Australian Health Insurance Association Ltd v Esso Australia Ltd

Federal Court of Australia|2007-12-19|Before: Lindgren J

Pursuant to section 17C(5) of the Insurance Act 1973 (Cth) (Act), an order that the need for the applicants to comply with section 17C(2)(c) of the Act is dispensed with in relation to the affected policyholders noted as being "Scheme Class C" policyholders in the spreadsheet at tab 6 of Exhibit DJP-1 to the affidavit of David John Porteous sworn on 20 September 2007 (the Policyholder Spreadsheet) (Porteous 1), and otherwise referred to as "Class C policyholders" in that affidavit (the Class C Policyholders), provided that: (a) an approved summary of the scheme is sent by pre-paid post to the relevant reinsurance broker in respect of each of the Class C Policyholders who: (i) is nominated with "NA" in the code column of the Policyholder Spreadsheet; and (ii) where the address to which the approved summary is to be sent is that given in the column titled "2007 Address Details" in the Policyholder Spreadsheet; (b) an approved summary of the scheme is sent by pre-paid post to the relevant reinsurance brokers in respect of the Class C Policyholder, nominated with "PR" in the column code of the Policyholder Spreadsheet and identified as "Various Lloyds Underwriters - Facultative", where the names and addresses of the relevant reinsurance brokers is that given in the spreadsheet at tab 9 of exhibit DJP-1 to Porteous 1; (c) an approved summary is also to be sent by pre-paid post to the last known address for each of the Class C Policyholders, where such an address is listed in the "2005 Address Details" of the Policyholder Spreadsheet, which differs from the "2007 Address Details" in the Policyholder Spreadsheet; (d) a covering letter, in the form of the sample letter attached to this order and marked "A" be provided to each insurance broker to whom an approved scheme summary is sent; and (e) a Notice of Intention, in the form approved by the Australian Prudential Regulation Authority (APRA) on 27 September 2007, be placed in the following newspapers on or before 16 October 2007: (i) The Australian; (ii) The Financial Review; (iii) The Financial Times; (iv) The Wall Street Journal (West Coast Edition); and (v) The Wall Street Journal (East Coast Edition).

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

"A" [TO CLASS C REINSURANCE BROKERS WHERE IDENTIFIED ON CALLIDEN GROUP LIMITED'S LETTERHEAD] [Date] [Address] Dear Sir / Madam Proposed transfer of the insurance and reinsurance business of Calliden Group Limited (ACN 061 215 601), formerly known as Reinsurance Australia Corporation Limited, (CGL) to Calliden Limited (ACN 110 186 224) (Calliden)

We are writing to provide you with important information regarding the proposed transfer of all of CGL's insurance business to Calliden.

Our records indicate that you are a reinsurance broker who has placed and/or administers, or in the past has administered, insurance or reinsurance policies underwritten by CGL.

CGL has applied to the Federal Court of Australia to confirm the transfer of its insurance business to Calliden by means of an insurance transfer scheme (Scheme) under Part III, Division 3A of the Insurance Act 1973 (Cth) (Act).

On 13 November 2007, the Court will be asked to confirm the scheme. If the scheme is confirmed, all policies, together with the insurance assets and liabilities of CGL, will become policies of Calliden. Calliden will then become the (re)insurer of the policies the subject of the scheme. Calliden will be wholly responsible for all obligations under those policies. All claims currently handled by CGL will be handled by Calliden. Any future claims arising under the transferred policies will similarly be handled by Calliden.

Part III, Division 3A of the Act, and the prudential standards provided by the Australian Prudential Regulation Authority (APRA), require that CGL provides affected policyholders with an APRA approved summary (summary) of the scheme to transfer its insurance business

Notwithstanding that you are not an affected policyholder, CGL has decided to provide you with a copy of the summary for your information. The copy is enclosed with this letter.

You are not required to take any action in respect of the proposed scheme. However, should you require further information, please the section titled "Public Inspection" in the summary or, if an affected policyholder seeks your advice and wishes to be heard at the Court proceedings, please see the section titled "Court Application and Right to Appear" in the summary.

Nick Kirk Chief Executive Officer Calliden Group Limited IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NSD 1903 OF 2007

Pursuant to section 17F(1) of the Insurance Act 1973 (Cth) (Act), the Scheme, a copy of which is annexed to this order and marked "A", in relation to a proposed transfer of the general insurance business of Calliden Group Limited to Calliden Limited be confirmed.
Pursuant to section 17F(2) of the Act, and despite anything to the contrary in any reinsurance treaties or arrangements to which the first applicant is a party: (a) on and from 11.59pm on 15 November 2007, all Outward Reinsurance Contracts, as defined in the Scheme, are valid, effective and continuing agreements between the second applicant (in place of the first applicant) and the parties other than the first applicant to those Outward Reinsurance Contracts; (b) on and from 11.59pm on 15 November 2007, the second applicant will: (i) be bound by; (ii) perform the obligations, which prior to that date were the obligations of the first applicant; (iii) be entitled to the benefits of and to take action under; and (iv) assume any obligations and liabilities in respect of, and relating to any matter arising out of,

the Outward Reinsurance Contracts, as if it were a party, and at all times had been a party, to the Outward Reinsurance Contracts, in place of the first applicant; and (c) on and from 11.59pm on 15 November 2007, the first applicant will be released from all obligations and liabilities under the Outward Reinsurance Contracts. 3. The applicants pay the costs of the Australian Prudential Regulation Authority as assessed or agreed. 4. Liberty to restore on 24 hours notice.

The "Transfer Date" in clause 1.1 of the scheme is 11.59pm on 15 November 2007. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NSD 1903 OF 2007

INTRODUCTION 1 Section 17B of the Insurance Act 1973 (Cth)(the Act) provides that no part of the insurance business of a general insurer may be transferred to another general insurer or amalgamated with the business of another general insurer, except under a scheme confirmed by this Court. Both applicants are general insurers and are authorised under Pt III Div 2 of the Act to carry on insurance business in Australia. The second applicant, Calliden Limited (Calliden), is a wholly owned subsidiary of the first applicant, Calliden Group Limited (CGL). CGL wishes to transfer its insurance business to Calliden. CGL would then become a non-operating holding company (NOHC), and would apply for an "NOHC authorisation" under s 18 of the Act. 2 CGL and Calliden applied to the Court for its confirmation under s 17F of the Act of a scheme under which the whole of CGL's insurance business would be transferred to Calliden. 3 Section 17C(2) of the Act provides that an application for confirmation of such a scheme may not be made unless certain conditions set out in that subsection are complied with. One of those conditions is that referred to in para (c), namely, that "an approved summary of the scheme has been given to every affected policyholder". Section 17C(5), however, provides that this Court may dispense with the need for compliance with that requirement in relation to a particular scheme if it is satisfied that, because of the nature of the scheme or the circumstances attending its preparation, compliance is not necessary. 4 The applicants included in their application a claim for interlocutory relief in the form of an order pursuant to s 17C(5) that the need for them to comply with s 17C(2)(c) be dispensed with in relation to certain affected policyholders. 5 On 11 October 2007 I made such a dispensing order subject to certain conditions. The order I then made appears at the front of these reasons for judgment. These reasons include my reasons for the making of that interlocutory order. 6 On 15 November 2007, I made orders confirming the scheme under s 17F of the Act subject to one modification: the scheme was originally to take effect at 11.59 pm on 31 December 2007 but the modification is that the time has been advanced to 11.59 pm on 15 November 2007 - the date of the making of the confirming orders. Those orders also appear at the front of these reasons for judgment, which include my reasons for confirming the scheme.

BACKGROUND 7 From August 1993 until February 2000, CGL (then known as Reinsurance Australia Corporation Limited (RAC or Re AC)) conducted an insurance business primarily in the field of reinsurance. In about February 2000, after suffering considerable operating losses in the immediately preceding years, CGL was placed into run-off. Since that time, it has been actively commuting its inward reinsurance contracts. 8 Further detail appears in an affidavit of Mark James Moyes sworn 20 September 2007. Mr Moyes is the Managing Director of 3 red Pty Limited (3 red), which operates an insurance consultancy business with a specialisation in reinsurance and was retained by CGL to assist it in connection with the scheme. Mr Moyes states that in the late 1980s and early 1990s, the worldwide reinsurance market was very competitive with downward pressure on rates. The market was affected by several significant catastrophic events which Mr Moyes identifies. In the result, capital available to the reinsurance industry was constrained and reinsurance rates increased. This created favourable market conditions for new entrants. Against that background CGL was incorporated in 1993 as a listed company on the Australian Stock Exchange (ASX). 9 CGL acted primarily as a reinsurer with a client base mostly made up of insurers, other reinsurers and Lloyds syndicates. Most of its business was written offshore, particularly in the United States of America and Europe. On average, only about five percent of its annual earned premiums originated from Australian based clients. 10 During 1999, CGL undertook some limited business in the Australian direct insurance market through an insurance underwriting agency, Insure That Pty Ltd (Insure That). CGL and Insure That entered into an agency agreement on 1 July 1999 which ran until 31 March 2000. During that nine month period CGL issued policies to approximately 3,500 policyholders through the Insure That agency. 11 Peter Robin Hayward, a director of Insure That, has supplied a spreadsheet containing a list of all Insure That policyholders whose policies were underwritten by CGL during that period, with the exception of crop insurance policies (as to which, see [50]-[54] below). 12 According to Mr Moyes, in 1995, 1996 and 1998 CGL opened various overseas branch offices. In 1996 it established a subsidiary in Monaco called Monegasque de Reassurances SAM (Monde Re). 13 As at 31 December 1998, CGL's shareholders' equity was approximately $515.7 million, but one year later on 31 December 1999 it was down to $52.9 million and CGL was placed into run-off. CGL then ceased underwriting and closed its overseas offices. Its staff numbers were reduced from approximately 130 to 30, and the number continued to fall as the run-off progressed. 14 Upon entry into its run-off phase, CGL had 1,942 policyholders (excluding the Insure That policyholders) and 21,620 contracts of insurance on its books. 15 During its run-off phase, CGL undertook a commutation process. Between 31 December 1999 and the date of Mr Moyes's affidavit, 20 September 2007, CGL commuted most of its reinsurance policies so that it now has only 937 policyholders (excluding the Insure That policyholders) in respect of approximately 5,296 contracts. 16 Further, as at 31 December 1999, CGL's total liabilities were $1.4 billion, but as the commutation process has advanced, the amount of its total liabilities has fallen. By 31 December 2000, they were down to $834.4 million; by 31 December 2001, $510 million; by 31 December 2002, $199.5 million; by 31 December 2003, $53.2 million; and by 30 June 2007, less than $4 million. 17 Adrian Diggelmann, the Chief Financial Officer of CGL and of its wholly owned subsidiaries including Calliden (together, the Calliden Group), has also provided affidavit evidence of the corporate structure and businesses of CGL and Calliden. 18 CGL is the direct holding company of six subsidiary companies. They include Calliden, and two other companies to which reference will be made, Mansions of Australia Limited (Mansions), and Calliden Insurance Limited (CIL) which was known as Australian Unity General Insurance Limited (Australian Unity) prior to 1 August 2007. CGL is also the indirect holding company, through Calliden, of Calliden Trademarks Pty Ltd. In addition, CGL is the owner of 50 percent of the issued share capital of a further five companies. 19 CGL has three aspects to its business: (a) first, it is an authorised general insurer and conducts the general insurance business (currently in run-off) previously mentioned; (b) secondly, it is the parent company of the companies in the Calliden Group; and (c) finally, it acts as a service entity for the companies in the Calliden Group, employing all staff and paying overheads. It recovers these costs from the other companies within the Calliden Group. 20 CGL's current reinsurance activities involve the management of the run-off portfolio, and include: (a) managing claims made in respect of its run-off portfolio; (b) managing and effecting commutations of policies; and (c) managing investments of its capital in accordance with the Prudential Standards of the Australian Prudential Regulation Authority (APRA). 21 CGL is required to set aside a minimum amount of its capital in accordance with APRA's Prudential Standard GPS 110 in order to enable it to respond to claims. This is APRA's Minimum Capital Requirement (MCR). The MCR is defined in GPS 110 para 5 as the "required level of capital for regulatory purposes". Once an insurer's MCR has been determined in accordance with GPS 110, its Capital Adequacy Measure (CAM) can be calculated. An insurer's CAM is determined by dividing its total base capital (also determined in accordance with GPS 110) by its MCR. APRA requires that the CAM be at least 1.2 times the MCR. 22 A joint actuarial report of Kevin Gomes and Geoff Atkins, respectively the approved actuaries of CGL and Calliden, addresses the effect of the scheme on CGL's MCR and CAM (see [85]-[91] below). 23 Mr Diggelmann states, in summary, that CGL is at present subject to two CAMs: (a) The first CAM affects CGL's ability to return capital to its shareholders. CGL is not at liberty to return capital to its shareholders unless, after deducting the cost of its investment in Calliden ($50 million) from its capital base, the capital base is greater than the sum of: (i) two times the MCR required by APRA's Prudential Standards; and (ii) the difference in claims reserves at the 99.5 per cent probability level of sufficiency and the 75 per cent probability of sufficiency. An effect of the requirement that CGL deduct $50 million, is that CGL is required to keep in reserve a greater amount of capital than it would have to do if it were not Calliden's parent. (b) The second CAM concerns CGL's ongoing operations. Following the acquisition by CGL of the Australian Unity general insurance business, that is, the acquisition of 100 percent of the issued share capital of Australian Unity General Insurance Limited, which is now known as Calliden Insurance Limited, and 100 percent of the issued share capital of Mansions of Australia Limited (see below), the second CAM has been the MCR required by GPS 110 plus a further amount of 1.2 times the adjusted MCR of Calliden, Calliden's own MCR being required to be 1.5 times the APRA minimum standard. 24 Calliden was incorporated as a wholly owned subsidiary of CGL in February 2005. It conducts a general insurance business as an APRA-authorised general insurer pursuant to Part III Div 2 of the Act. 25 For the year ended December 2006, Calliden's written premiums grossed approximately $52 million. 26 APRA has determined that Calliden must have an MCR 1.5 times the minimum required by GPS 110. Mr Diggelmann states that in his experience a 1.5 times requirement is commonly applied to start up insurers to reflect the increased risk associated with a newly established underwriter. 27 On 31 July 2007, CGL completed an acquisition of the issued share capital of CIL and Mansions. This effected the acquisition of the Australian Unity general insurance business and a 50 percent interest in Farmers' Mutual Insurance Limited(due to Mansions' 50 percentshareholding in that entity). The purchase price for the acquisition was $62.5 million, funded by way of cash and scrip. 28 The acquisition of the Australian Unity general insurance business is relevant to the proposed scheme for two reasons. First, the acquisition has resulted in CGL's CAM being altered so that the current policyholders of CGL would enjoy a higher CAM following the implementation of the scheme (that is, if their policies become policies of Calliden) than if they were to remain with CGL. 29 Secondly, as part of the process of acquiring the Australian Unity general insurance business, CGL applied on 13 July 2007 to APRA as the Commonwealth Treasurer's delegate for approval pursuant to: (a) the Financial Sector (Shareholdings) Act 1998 (Cth) (FSSA Act) on the basis that CGL was proposing to acquire a stake of more than 15 percent in a "financial sector company" as defined in the FSSA Act; and (b) the Insurance Acquisitions and Takeovers Act 1991 (Cth) (IAT Act), on the basis that the acquisition would amount to a "trigger proposal" pursuant to the IAT Act. When applying to APRA for these approvals, CGL indicated to APRA that it intended to apply to this Court for its confirmation of the present scheme. 30 On 25 July 2007, APRA gave CGL approvals under both the FSSA Act and the IAT Act. Both were conditional upon: (a) the making to APRA of a complete application to transfer the reinsurance run-off portfolio of CGL to Calliden by 28 September 2007 (the complete application was made to APRA on 16 August 2007); (b) the making to APRA by 31 October 2007 of a complete application under s 18 of the Act for authorisation of CGL as an NOHC and of a request that CGL's authorisation under s 12 of the Act be revoked; and (c) the submission to APRA of a Capital Management Plan satisfactory to APRA, designed to ensure that CGL's capital ratio would remain at least 1.2 times MCR at all times and included adequate contingency plans and trigger points for action (the Capital Management Plan was submitted to APRA in July 2007).

THE SCHEME 31 The purpose of the present scheme is to streamline the business of the Calliden Group by reducing the number of its general insurers, and allowing CGL as the Calliden Group's parent company to operate as a NOHC. If the scheme is approved, it will benefit both CGL and CGL's policyholders because: (a) Calliden, the company to which CGL's policyholders are to be transferred, will have a higher CAM than that of CGL at present; (b) there will be a saving in administrative costs to CGL and Calliden; and (c) the Calliden Group's business will be more streamlined by the concentration of its insurance business in Calliden. The only other general insurer within the Calliden Group will then be CIL. The respective Boards of Directors within the Calliden Group may decide to streamline further by placing the general insurance business wholly into either CIL or Calliden. 32 The scheme transfers from CGL to Calliden: (a) the reinsurance liabilities in respect of CGL's run-off portfolio, and the insurance policies issued by Insure That and underwritten by CGL; (b) cash or investments equal to the market value of the liabilities being transferred; and (c) the benefit of outward reinsurance contracts issued to CGL. 33 Pursuant to the Scheme Transfer Deed, Calliden agreed to assume and take over all of the liabilities, rights and obligations of CGL in respect of the insurance contracts the subject of the scheme, and CGL has agreed to pay cash or to transfer investments to Calliden which have an equivalent market value to the assumed liabilities under those insurance contracts. The value of the liabilities was determined in accordance with the actuarial report to which I refer below.

INTERLOCUTORY APPLICATION IN RELATION TO THE GIVING OF THE APPROVED SUMMARY TO EVERY AFFECTED POLICYHOLDER 34 David John Porteous is a director of 3 red (see [8] above). Mr Porteous has worked in the Australian insurance and reinsurance industry since September 1998. At that time he commenced employment with CGL and he remained employed by CGL until April 2005. From then until his commencement with 3 red on 1 April 2006, he was employed successively by two other companies. Mr Porteous deposed to steps that he took on behalf of 3 red in its role as a consultant to CGL. One task that he undertook was that of attempting to identify CGL's reinsurance policyholders. That information is housed by CGL on a combined computer software and operating system package called the "RAC System" (the RAC database). 35 Mr Porteous explained that the addresses entered on the RAC database for policyholders were often incomplete or were not entered at all. He stated that this was due to the fact that the reinsurance was placed through a reinsurance broker who often did not provide the address of the policy holder. 36 In late 2004 and early 2005, and again more recently, Mr Porteous took steps to identify the addresses of the "uncommuted reinsurance policyholders of CGL". Unfortunately, he came across instances where several entities were insured by the one policy, but the RAC database had listed only one of the insureds. The RAC database allowed for the listing of only one entity, per entry. 37 Mr Porteous also stated that in his experience no information was ever deleted from the RAC database, even if a policy ceased to operate or was commuted. The RAC database contains details of all individual contracts of reinsurance under which CGL was the reinsurer, including those that had ceased to operate and those that had been commuted. 38 Mr Porteous explained that in practice, CGL's employees did not use the RAC database in their day-to-day tasks, such as accessing policyholder information and producing financial and managerial reports. Rather, they used a "Microsoft Access database" onto which the data from the RAC database was downloaded regularly. The Microsoft Access database is more easily accessible and manipulable than the RAC database is. Mr Porteous stated, on the basis of his experience, that each month, CGL'S IT Manager, Ray Caldwell, would download the contents of the RAC database onto the Microsoft Access database. He said that the Microsoft Access database contains a complete set of CGL's records concerning its reinsurance policyholders. The searches that Mr Porteous conducted were of the Microsoft Access database. 39 Mr Porteous put into evidence a spreadsheet of all reinsurance policyholders of CGL (Policyholders Spreadsheet). The Policyholders Spreadsheet shows all insurance companies, reinsurance companies and Lloyds syndicates who had entered into contracts of reinsurance with CGL and who could therefore make claims on CGL. 40 No claims had been notified to CGL from the date of the currency of the Microsoft Access database (27 April 2007) and the date of Mr Porteous's affidavit (20 September 2007), and in that period there was only one commutation, namely, that relating to AXA Global Risks, United Kingdom (AXA UK). Although AXA UK was included in the Policyholders Spreadsheet, on 18 September 2007, CGL and AXA UK agreed to the terms of the commutation of AXA UK's reinsurance. In these circumstances, AXA UK should no longer be treated as a policyholder. 41 The Policyholders Spreadsheet identified 964 current policyholders of CGL (including AXA UK). Their names appeared in a column headed "Cedant Name per RAC". In a column headed "2005 Address Details" Mr Porteous included the policyholders' addresses that he verified in his investigation in late 2004 and early 2005. Where there was no address, Mr Porteous set about identifying the address of the individual policyholder. In some cases, he was able to do so by reference to worldwide insurance industry directories. He also resorted to the internet and searched various websites. He inserted addresses discovered in these ways into the Policyholders Spreadsheet in a column headed "2007 Address Details". Mr Porteous classified entries in the Policyholders Spreadsheet as follows: · "OK" - policyholders for whom he believed that he had located the current address; · "NA" - those for whom he was unable to locate an address; · "LL" - a Lloyds of London syndicate that had closed and no longer existed; · "PR" - a problematic policyholder requiring further consideration; · "MM" - a policyholder who was reinsured under a reinsurance policy that insured several entities. 42 Of the 964 CGL policyholders (including AXA UK) identified by Mr Porteous there were: (a) 69 policyholders who had notified a claim to CGL that was yet to be settled ("Class A policyholders"); (b) 811 policyholders who had not notified a claim to CGL under their contracts of reinsurance, excluding those in (c) below ("Class B policyholders"); (c) 84 policyholders who had not notified a claim to CGL under their contracts of reinsurance and in respect of whom Mr Porteous had not been able to find a current address, or who had ceased to exist ("Class C policyholders"). 43 In a second affidavit of Mr Porteous sworn 5 October 2007, he stated that 280 of the 338 reinsurance policies issued to the 84 Class C policyholders expired prior to 1 January 1998, and that the most recent expiry date that he had observed appeared to be 30 September 2000. 44 Mr Porteous addressed the 84 Class C policyholders as follows: (a) In the case of 61 of them, it was proposed to send the approved summary to the broker who placed the policyholder's reinsurance contract with CGL (Mr Porteous had inserted the current mailing address for the broker in the Policyholders Spreadsheet); (b) 20 of the Class C policyholders were underwriting syndicates that formed part of Lloyds of London. Each had ceased operating and had closed and ceased to exist. There was no syndicate manager or other contact person whose details could be located by Mr Porteous. There was neither a current address nor a placing broker for these 20 Class C policyholders; (c) The remaining three Class C policyholders, being those identified as problematic (PR) in the Policyholders Spreadsheet, were: the "Hawaii Hurricane Relief Fund", the "Protea Insurance Company South Africa" and "Various Lloyds Underwriters Facultative". Mr Porteous explained that the Hawaii Hurricane Relief Fund was a statutory fund set up after Hurricane Iniki, which affected Hawaii in the 1992 storm season. The Fund had been closed in 1994 and no longer existed. The Protea Insurance Company was deregistered in South Africa with effect from 5 December 2001. The "Various Lloyds Underwriters Facultative" represented a reinsurance business that was administered by the reinsurance broker in such a way that CGL was never aware of the counterparties under each contract. CGL intended to write to the reinsurance broker responsible for the placement and administration of each of those contracts. There were in fact 82 individual contracts of reinsurance placed with CGL through eleven individual reinsurance brokers, and Mr Porteous set out a schedule of those brokers and their current addresses. 45 The RAC database also contained details of outward reinsurance contracts that had been purchased by CGL. The information containing outward reinsurance was also downloaded onto the Microsoft Access database on a monthly basis as part of the download of the entire suite of information housed on the RAC database. Mr Porteous ascertained that there were 163 current reinsurers of CGL as at 12 July 2007. He created an "Outward Reinsurance Spreadsheet" listing the names and countries of origin of the reinsurers. Of the 163 listed CGL reinsurers, Mr Porteous was able to find a current address for 104 of them, unable to locate a current address in the case of 32 of them, and the remaining 27 of them were reinsurers who were underwriting syndicates forming part of Lloyds of London, each of which syndicates had ceased operations, had closed and no longer existed. The first group was marked "OK", the second group "NA", and the third group "LL" on the Outward Reinsurance Spreadsheet. 46 Mr Porteous also searched the RAC database and obtained details of the reinsurance brokers who were responsible for the placement and administration of all contracts of reinsurance entered into by CGL. His search revealed that there were 209 reinsurance brokers involved with CGL as at the date of his search, 12 July 2007. Mr Porteous created a spreadsheet containing details of these reinsurance brokers (the Reinsurance Brokers Spreadsheet). Of the 209 CGL reinsurance brokers listed, Mr Porteous identified 185 whose addresses he could locate, and 24 whose addresses he could not locate, marked respectively "OK" and "NA" in the Reinsurance Brokers Spreadsheet. 47 Finally, Mr Porteous exhibited to his affidavit a copy of an Excel spreadsheet provided by Mr Hayward showing the names and addresses of the 3,524 individual policyholders of Insure That. 48 Harold Fredrick Kable, a director of Australia 2 Pty Limited (A2) which provides IT consultancy services to, inter alia, the insurance industry, provided affidavit evidence as to how the Excel spreadsheet of insurances effected by Insure That with CGL was prepared. He stated that since about 1 November 1999, Insure That has maintained lists of all of its policyholders on its computer software database known as "Titen". Mr Kable had worked as an IT consultant for Insure That since about July 1999, and A2 provided Insure That with IT consultancy services. One of Mr Kable's tasks at Insure That was to maintain and operate the Titen software, and he had an extensive knowledge of the way in which it operated and of its place in Insure That's business. 49 Mr Kable accessed the Titen system and isolated all of the insurance policies underwritten by CGL that were issued by Insure That at any time. He saved that information onto the Excel spreadsheet and emailed it to Mr Peter Hayward, the Managing Director of Insure That. Mr Kable stated that so far as he was aware, there were no insurance policies issued by Insure That underwritten by CGL that were not recorded in that spreadsheet, except for crop insurance policies. The crop insurance policies were on a standalone software system, with its own language that was not transferred to the Titen system.

CROP INSURANCE 50 Insure That effected crop insurance underwritten by CGL during the six month period, 1 July 1999 to 31 December 1999. There was a problem in gaining access to the database relating to the crop insurance. 51 Mr Hayward of Insure That provided affidavit evidence in relation to his attempt, in response to the request by Mr Moyes of 3 red, to identify all insurance policies underwritten by CGL and procured by Insure That. He referred to the assistance he obtained from Mr Kable in relation to insurances other than crop insurances (see [48]-[49] above). 52 Mr Hayward confirmed that the data in relation to crop insurance was housed on a standalone database that was written in a language developed by a former IT consultant of Insure That (Crop Software Database) and was never transferred to Insure That's Titen software system maintained by Mr Kable. 53 The consultant who wrote the Crop Software Database had died. Mr Hayward was unable to access that database to gain a list of the crop insurance policyholders. He estimated the number of policyholders who took out crop insurance between July 1999 and December 1999 to be no more than 300, and possibly to be as few as 200. Mr Hayward was not able to give the names and addresses, however. 54 In his affidavit sworn 4 October 2007, Mr Hayward stated: In respect of these crop insurance policyholders, and their policies, I believe the following: (a) the crop insurance insured the policyholder against a planted crop not being harvested due to such things as hail damage or fire; (b) the crops insured were only ever seasonal crops that would need to be resewn [sic] each year with new insurance purchased; (c) if a claim was to be made on such policies, it would have been made prior to the next season's crop being sown; (d) as a result, this type of insurance has a very short insurance tail; (e) I do not recall any claims being made on Insure That in respect of these policies, which are outstanding for payment; (f) Insure That has not been notified of any potential claims in respect of these policies which have not been settled; (g) Insure That has no outstanding claims in respect of these policies; and (h) I would not regard there as being any realistic likelihood of a claim in respect of these policies ever being made. Whilst I cannot readily imagine any circumstances in which a claim could be made under a crop insurance policy entered into in 1999, if one were made and notified to Insure That, I would inform the policyholder of the scheme if it is confirmed by the Court.

THE SCHEME DOCUMENTS AS APPROVED BY APRA 55 On 16 August 2007, Mr Diggelmann sent to APRA, CGL's application for its approval of the transfer of CGL's insurance business to Calliden pursuant to APRA's Prudential Standard GPS 410, and other "scheme documents". The scheme documents included: (a) CGL's submission to APRA; (b) the proposed scheme; (c) the proposed Scheme Transfer Deed; (d) the draft joint actuarial report; (e) the proposed summary of the scheme for distribution to affected policyholders; (f) the proposed notice of intention to make an application under Pt III Div 3A of the Act; (g) a notice of a trigger event pursuant to s 38(b) of the IAT Act. 56 On 21 September 2007, Mr Diggelmann caused to be sent to APRA: (a) revised draft versions of the scheme documents; (b) a signed joint actuarial report from the actuaries of CGL and Calliden; and (c) a signed application under the IAT Act. 57 I am satisfied that the applicants gave to APRA a copy of the scheme and of the actuarial report on which the scheme is based, in accordance with the Prudential Standards, and that notice of intention to make the application was published by the applicants in accordance with the Prudential Standards (but see [72]ff below). 58 On 27 September 2007, APRA gave formal approval to the scheme documents sent to it on 21 September 2007. Also on that date, Mr Venkatramani of APRA, in his capacity as the Minister's delegate, provided a notice of go-ahead pursuant to the IAT Act. 59 On 28 September 2007, Mr Diggelmann caused to be served on APRA a copy of the application to this Court for its confirmation of the scheme and copies of all the affidavits and exhibits filed as at that date in this proceeding. On 4 October 2007, he caused APRA to be notified of the application to be heard on 11 October 2007 for the dispensation under s 17C(5) of the need for compliance with s 17C(2)(c) of the Act. At the same time, he advised APRA of the date that had been provisionally allocated for the final hearing (13 November 2007).

DISPENSATION ORDER 60 The applicants proposed a dispensation order subject to conditions. The conditions were designed to ensure that the approved summary of the scheme was likely to come to the notice of the Class C policyholders identified by Mr Porteous and the crop insurance policyholders identified by Mr Hayward. The conditions related to the sending of the approved summary of the scheme by prepaid post to reinsurance brokers and to the last known address of each of the Class C policyholders, and in the case of the brokers, an appropriate form of covering letter. It was also proposed that there be a condition that notice (approved by APRA) of the intention to apply to the Court for confirmation of the scheme be placed in five nominated newspapers that have a wide circulation. 61 In the case of the crop insurance policyholders, the only condition was the one requiring publication of the APRA approved notice of intention in the five newspapers.

62 I was satisfied that the dispensing order under s 17C(5) of the Act should be made. I took into account: · the period of time that had elapsed since the expiry of the insurance periods; · the diligence of the searching for addresses that had taken place; · the fact that APRA did not object to the dispensation; · the fact that the transfer was between companies within the same group, so that there would be no difficulty if a claim should be made on CGL, in that claim being referred on to Calliden; and · the widespread nature of the proposed advertising. 63 For the above reasons, on 11 October 2007 I made the dispensation orders as sought under s 17C(5) of the Act.

MONDE RE 64 Counsel for the applicants made disclosure of what he submitted were guarantees given by CGL. The history of Monde Re was given in an affidavit of Stephen Fay, the Strategic Services Director at Calliden. As noted at [12], Monde Re was a subsidiary of CGL. It was incorporated on 23 December 1996. It entered into run-off in February 2000, following the suffering of significant underwriting losses in 1998 and 1999. 65 On 13 November 1997 CGL executed a deed poll in favour of persons entitled to cover pursuant to contracts of insurance or reinsurance issued by Monde Re. In the deed poll, CGL was called "Guarantor". The general nature of the obligations undertaken by CGL in the deed poll are indicated by cll 2.1 and 2.2 which were are follows: 2.1 Unconditional guarantee The Guarantor unconditionally and irrevocably guarantees the punctual payment of Guaranteed Money to the Insured. The Guarantor must upon demand immediately pay the Insured any amount of Guaranteed Money not paid by the Insurer. 2.2 Unconditional indemnity The Guarantor unconditionally and irrevocably indemnifies the Insured against all losses, damages, costs, charges, liabilities and expenses which the Insured may at any time suffer or incur directly or indirectly because: (a) it does not for any reason recover from the Insurer any Guaranteed Money or any money which would be Guaranteed Money but for: (i) the fact that any agreement between the Insured and the Insurer or another person is void, voidable or wholly or partially unenforceable; or (ii) any release of the Insurer; (b) the Insured has to disgorge any money paid to or received by it and credited against Guaranteed Money; (c) the Insurer or the Guarantor fails to pay any Guaranteed Money when payable; (d) the Insured seeks to recover any Guaranteed Money from any other person liable to pay; or (e) a warranty in this deed is incorrect in any respect. 66 By notice dated 8 May 2003, CGL notified Monde Re that pursuant to cl 6.2 of the deed, CGL terminated its liability under the deed on 30 June 2003. The reason for the termination is that Monde Re was no longer writing reinsurance. 67 On 22 September 2005, at an extraordinary general meeting of Monde Re in Monaco, it was resolved to place Monde Re into voluntary liquidation and to appoint CGL, represented by Mr Fay, as liquidator. Mr Fay caused letters to be sent to all of the non-commuted policyholders of Monde Re calling for written proofs of debt by 22 December 2005. Between September 2005 and that date, he received three proofs of debt. The claims represented by those proofs were resolved. 68 On 22 August 2006 the liquidation of Monde Re was finalised and it was deregistered. As at the date of the deregistration, Monde Re had 223 uncommuted policies. All of the uncommuted policies expired by 2002 at the latest. So far as Mr Fay knows, no claims were made on Monde Re in respect of any of those uncommuted policies during the liquidation, notwithstanding that the policyholders were asked to submit proofs of debt if they thought they had a claim. 69 I accept the submission made by counsel for the applicants that the deed poll did not provide for insurance but was in the nature of a guarantee. Counsel referred to the distinction between contracts of insurance and other classes of contract including contracts of guarantee recognised in such cases as Prudential Insurance Company v Inland Revenue Commissioners [1904] 2 KB 658 at 662-664 per Channell J; Australian Health Insurance Association Ltd v Esso Australia Ltd (1993) 41 FCR 450; Seaton v Heath [1899] 1 QB 782 at 789, 792; Re Australian & Overseas Insurance Co Ltd [1966] 1 NSWR 558 per McLelland CJ in Eq. 70 I took into account the following considerations in not treating the deed poll as a contract of insurance: · the deed poll imposes an obligation on CGL to pay money that, ex hypothesi, Monde Re would already owe its insureds, so that CGL's liability was a collateral or secondary liability that would arise upon Monde Re's failure to satisfy its own liability; · none of the persons benefited by the deed poll were required to pay any premium or other amount to CGL; · of its nature, the deed poll did not have as a party any of the insureds, in contrast to a contract of insurance which is usually formalised by the issue of policy in response to a proposal by the prospective insured; · because of the relationship between Monde Re and CGL, CGL could hardly be heard to complain about non-disclosure by Monde Re, yet it would have been entitled to make such a complaint if the deed poll were a contract of insurance imposing duties of utmost good faith; and · the language of the deed poll, including its title, refers to "guarantee". 71 I therefore agreed with counsel for the applicants that the deed poll had not been entered into as part of CGL's insurance business and that the applicants were not required to provide the approved scheme summary to the policyholders of Monde Re (unless, of course, they were also policyholders of CGL).

COMPLIANCE WITH s 17C OF THE ACT AND WITH THE ORDERS MADE ON 11 OCTOBER 2007 72 The final hearing on 15 November 2007 was occupied with two main issues: · compliance with s 17C of the Act and with the orders made on 11 October 2007; and · the actuarial evidence in support of confirmation of the scheme. 73 I do not find it necessary to refer to all of the evidence of compliance. However, one matter must be mentioned. Due to an oversight, the solicitors for the applicants made some very minor alterations to the form of the notice of intention and to the approval scheme summary. Both of those documents were referred to in my orders of 11 October 2007. 74 The Act provides in s 17C(2) that an application for confirmation of a scheme may not be made unless, relevantly: · notice of intention to make the application has been published by the applicant in accordance with prudential standards (s 17C(2)(b)); and · a summary of the scheme approved by APRA has been given to every affected policyholder, that is, every holder of a policy affected by the scheme (s 17C(2)(c)). Order 1(a)-(d) of the orders made on 11 October 2007 required that an approved summary of the scheme (meaning a summary of it approved by APRA) be sent with a view to notification to the Class C policyholders. Orders 1(e) and 2 of the orders made on 11 October 2007 required that a notice of intention in the form approved by APRA on 27 September be placed in five nominated newspapers on or before 16 October 2007. 75 The minor departures from the APRA-approved summary of the scheme and from the APRA-approved notice of intention signified that both s 17C(2) and the orders of 11 October 2007 were not complied with (it was a condition of the dispensation under s 17C(5) of the Act with the need to comply with s 17C(2)(c) of the Act that the orders be complied with). 76 An affidavit of Bede Gerald Haines, solicitor of Holding Redlich, the solicitors for the applicants, referred to two amendments he made to the notice of intention: (a) the names of the Australian States and Territories in the notice of intention were abbreviated from their full names into their common abbreviated forms; and (b) the Australian company numbers for CGL and Calliden were removed from the last sentence of the notice of intention (this was an entirely appropriate amendment to make since the numbers remained in the first sentence of the notice and therefore formed part of the definitions of "CGL" and "Calliden" as there given). 77 Mr Haines stated that he made three amendments to the scheme summary: (a) he added the words "and CL" to para 1(e) after the words "by CGL" and before the words "to the Federal Court" in order to make it clear that the application for confirmation was being made by two applicants, rather than by CGL alone; (b) he made a similar amendment in para 4(d) to make it clear that the address of Holding Redlich was the address for service on both CGL and Calliden; and (c) he amended the reference to the Court form to be used for the filing of a notice of appearance by any affected policyholder (the approved scheme summary had referred to Form 4 of the Federal Court (Corporations) Rules 2000 whereas the correct form was Form 15 of the Federal Court Rules). 78 Mr Haines did not become aware of his oversight in failing to obtain prior approval to these changes until after the notice of intention had been despatched for publication and the scheme summary had been sent to affected policyholders. Upon becoming aware of the oversight, on Monday morning 15 October 2007 he telephoned APRA to advise it of the changes he had made. Later in the morning of 15 October 2007 he wrote to APRA, confirming his telephone advice. 79 APRA considered that it could not approve of the amendments retrospectively. It indicated, however, that it would have approved of them if its approval had been sought in advance. 80 The applicants submit that having regard to the minor and uncontroversial nature of the amendments, the Court should nonetheless confirm the scheme. 81 In Re Armstrong Jones Life Assurance Ltd (1997) 74 FCR 160, Emmett J had held that a provision in the Life Insurance Act 1995 (Cth) analogous to s 17C(2) of the Act did not lay down a condition precedent to the existence of jurisdiction in the Federal Court to confirm a scheme. In Re Royal & Sun Alliance Life Assurance Ltd (2000) 104 FCR 37, Katz J adopted the same approach because his Honour did not think that Emmett J had been plainly wrong. In Re Insurance Australia Ltd (2004) 139 FCR 450, although with some doubt, I adopted the same approach, namely, of following Emmett J because I did not think his Honour was plainly wrong (at [63]). A similar approach was subsequently taken by Bennett J in Re MLC Lifetime Company Ltd (No 2) [2006] FCA 1367 at [11]. Perhaps predictably, I took the same approach in the present case in relation to the question of jurisdiction. 82 The changes made by the solicitors here were minor, uncontroversial and ameliorative. I had no hesitation in exercising my discretion not to allow those departures to stand in the way of confirmation of the scheme. 83 Helpfully, the applicants provided as an annexure to counsel's submissions a "Table of Compliance" listing in a column the paragraphs of APRA Prudential Standard GPS 410 and paragraphs of my dispensation order of 11 October 2007, and corresponding references to the evidence of compliance with the requirements imposed by GPS 410 and the orders. 84 I was satisfied that, subject to the matter mentioned above, there was compliance and that no policyholder had evinced any desire to oppose confirmation of the scheme.

ACTUARIES' REPORT 85 The final signed report of Kevin Gomes, the approved actuary of CGL, and Geoff Atkins, the approved actuary of Calliden, was in evidence. Their evidence took into account the fact that CGL and AXA UK had entered into a "Commutation and Release Agreement" dated 19 September 2007. By that agreement CGL undertook to pay to AXA UK some $212,515, upon receipt of which AXA UK released CGL from its liability as reinsurer. 86 The joint actuarial report referred to CGL's agreement on 6 July 2007 to purchase the Australian Unity general insurance business which included Mansions (an underwriting agency) and a 50 percent share in Farmers Mutual Insurance Limited, also an underwriting agency. 87 In their report, the actuaries considered the critical question of the impact of the scheme on the affected policyholders, being the inwards reinsurance policyholders of CGL. In table 4.1 in their report they summarised the financial positions of CGL and Calliden as at 31 December 2006, the date at which the most recent audited accounts of the two companies existed. The table showed the net assets of CGL as being $88,482,000 and those of Calliden as being $40,169,000. Table 4.6 stated the MCR and CAM for CGL both before and after acquisition of the Australian Unity businesses. Prior to that acquisition, the CAM was 5.4 and after that acquisition it was 1.3. That acquisition, however, had no impact on the capital adequacy of Calliden. 88 Table 4.7 gave a pro forma CAM as at 30 June 2007, prior to the scheme transfer but subsequent to the acquisition of the Australian Unity businesses. The CAM for CGL was 1.3 (as noted above) and that for Calliden was 3.4. 89 Table 4.8 gave the CAM for Calliden as at 30 June 2007 pre- and post-transfer pursuant to the scheme. Prior to the transfer, its CAM was 3.4 and, after it, its CAM would be 3.1. However, a CAM of 3.1 is still well above CGL's CAM of 1.3. 90 In summary, the "affected policyholders", that is to say, the policyholders of CGL, are substantially benefited by the scheme, whereas Calliden's policyholders are disadvantaged by the scheme, although only to a minor extent. Although the Act requires only the positions of the affected policyholders to be taken into account, the effect of the scheme on Calliden's policyholders is relevant to the exercise of discretion. 91 It was my view that the interests of the affected policyholders were more than adequately protected by the scheme, and those of the Calliden policyholders were disadvantaged only to such a minor extent that the disadvantage should not stand in the way of confirmation of the scheme.

APRA 92 APRA was represented on the hearing and indicated through its solicitors that APRA was content with the scheme, both procedurally and substantively.

CONCLUSION 93 For the above reasons I made orders on 15 November 2007 confirming the scheme. I certify that the preceding ninety-three (93) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren.

Associate: Dated: 19 December 2007 Counsel for the First and Second Applicants: Mr R A Dick

Solicitor for the First and Second Applicants: Holding Redlich

Solicitor for the Australian Mr D Sullivan (11 October 2007) Prudential Regulation Authority: Mr T Grady (13 and 15 November 2007)

Dates of Hearing: 11 October, 13 and 15 November 2007

Date of Judgment: 15 November 2007

Date of Publication of Reasons 19 December 2007

Insurance Act 1973(Cth)ss 12, 17B, 17C, 17F, 18

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