Acorn Prudential Limited, the application of Acorn Prudential Limited [2006] FCA 551

REASONS FOR JUDGMENT 1 The Applicant in the proceedings now before the Court, Acorn Prudential Limited, was registered as a company limited by guarantee on 5 June 1902 as United Ancient Order of Druids Friendly Society NSW Limited. On 9 September 2005 the Applicant entered into an agreement with Australian Health Management Group Limited ('AHM'). That company was registered as a company limited by guarantee on 21 December 1988. 2 The Applicant is a friendly society within the meaning of s 16C(1) of the Life Insurance Act 1995 (Cth) ('the Act'). It is also a jointly regulated friendly society within the meaning of s 16ZB(2) of the Act. The constitution of the Applicant provides for the Applicant to provide health and welfare benefits and other benefits to members of the Applicant. 3 A person becomes a member upon that person becoming a benefit fund member under clause 6.3 of the constitution. 'Benefit Fund' is defined in clause 1.1 of the constitution to mean a fund: '(1) that is established to provide benefits in accordance with this Constitution; and (2) that is established in the records of the Society …' 4 'Society' is a reference to the Applicant. 5 The Applicant has three benefit funds, namely, a Health Benefits Fund, a Funeral Benefit Fund and a Blue Chip Endowment Assurance Fund. Its Health Benefits Fund had some 1611 members as at 30 June 2005 but because some memberships were family memberships the overall number of persons in the fund as at 30 June 2005 was 2807. The net assets of the Applicant's Health Benefits Fund were $1.991 million as at 30 June 2005. 6 AHM on the other hand, had a health fund which, as at 30 June 2005, had 233,392 members with net assets of $123.369 million. It may be readily inferred from the foregoing that the latter fund is, from an administration point of view, more economic than the Applicant's fund. A number of factors led to the conclusion that it was in the best interests of members of the Applicant's fund that the business of that fund should be transferred to AHM. 7 These included: (a) the Applicant's fund had an ongoing difficulty in meeting capital adequacy ratios required of it by the Private Health Insurance Administration Council ('PHIAC') and had been obliged to obtain financial support from the Applicant's management fund; (b) the Applicant's fund had an ageing membership and had not attracted any new younger members for some time; (c) the Applicant's fund's fixed costs contributed to higher management charges than currently existed with many other health funds; (d) the Applicant's fund only offered a limited range of tables to its members; and (e) the Applicant's fund did not have facilities which have become commonplace among other health funds which if introduced into the Applicant's fund would require substantial capital investment. 8 On 18 August 2005 the Applicant resolved to transfer the business of its Health Benefits Fund to AHM and on 9 September 2005 an agreement was entered into between the Applicant and AHM for the sale of that fund. Under clause 4.1 of the agreement, the price payable was to be the value of the net assets of the relevant fund as at the date of completion and a mechanism was put in place for the determination of that amount. 9 Under clause 5 of the agreement, provision was made for the price for the fund to be applied in two ways. Firstly, 50% was to be paid to the Applicant to be credited to its Management Fund and secondly, 50% was to be applied by way of the provision of additional benefits to continuing members of the Applicant's fund in accordance with schedule 4 to the agreement. Schedule 4 provided for the proceeds of the account in which the moneys were to be invested to be applied for the benefit of the members of the Applicant's Health Benefits Fund in the form of lower premiums until 31 December 2008 or until such time as the balance in the relevant account fell below $100,000, whichever should first occur, whereupon the balance in the account was to be returned to AHM for its own use and benefit. 10 The agreement did not expressly deal with the manner in which the Applicant was to deal with that one half of the purchase price which was to be credited to its Management Fund. The Applicant's Management Fund was established and maintained in accordance with clause 10 of its constitution. The proposal was that the one half of the purchase price credited to the Management Fund would work for the benefit of members of the Health Benefits Fund in this way. It was contemplated that a new benefits fund would be established which would provide an investment bond for each member of the Applicant's Health Benefits Fund. It was contemplated that this fund would be accessible to members of the Applicant's Health Benefits Fund after the expiration of three years from its establishment through to ten years after its establishment and, if not earlier withdrawn, the benefit of the individual members' entitlements under the new benefit fund would be paid out to them at the expiration of the ten year period. 11 The Act contains a somewhat unusual s 16ZC which permits modifications to be made to the Act by the regulations made under s 253 of the Act. Under schedule 6 to the Life Insurance Regulations 1995 (Cth) ('the Regulations') further modifications were made to the Act in relation to jointly regulated friendly societies. By virtue of these amendments no part of the Applicant's health insurance business was capable of being transferred to another organisation except under a scheme confirmed by the Court (see s 190(1A)). 12 Part 9 of the Act entitled 'Transfers and amalgamations of life insurance business' applies to the transfer of the Applicant's Health Benefits Fund to AHM. The relevant statutory provisions for present purposes are ss 189 to 194 of the Act. Apart from the modification to s 190 to which I have referred, further modifications were made to ss 191(2)(a) and 193 of the Act by schedule 6 to the Regulations. 13 The sections in question require an Applicant for confirmation of a scheme to give a copy of the scheme and any actuarial report on which the scheme is based to the Australian Prudential Regulation Authority ('APRA'), PHIAC and the Minister for Health and Aging. Section 190(3) of the Act provides: '190(3) A scheme must set out: (a) the terms of the agreement ... under which the proposed transfer ... is to be carried out; and (b) particulars of any other arrangements necessary to give effect to the scheme.' 14 By letters dated 30 September 2005 to APRA, PHIAC and the Minister, the Applicant gave each of the persons mentioned a copy of the agreement made 9 September 2005, a draft Scheme of arrangement, a summary of the draft Scheme of arrangement, an actuarial report of a Mr Stevenson of 12 September 2005, an auditor's report of Mr Lewis of 8 September 2005, a draft form of public notice, draft benefit fund rules and a covering letter to members advising of the Scheme. By letter dated 22 March 2006, which bears the stamped date 23 March 2006, APRA approved a summary of the Scheme, advised its requirements in respect of publication of Notice of intention to apply for confirmation of the Scheme and approved the form of the Notice of intention to apply for confirmation of the Scheme for advertisement purposes. The General Manager - Specialised Institutions, Central Region of APRA also said: 'I have had regard to the Scheme, pursuant to Part 9 of the Life Insurance Act, for the transfer and amalgamation of the health insurance business of Acorn Prudential Limited with Australian Health Management Group Limited and have no objection to the companies proceeding with their application to the Court to confirm the Scheme.' 15 By letter dated 13 April 2006, which bears the stamped date 18 April 2006, APRA forwarded to the Applicant an approval of benefit fund rules under s 16L(3) of the Act. Those rules related to the investment of one-half of the purchase price which was to be paid to the Applicant's Management Fund under clause 5.1(a) of the agreement. 16 By an application filed in Court on 2 March 2006, the Applicant sought confirmation of the Scheme, a copy of which was annexed and marked "A" to the application. Whilst the application was filed on 2 March 2006, the formal application of the Applicant for confirmation of the scheme was not made until today. The Applicant, as a company affected by the scheme, was entitled to bring the application in accordance with ss 193(1), (2) and (4) of the Act, and APRA, PHIAC and the Minister for Health and Ageing are entitled to be heard on the application. 17 When the matter was called for hearing earlier today, the Minister did not appear. However, appearances were announced for APRA and PHIAC. APRA advises that it has examined the scheme, obtained satisfactory answers where clarification has been sought and supports the application. PHIAC is of the view that the transfer of the Applicant's health insurance business is in the best interests of the contributors to the Applicant's Health Benefits Fund and will not disadvantage the contributors to the health benefits fund of AHM. 18 The Act provides for the publication in the Gazette and in newspapers of Notice of intention on the part of the Applicant to make the application. APRA's requirement was that, not only should there be publication in the Gazette, but also in The Australian newspaper and the Sydney Morning Herald newspaper. I am satisfied that due notice of intention to make the application was published as required. 19 The Act also requires an approved summary of the Scheme to be given to every affected member of the Applicant's Health Benefits Fund. I am satisfied that this requirement was complied with when a summary approved by APRA was sent to the affected members. Under s 191(4) of the Act, affected members were entitled to be provided with a copy of the Scheme free of charge in the event that they requested same. The evidence of Ms Nai is that nine members requested a copy of the scheme. She handed a copy to one such member and posted, by express post, copies to the other eight members. 20 The form of the Scheme so provided was as indicated in exhibit A33 which was marginally different from that attached as annexure A to the application as filed. Two actuaries have expressed opinions about the scheme. Mr Stevenson of Mercer Finance & Risk Consulting said in his report dated 12 September 2005: 'Our review did not uncover any reason to believe that AHM would not be able to provide your members with adequate service for the foreseeable future. The current financial statements indicate that AHM is financially sound and this is supported by your auditor.' 21 The last mentioned reference was to Mr Lewis, a partner in Forsythes, accountants, who in relation to the proposed transfer said in his report dated 8 September 2005: 'Our review indicates that the Australian Health Management Group Limited is in an acceptably strong financial position and that the financial positions as reported in the documents referred to earlier are not misstated in any material way.' 22 The other actuary who expressed an opinion about the proposed transfer was Mr Rawsthorne of Cumpston Sarjeant Pty Limited who said in his report: 'Considering the members of benefit funds other than the HFIB Fund [Health Fund Investment Bond Fund], I agree with the opinion provided by Carl Stevenson in his 16 February 2006 letter, and its justifications. In my opinion the interests of the benefit funds (other than the HFIB fund) will not be diminished by the transfer.' 23 The letter of 16 February 2006 from Mr Stevenson to the Applicant included the following: '… I have reviewed the financial position of AHM and, assuming the audited financial statements and AHM's actuarial assessments are sound, I regard AHM as being in a sound financial position. The Acorn Prudential Ltd (formerly Druids NSW) health fund is very small having roughly 1,600 members. The extremely small size means there is a much greater risk of significant adverse experience than would be expected in a much larger organisation. Larger organisations exhibit less volatile claims experience. Small organisations are also subject to expense levels (expressed as a percentage of contributions received) that are higher than larger organisations which can spread overheads over a larger base. The expense rate for Acorn Prudential Ltd health fund was around 20% in 2004/05 compared with 10.5% for AHM. The lower expense rate is a significant improvement for the Acorn Prudential Ltd health fund members. They also gain the greater security that comes with being part of a larger fund. The sale agreement also provides for the net assets of the Acorn Prudential Ltd health fund to be applied to benefit the Acorn Prudential Ltd health fund members. I understand that the costs incurred for the transfer will be charged to the health fund and net assets will be assets after these charges. Half of these net assets will be applied in the form of a contribution discount and the other half will be passed to Acorn Prudential Ltd and placed in a new benefit fund for ex Acorn Prudential Ltd health fund members. Each member will receive the same benefit entitlement. The new benefit fund ensures that members retain voting rights in Acorn Prudential Ltd. In view of the greater security, the allocation of surplus assets for the benefit of members and the retention of voting rights in Acorn Prudential Ltd in my opinion the health fund members will not be disadvantaged by the transfer. The members are I believe advantaged by the transfer.' 24 Mr Stevenson proceeded to consider the position of the members of the Applicant's other funds, namely its Funeral Benefit Fund and its Blue Chip Endowment Assurance Fund and concluded: 'In my opinion the interests (both financial and voting) of the members of the benefit funds (other than the health fund) will not be diminished. Hence none of these members will be disadvantaged by the transfer.' 25 I am satisfied that all of the necessary procedural steps laid down in the Act and the Regulations have been complied with. Given the involvement of APRA in the process which has lead to the hearing today, the absence of any requirement on the part of APRA for an independent actuary to make a written report on the scheme in accordance with s 192(1) of the Act, the position taken by APRA and PHIAC in relation to the application and the lack of any opposition from any affected member along with the support for the scheme by AHM, I am of the view that an order for confirmation of a scheme should be made. 26 The approved summary of the Scheme is to be found in exhibit A34. Those members who requested a copy of the scheme were provided with a copy of the document which is exhibit A33. Whilst APRA, PHIAC and the Minister had copies of the agreement made 9 September 2005 and the benefit fund rules proposed in respect of the new benefit fund to be established with one-half of the purchase price at all material times, nevertheless copies of the agreement and of those rules were never made available to the members requesting a copy of the Scheme in accordance with s 191(4) of the Act. 27 In the light of the judgment of Katz J in The Application of Royal & Sun Alliance Life Assurance Limited [2000] FCA 1259 at [7] - [12] and the decision of Emmett J in Re Armstrong Jones Life Assurance Limited (1997) 74 FCR 160 at 163, I am satisfied that the application for confirmation of the scheme made today is competent, even though the formal application was filed on 2 March 2006 and notwithstanding the provisions of s 191(2) of the Act and the relevant provisions of the Regulations. My only concern has been as to whether the Scheme, the confirmation of which has been sought, sufficiently sets out the terms of the agreement under which the proposed transfer is to be carried out. 28 On one construction, s 190(3)(a) of the Act would require the Scheme to set out verbatim all of the provisions of the relevant agreement. The contrary construction, for which senior counsel for the Applicant contends, is that the section will be complied with if the salient terms of the agreement referable to the transfer are set out in the Scheme. When one has regard to the fact that the agreement, amongst other things, deals with the administration in the future of the Applicant's Funeral Fund, I am inclined to accept the submission of senior counsel for the Applicant that the construction for which he contends is correct. 29 Notwithstanding my satisfaction that the Scheme contained in exhibit A33 satisfies the requirements of s 190(3) of the Act, I think that confirmation of that scheme should be subject to two modifications, namely the attachment of a copy of the agreement made 9 September 2005, which is exhibit A6, and also a copy of the approval of benefit fund rules of APRA dated 13 April 2006 and the schedule thereto, which is part of exhibit A40. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Graham.