FEDERAL COURT OF AUSTRALIA

MDU Australian Insurance Company Pty Limited, in the matter of MDU Australian Insurance Company Pty Limited [2008] FCA 490

IN THE MATTER OF MDU AUSTRALIA INSURANCE COMPANY PTY LIMITED, MDU AUSTRALIA INSURANCE COMPANY PTY LIMITED

NSD152 of 2008

EMMETT J

3 APRIL 2008

SYDNEY

‘A’

SCHEME

INSURANCE ACT 1973

(PART III DIVISION 3A)

SCHEME FOR THE TRANSFER OF THE AUSTRALIAN INSURANCE BUSINESS OF MDU AUSTRALIA INSURANCE COMPANY LIMITED TO avant INSURANCE LIMITED

Background

A.         MDU Australia Insurance Company Limited (ABN 46 070 399 950) (‘MDUAIL’), a company incorporated in New South Wales and Avant Insurance Limited (ABN 82 003 707 471) (‘Avant Insurance’), a company registered in New South Wales, are each authorised to carry on Insurance Business in Australia under the Insurance Act. 

B.         This Scheme has been prepared under Part III Division 3A of the Insurance Act to give effect to the terms of an agreement by which MDUAIL and Avant Insurance have agreed that MDUAIL’s Insurance Business and Insurance Contracts be transferred to Avant Insurance, subject to confirmation by the Federal Court.

C.         This Scheme is based upon the Actuarial Report.

1.         DEFINITIONS AND INTERPRETATION

1.1        Definitions

In this Scheme, unless the context requires otherwise:

‘Actuarial Report’ means the report dated 13 February 2008 of Adrian Gould, upon which the Scheme is based;

‘Approved Actuary’ means Adrian Gould of Taylor Fry Consulting Actuaries, or such other actuary appointed by MDUAIL to supervise the Insurance Business whose appointment has been approved by APRA in accordance with section 40 of the Insurance Act;

‘APRA’ means the Australian Prudential Regulation Authority;

‘Assumed Liabilities’ means all liabilities of MDUAIL including but not limited to:

(a)        all Claims reported and outstanding;

(b)        all obligations and liabilities arising under the Insurance Contracts;

(c)        incurred but not reported Claims (IBNR);

(d)        premium liabilities;

(e)        claims handling expenses in relation to the above liabilities as relevant;

(i)         all liabilities in relation to eligible run off claims arising under the Medical Indemnity Act 2002 (Cth) in respect of the Run Off Cover Scheme, if any; and

(f)         all other liabilities and obligations of MDUAIL.

‘Business Day’ means a day that is not a Saturday, Sunday, public holiday or bank holiday in New South Wales;

‘Claims’ means any claim, whether actual or contingent, made by a Policyholder under an Insurance Contract which was issued by MDUAIL prior to the Effective Date and includes any existing or pending legal proceedings in relation thereto.

‘Completion’ means completion of the transactions provided for in this Scheme, which are to take place on, or as soon as reasonably practicable after, the Effective Date;

‘Effective Date’ means 3 April 2008 or such other day as is ordered by the Federal Court;

‘Federal Court’ means the Federal Court of Australia;

‘Insurance Act’ means the Insurance Act 1973 (Cth);

‘Insurance Business’ has the meaning given to that expression in the Insurance Act;

‘Insurance Contracts’ means all contracts for general insurance risks in Australia issued by MDUAIL;

‘Owner’, in relation to a Insurance Contract, means a person who for the time being is insured under an Insurance Contract;

‘Policyholder’ means the person identified as the insured under an Insurance Contract;

‘Portfolio Assets’ means:

(a)        cash and investments;

(b)        the benefits arising from the Reinsurance Contracts;

(c)        entitlements to any Commonwealth payments due under the Medical Indemnity Act 2002 (Cth) by way of indemnity or otherwise in respect of the High Cost Claim Scheme, Exceptional Claim Scheme and Run Off Cover Scheme, if any;

(d)        trade debtors; and

(e)        all other assets of MDUAIL;

‘Portfolio Transfer Deed’ means the Portfolio Transfer Deed dated 15 February 2008 between MDUAIL and Avant Insurance for the transfer of MDUAIL’s Insurance Contracts to Avant Insurance.

‘Reinsurance Contracts’ means contracts in place between MDUAIL and reinsurers of MDUAIL’s risks in Australia as at the Effective Date;

‘Reinsurance Recoveries’ means the moneys to be paid to MDUAIL pursuant to the Reinsurance Contracts;

‘Scheme’ means the scheme contemplated by this document;

1.2.       Interpretation

In this Scheme, except where the context otherwise requires:

(a)        the singular includes the plural and vice versa, and a gender includes other genders;

(b)        a reference to a clause, paragraph, schedule or annexure is to a clause or paragraph of, or schedule or annexure to, this Scheme, and a reference to this Scheme includes any schedule or annexure;

(c)        a reference to A$, $A, dollar or $ is to Australian currency;

(d)        a reference to a person includes a natural person, partnership, body corporate, association, governmental or local authority or agency or other entity;

(e)        a reference to a statute, ordinance, code or other law includes regulations and other instruments under it and consolidations, amendments, re‑enactments or replacements of any of them;

(f)         a word or expression used in this Scheme which is defined in the Act has the meaning given to it in the Act; and

(g)        if a day on or by which an obligation must be performed or an event must occur is not a Business Day, the obligation must be performed or the event must occur on or by the next Business Day.

1.3.       Headings

Headings are for ease of reference only and do not affect interpretation.

2.         THE SCHEME

2.1.       Upon confirmation of this Scheme, on and with effect from and including the Effective Date:

(a)        MDUAIL transfers and assigns by statutory vesting the Portfolio Assets to Avant Insurance and Avant Insurance will accept such transfer and assignment by statutory vesting;

(b)        Avant Insurance assumes by statutory vesting the Assumed Liabilities and, by virtue of the order of the Court and without any further act or instrument, the Assumed Liabilities will become liabilities and obligations of Avant Insurance;

(c)        Avant Insurance indemnifies and will keep indemnified MDUAIL from and against all Assumed Liabilities and all actions, proceedings, claims, costs and demands in respect of Assumed Liabilities; and

(d)        Avant Insurance is substituted for MDUAIL under all Insurance Contracts by way of novation and MDUAIL is released and discharged from all Assumed Liabilities.

3.         INSURANCE CONTRACTS

3.1.       Despite anything to the contrary in the Insurance Contracts, on and from the Effective Date, all Insurance Contracts are assigned to Avant Insurance.

3.2.       On and from the Effective Date, Avant Insurance:

(a)        is bound by;

(b)        must perform the obligations under (which prior to that date were obligations of MDUAIL);

(c)        is entitled to the benefits of and to take action under; and

(d)        assume any obligations and liabilities in respect of and relating to any matter arising out of,

the Insurance Contracts as if it were a party, and at all times had been a party, in place of MDUAIL.

3.3.       On and from the Effective Date, MDUAIL is released from all obligations and liabilities under the Insurance Contracts.

4.         REINSURANCE CONTRACTS

4.1        On and from the Effective Date, all Reinsurance Contracts to which MDUAIL is or has been a party (as reinsured) relating to the Insurance Contracts are assigned to Avant Insurance.

4.2        On and from the Effective Date, Avant Insurance:

(a)        is bound by;

(b)        must perform the obligations under (which prior to that date were obligations of MDUAIL);

(c)        is entitled to the benefits of and to take action under; and

(d)        assume any obligations and liabilities in respect of and relating to any matter arising out of,

the Reinsurance Contracts as if it were a party, and at all times had been a party, in place of MDUAIL.

5.         PROCEEDINGS

If any proceedings are pending or any proceedings are brought on or after the Effective Date by or against MDUAIL in any court or tribunal in respect of an Insurance Contract, such proceedings will be continued by or against Avant Insurance and any judgment or determination for or against MDUAIL in any such proceedings will have effect as if such judgment or determination had been made for or against Avant Insurance and Avant Insurance will indemnify and keep indemnified MDUAIL accordingly.

6.         EFFECTIVE DATE

The transfer of Assumed Liabilities to Avant Insurance pursuant to this Scheme takes effect on and from the Effective Date and MDUAIL will account to Avant Insurance and Avant Insurance will be entitled to all benefits and assume all obligations in respect of the Assumed Liabilities as from and including the Effective Date.

7.         IMPLEMENTATION

MDUAIL and Avant Insurance will do all acts and things and execute all documents necessary or desirable to give effect to the provisions of the Portfolio Transfer Deed, this Scheme and the Actuarial Report and the transactions contemplated by them.

8.         COSTS OF SCHEME

8.1.       The costs and expenses of and incidental to the preparation and confirmation of this Scheme and its implementation will be borne by Avant Insurance, unless the parties otherwise agree.

8.2.       Any stamp duty, duties or other taxes of a similar nature (if any) in connection with this Scheme will be paid by Avant Insurance.

9.         SUBSEQUENT CHANGES

9.1.       Counsel appearing for the parties at the hearing of the application for confirmation of the Scheme is hereby authorised to assent to any modification the Court may think fit to approve or impose pursuant to the provisions of the Insurance Act.

IN THE MATTER OF MDU AUSTRALIA INSURANCE COMPANY PTY LIMITED

REASONS FOR JUDGMENT

1                          Before me is an application under the Insurance Act 1973 (Cth) (the Act) for confirmation of a scheme involving the transfer of the insurance business of the first applicant, MDU Australia Insurance Company Pty Limited (MDU), to the second applicant Avant Insurance Limited (Avant).  Some of the background to the proposal was outlined in my reasons, of 14 February 2008, for dispensing with the need for compliance with the provisions of s 17C(2)(c) of the Act (see MDU Australia Insurance Company Pty Ltd, in the matter of MDU Australia Insurance Company Pty Limited [2008] FCA 342).

            THE SCHEME

2                          The pivotal provision of the proposed scheme is to be found in clause 2.1, whereby MDU transfers and assigns the Portfolio Assets, as defined, to Avant and Avant assumes the Assumed Liabilities, as defined.  Portfolio Assets are, in essence, all assets of MDU.  Assumed Liabilities are, in effect, all liabilities and obligations of MDU.  There are other supporting provisions of the scheme to ensure an effective transfer of the business of MDU to Avant. 

3                          The procedural steps required by the Act are extensive.  I am satisfied from the evidence that has been read that the steps have been satisfied, as set out in the annexure to the affidavit of Derek Raymond Hilliard, sworn 31 March 2008. 

4                          However, there are two matters to which the Court’s attention has been drawn in relation to the procedural requirements.  The first is that the scheme that was before the Court on 14 February 2008 has been amended in several immaterial respect; I do not consider that those changes have any bearing on the exercise of the Court’s discretion.    

5                          The other matter is slightly more substantive.  It is a requirement of s 17C(2)(b) of the Act that a notice of intention to make an application for confirmation of a scheme be published by the applicant in accordance with Prudential Standards prescribed by Australian Prudential Regulatory Authority (APRA).  One of those requirements, contained in Prudential Standard GPS 410, is that the applicant must publish notice of its intention to make an application, in a form approved by APRA, in the Government Gazette and in one or more newspapers approved by APRA.  Paragraph 16 of Prudential Standard 410 requires that the notice be published before the scheme is released for public inspection and that a copy of the scheme be open for public inspection during specified hours every day for a period of at least 15 days.

6                          While notice of MDUs intention to apply was published on 4 March 2008 in newspapers approved by APRA, notice of its intention was not published in the Government Gazette until 11 March 2008, notwithstanding that the scheme was open for public inspection from 4 March 2008.  The reason for the non-compliance was that the timetable that was adopted was too tight to enable the notice to be published in an appropriate edition of the Government Gazette. 

7                          I am satisfied that the failure to comply strictly with the requirement of Prudential Standard 410 should not adversely affect the exercise of the Court’s discretion.  In exercising the discretion under the Act to confirm a scheme, the Court has a general discretion.  The Act does not specify any criteria to be satisfied.  The critical consideration is whether affected policy-holders will be detrimentally affected by the implementation of the scheme.  As I indicated in my earlier reasons, MDU and Avant are wholly-owned subsidiaries of Avant Mutual.  The purpose of the scheme is to merge the captive insurers of Avant Mutual and so gain the economies of a merged entity.  Clearly enough, one effect of the scheme will be to avoid significant duplication of compliance and prudential requirements. 

8                          The interests of affected policy-holders of MDU must be the subject of critical consideration.  The evidence of Mr Adrian Gould, the approved actuary of Avant, is that there is potentially an erosion of the security of the MDU policy-holders.  The level of such security is judged by the ratio of the APRA approved capital base of an insurer to APRAs minimum capital requirement for that insurer.  That ratio for MDU’s policyholders will drop from 378% to 321%.  Nevertheless, that ratio is comfortably in excess of the ratio that APRA regards as an appropriate ratio, namely, 150%.

9                          The interests of the transferee policyholders must also be considered.  The evidence of Mr Gould suggests that the position of Avant policyholders will be marginally improved in that the relevant ratio will increase from 319% to 321%. 

10                        Avant already manages the business of MDU and the policy conditions will be unchanged.  The proposed transfer of business will be seamless.  MDU has, in fact, been in run off since 1999 and the affected policyholders are nine policyholders with open files who have given notification of possible claims.  None of those notifications has yet resulted in a claim.  None of the prospective claims has been active since 1998.  All of MDU’s reinsurers have intimated that they have no objection to the proposed scheme. 

11                        APRA was represented at the hearing today and does not oppose the scheme.  APRA approved the relevant summary that was required to be given to policyholders.  Further, APRA did not consider that it was necessary to arrange for the appointment of an independent actuary.  Affected policyholders have been notified in accordance with the requirements of the Act and Prudential Standard 410.  There have been no objections by affected policyholders. 

12                        In all of the circumstances, I am satisfied that there is unlikely to be any materially adverse effect on the MDU policyholders.  Accordingly, I propose to confirm the scheme pursuant to s 17F of the Act.

13                        Amongst the evidence that has been tendered are schedules of the policyholders of MDU who still have outstanding notifications.  MDU has asked that access to that evidence be limited to the applicants and their lawyers, and to APRA and its lawyers.  It is appropriate in the circumstances to make an order to that effect. 

Associate:

Dated:         15 April 2008