 104 FCR 37.
• Notice of the intention to make the application to the Court has been published in several newspapers throughout Australia, the form of the notice having apparently received prior approval from APRA. The notice advises policyholders where they may obtain a copy of the scheme.

7                     The actuarial report on which the scheme is based was prepared by Mr PD Beck. That report includes a section headed “Benefit expectations and security of policyholders of CMLA”, prepared by Mr T Cook, also an actuary. That section of the report includes the following passages:

“The intention of both CLL and CMLA is that as a result of the transfer there will be no adverse changes to any contractual benefits or the future expectations of CLL or CMLA policyholders. CMLA shareholders funds will meet all costs associated with the transfer on the basis explained in sections 10.1 and 10.2.

Separate revenue accounts are maintained in respect of each statutory fund and sub fund and segregated assets are maintained. The transfer will be achieved through the amalgamation of the assets and liabilities of the various sib funds, as discussed in previous sections of this report, in a manner that will ensure that there is no leakage between policyholder and shareholder accounts. Any questions as to the equity of the proposed transfer relate particularly to ensuring that there is no cross subsidy between the policyholders of the two companies.

Under the proposed transfer:

·        There are no changes proposed to policyholder contractual benefits or entitlements

·        There are no changes proposed to shareholder profit entitlements

·        There are no changes proposed to the expected future bonus entitlements for participating traditional business for policyholders of CMLA

·        There are no changes proposed to the expected future interest credits for the investment account business for policyholders of CMLA

·        There will be no cross subsidy between policyholders of CLL and CMLA

·        There are no changes proposed to surrender value bases

·        There are no changes proposed to investment mandates or processes

·        There are no changes proposed to the basis for valuing investment assets

·        There are no changes proposed to the expense allocation processes

·        There are no changes proposed to the process for allocating revenue account items such as investment income and taxation provisions

·        There are no increases proposed in discretionary fees and charges

·        There are no changes proposed to CMLA reinsurance arrangements, with the exception of the transfer of CLL reinsurance arrangements to CMLA

·        All existing policyholder options will be preserved

….

Immediately following the proposed transfer, the level of excess assets in the statutory funds will be at least equal to the total excess assets in the statutory funds of the two companies prior to the transfer. Therefore, there will be no impact on policyholder security. Additionally, the sum of the capital adequacy reserves and the working capital within each statutory fund will continue to be held at the level which CMLA and CLL believe is appropriate, taking account of the size and the risk profile of each statutory fund and the requirements of the [Act].

Taking account of

·        The Capital Adequacy reserving requirements; and

·        Additional capital and reserves in the statutory funds;

I am satisfied that following the proposed transfer adequate security for the policyholders of CMLA should be maintained.”

Other actuarial reports are to the same effect.

8                     I think that some care needs to be taken before an order is made dispensing with the requirements of s 191(2)(c) of the Act. Clearly enough, the policy underlying the statutory requirement, when read in conjunction with s 191(2)(b), is to give every affected policyholder a summary of the scheme and, an opportunity, if he or she so desires, to make submissions to the Court in respect of any application for confirmation of the scheme. A right to be heard in relation to a proposed scheme may be of little value if a person does not know of the proposal.

9                     Subject to one issue that I shall mention, I think the matters pointed to by Dr Flick justify the making of an order dispensing with the requirement to provide an approved summary of the scheme to every CMLA policyholder.  In particular, the nature of the scheme is one which, according to the evidence, involves no change in the entitlements or security of CMLA policyholders.  The substance of the scheme is to provide for the transfer of policies held from one insurer within a group to another. The actuarial evidence indicates that CMLA policyholders will experience no change in their contractual benefits or entitlements and, more importantly, that the scheme will have no impact on policyholder security. 

10                  I think that I can also take into account, as a circumstance attending the preparation of the scheme, the fact that notices have been published in the press which advise CMLA policyholders of the scheme and of their entitlement to appear before the Court on the application for confirmation of the scheme.  Other relevant circumstances are APRA’s approval of the proposed course and the fact that the actuary responsible for preparation of the scheme provided a copy of his report on the scheme to APRA on 14 March 2003 in which the view was expressed that CMLA policyholders will not be prejudiced by the scheme.

11                  The remaining issue to which I have referred is this. On the first return date, when Dr Flick sought to move on the motion, I raised with him a concern I had that CLL policyholders (numbering about 278,800) had each received a notice of summary of the scheme. I asked why the applicants distinguished between the CLL policyholders and the CMLA policyholders in terms of individual notification of the scheme.

12                  The answer that has been provided to that question is as follows:

• It is the CLL policyholders whose policies are being transferred, while the CMLA policyholders will experience no change in their relationship with their insurer. All of the statutory funds to which the CMLA policies are referable remain intact.
• CLL policyholders, in any event, must be informed of the proposed transfer and of the statutory fund maintained by CMLA to which their respective policies will be referable after the transfer, assuming confirmation of the scheme.
• The interests of CMLA policyholders have been considered by a number of actuaries, including an independent actuary and the conclusion has been reached that their interests are not prejudiced by the scheme.

13                  In the circumstances I have outlined, I am satisfied, both by reason of the nature of the proposed scheme and also by reason of the circumstances attending its preparation, that it is not necessary that an approved summary of the scheme be given to every CMLA policyholder.  Accordingly, I dispense with the need for compliance with s 191(2)(c) of the Act insofar as it requires an approved summary of the scheme to be given to the CMLA policyholders.

14                  Since there are obvious difficulties in tracing policyholders for whom CLL has no record of a current mailing address, I think it appropriate also to make an order dispensing with compliance with s 191(2)(c) of the Act, insofar as it requires an approved summary of the scheme to be given to holders of CLL policies for whom CLL has no record of a current mailing address.

Associate:

Dated:              20 May 2003