COLONIAL PORTFOLIO SERVICES LIMITED & COLONIAL MUTUAL LIFE ASSURANCE SOCIETY LIMITED v AUSTRALIA PRUDENTIAL REGULATION AUTHORITY & NATHAN CRAFTI

Procedural Requirements 5 There was no issue in this case as to the applicants' compliance with the procedural requirements of the Act and regulations. There was ample evidence to satisfy me of this aspect of the matter. But because a question was raised under the "discretionary" aspect of the case as to the adequacy of the information which was given to policy owners, I should briefly advert to the procedural requirements and to the manner in which they were met in this case. 6 Communication to interested members of the public as to the existence and nature of a proposed scheme under Part 9 is, in the first place, required to be effected by means of direct communication with policy owners, and by advertising in the Gazette and in at least one newspaper in each state or territory where the policies of affected policy owners are registered. 7 Dealing first with direct communications with affected policy owners. S 191 (2)(c) of the Act requires that policy owners be provided with a summary of the scheme in a form approved by the Australia Prudential Regulation Authority (APRA). S 191(5) empowers the Court to dispense with this requirement in relation to a particular scheme in certain circumstances. In this case, an order was made by Madgwick J on 20 August 1999 dispensing with compliance with s 191(2)(c) in relation to certain policy owners as to whom the applicants had no record of a current mailing address. Subsequently, a "mail pack" was sent to all other affected policy owners. This pack consisted of a pro-formaletter addressed to the policy owner, a four page leaflet containing a summary of the scheme which had been approved by APRA, and a notice, similar to that set out in the advertisements (as to which see later) to the effect that the scheme itself and supporting actuarial reports could be obtained from certain designated addresses. Finally, the pack contained a promotional brochure for the Colonial group of companies. Over 520,000 of these mail packs were sent to owners of policies in CPSL and CMLA. 8 As to the advertised notices, APRA is required under the regulations to approve both the form of the notices and the newspapers in which they appear. That happened in this case, and duly approved notices were inserted in the Gazette and in approved newspapers in every Australian state and territory. The regulations require that these notices inform affected policy owners that they may obtain a copy of the proposed scheme from an address provided in the advertisement. Further, a copy of the proposed scheme is required to be available for public inspection between 9.00 am and 5.00 pm each working day for a period of at least fifteen days at an approved location in each state and territory where affected policy owners are registered. 9 As required by the regulations, the scheme was made available for inspection at a specified location in the capital city of each state or territory for at least fifteen working days. The evidence shows that a total of seven people attended at these locations and sought further information about the scheme, and four telephoned queries were received. A further ten people telephoned the applicants' solicitor, Mr Forbes, whose name and contact details had appeared in the advertisements and notices. Three letters were received by the applicants or Mr Forbes raising substantive issues in relation to the scheme. Two interested policy owners appeared at the hearing of the application. One of them, Mr Nathan Crafti, sought and was granted leave to be joined as a party in the proceedings. However, before adverting to the course of the hearing, it is appropriate to describe, albeit briefly, the applicants themselves and the general nature of the scheme.

The Applicants 10 CPSL and CMLA are life insurance businesses registered under Part 3 of the Act. Both companies are now members of the Colonial Group of companies. CPSL was previously named Prudential Corporation Australia Limited and was part of the Prudential Group. It conducts life assurance business in all Australian states and territories. On 30 September 1998 it was purchased by the Colonial Group and became a wholly owned subsidiary of Colonial LGA Holdings Limited. This company is itself a wholly owned subsidiary of CMLA. 11 CMLA was founded in Melbourne in 1873 as a life insurer. In 1996 the Colonial Group was restructured through the demutualisation of CMLA, with the issue of shares in a new holding company, Colonial Limited, to members, followed by the listing of those shares on the Australian and New Zealand Stock Exchanges. According to an actuarial report accompanying the scheme, the Colonial Group now ranks as the second largest life insurer in Australia.

The Scheme 12 Put briefly, the scheme involved the transfer to CMLA of all policies issued by CPSL before 31 October 1999 together with the statutory funds supporting those policies. CMLA was to assume liability under all such policies. Similarly it was to become entitled to receive premiums payable under those policies and to exercise rights and remedies available to CPSL in the event of non-payment of premiums. From the policy holders' point of view, CPSL policies were effectively deemed, after 31 October 1999, to be CMLA policies. CMLA policies remained essentially unchanged. 13 The administration of CPSL and CMLA's life insurance work had already been integrated before the scheme came into operation. A service company was established on 30 June 1998 to provide administration services to both companies. Since 1 January 1999 the service company, which receives monthly fees from the life companies, has borne virtually all the life companies' expenses relating to administration and management. 14 Actuarial reports relating to the proposed scheme were initially prepared by AJ Cook, RE Pfeifer and the appointed actuary, PD Beck. Mr Cook examined the impact of the proposed scheme on CPSL policy holders. He concluded that: · "There will be no adverse change to the benefits or to the future expectations to CPSL policy holders · Adequate security for the benefits of CPSL policy holders will be maintained · The transfer is in the interests of policy holders of CPSL and Accordingly I support the proposed transfer." 15 Similar conclusions were reached by Mr Pfeifer in relation to CMLA policy holders. Accordingly, both actuaries supported the proposed transfer. Mr Beck considered these two opinions. In addition he separately reviewed the proposed transfer and took into account shareholders' considerations. All costs in respect of the transfer were to be met by shareholders so that there would be no reduction in policy owner benefits. It was anticipated that the shareholders would benefit from the transfer in that there would be a less complex management structure, with potential savings in administrative costs, and the opportunity for more efficient management of shareholders' capital. 16 As to policy holders, Mr Beck considered that the following benefits would result from the transfer: · "Policy holders of both companies will have access to a larger range of products and investment options than would be available if the Transfer did not occur. · The higher levels of capital in the Shareholders Fund of CMLA will enhance the security supporting CPSL policies. · The transfer will result in larger statutory funds and enable the insurance risks for a greater number of policies to be combined. This is expected to lead to less volatile fund experience. Such lower volatility could be expected to be reflected in improved benefits or lower premiums for some policy holders." 17 Mr Beck concluded his report in the following terms: "As a result of my investigations I have concluded that: · There will be no adverse change to the benefits or future expectations of the policy holders or either company · Adequate security of policyholder benefits will be maintained · The transfer is in the interests of policy holders of both companies · The transfer is in the interests of shareholders Accordingly I support the proposed transfer." 18 At the request of the Board of Directors of Colonial Limited, an external auditor, Clive Aaron, was asked to provide an opinion as to the impact of the scheme on policy owners. Mr Aaron's conclusions were as follows: "In terms of the scope of our review, we have considered whether the policy owners of CMLA and CPSL would be adversely affected by the Scheme. After considering all aspects of the Scheme, it is our opinion that on balance, the policy owners of CMLA and CPSL should not be adversely affected by the Scheme: (i) The benefit expectations of CMLA policy owners should not be adversely affected. (ii) The Scheme should result in no material reduction in the security of CMLA policy owners. (iii) The benefit expectations of CPSL policy owners should not be adversely affected. (iv) The security of CPSL policy owners should be enhanced since CMLA's shareholder's fund contains a very significant level of assets, which are a source of support for policy owners."

The Hearing 19 At the hearing of the application for confirmation, Mr Rayment QC and Mr Kunc appeared for the applicants. Mr Murray, solicitor, appeared for APRA. As already mentioned, two policy holders attended at the hearing. One of them, Mrs Robertson, wanted only to observe the proceedings. The other, Mr Nathan Crafti, sought and was given leave to be added as a party to the proceedings. Mr Crafti is a long time policy holder in CMLA. He had, before the hearing, filed an affidavit in the proceedings, in which he expressed disappointment and concern about the poor performance of his policies over the years. His particular concern in relation to the proposed scheme was that the security of CMLA policy holders might be weakened by reason of a diminution in funds supporting their policies. In this respect, he referred to Mr Aaron's report, described above, and particularly Mr Aaron's opinion that "on balance"the policy owners of CMLA and CPSL should not be adversely affected by the scheme. Mr Crafti referred to Mr Aaron's conclusion that "the security of CPSL policy holders should be enhanced since CMLA's shareholder's fund contains a very significant level of assets, which are a source of support for policy holders". Mr Crafti submitted that the merger would conversely weaken support for CMLA policy holders. 20 The essence of Mr Crafti's complaint was that the surplus in CMLA's statutory funds, over and above statutory minimum requirements, was greater than the surplus in CPSL's statutory funds. Hence, any merger of the two funds would inevitably lead to an increase in CPSL's surplus and a corresponding decrease in that of CMLA. To this extent, the proposed scheme represented a diminution of security for CMLA policy holders. 21 It was not disputed by the applicants that, after the scheme, there would be a slight diminution in the amount by which the CMLA statutory funds exceeded the statutory minimums. The statutory minimums are referred in the Act as "solvency" and "capital adequacy" standards. The purpose of the solvency standard is set out in s 66 of the Act: "66 Purpose of solvency standard The purpose of the solvency standard is to ensure, as far as practicable, that, at any time, the financial position of each statutory fund of a life company is such that the company will be able, out of the assets of the fund, to meet all policy and other liabilities referable to the fund at that time as they become due." 22 The purpose of the capital adequacy standard is described in s 71 in the following terms: "71 Purpose of capital adequacy standard The purpose of the capital adequacy standard is to ensure, as far as practicable, that there are sufficient assets in each statutory fund of a life company to provide adequate capital for the conduct of the business of the fund in accordance with this Act and in the interests of the owners of policies referable to the fund." 23 The extent of the assets in the statutory funds of the two companies was referred to in Mr Cook's actuarial report. On 31 December 1998 the CPSL statutory funds exceeded the solvency standard by $168 million. On the same date the CMLA statutory funds exceeded the solvency standard by $284 million (later reduced to $241 million after transfers were made to the shareholders' funds). Both funds had assets which exceeded the capital adequacy standard by an unspecified amount. As to shareholders' funds, the net assets of the CPSL shareholders' funds were $54 million. In the case of CMLA they were $1.817 billion. These figures were referred to by Mr Pfeifer in an affidavit sworn on 12 October 1999. He concluded that, whilst in a mathematical sense there may be a very minor reduction in policy owner security in respect of certain CMLA funds, that reduction will "not be material and CMLA Policy Owners will continue to enjoy high levels of security following the implementation of the Scheme".

Discussion 24 On the basis of this material I am firmly of the opinion that the security of both CMLA and CPSL policy holders is so great that a slight diminution of the funds available to one group, with a corresponding increase in the funds available to the other, will not materially affect the security of either of them. 25 No other matters of substance have been raised in opposition to the confirmation of the scheme. It is pertinent to note that the principal object of seeking the Court's confirmation under Part 9, although not mentioned in s 194 of the Act, is to ensure that policy owners are adequately protected and that their interests will not be adversely affected by a transfer of life insurance business. That this is so emerges from a reading of s 3 of the Act. Section 3, as relevant here, provides as follows: "Object of Act (1) The object of this Act is to protect the interests of the owners and prospective owners of life insurance policies in a manner consistent with the continued development of a viable, competitive and innovative life insurance industry. (2) The principal means adopted for the achievement of this object are the following: …….. (f) providing for the supervision of transfers and amalgamations of life insurance business by the Court." 26 The continued development of a "viable, competitive and innovative" life insurance industry is also a relevant factor under s 194. In this case, there is no indication that the scheme would adversely affect the viability or competitiveness of the life insurance industry. 27 Mr Crafti suggested in his cross-examination of Mr Pfeifer that the communications to policy holders, informing them of the proposed scheme, should have been personalised, so as to enable individual policyholders to identify the relevant fund or sub-fund to which his or her policy belonged, so that all policy holders could satisfy themselves that they were unlikely to be prejudiced by this scheme. In my view, however, such a requirement would be excessively burdensome, and in the circumstances of this case, entirely unnecessary. The documentation which was sent to policy holders, or which was available to them on request, was, in my view, thorough, detailed and comprehensive. 28 It is relevant to note that APRA, which operates as something of a watchdog in relation to transfers under Part 9 of the Act, had no objection to the confirmation of the scheme. Nor did APRA arrange for an actuarial report on the scheme, as it is entitled to do under s 192 of the Act. It can be inferred that APRA regarded the reports furnished by the applicants as adequate. Moreover the number of enquiries and responses received by the applicants as a result of its notifications to policy owners was, proportionately, very small indeed. Five hundred and twenty thousand mail packs were sent out. The total number of responses, including telephone inquiries, appears to have been 26. 29 The discretion conferred by s 194 of the Act, is, as I have already commented, extremely broad. The protection of the interests of the policy holders will, as already mentioned, be the primary concern of the Court. Within that rubric, the relevant considerations will be likely to vary from case to case. In this case, the applicants have produced cogent reasons why the scheme will lead to greater efficiencies, which will presumably benefit both policy holders and shareholders alike. The interests of all policy holders are, in my view, adequately secured. 30 For all these reasons I ordered that the scheme be confirmed. The formal orders I made were:

1. The scheme be confirmed without modification.
2. The applicants to pay the costs of the Australia Prudential Regulation Authority. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mathews.

Associate: Dated: 17 December 1999 Counsel for the Applicants: B Rayment QC with F Kunc

Solicitor for the Applicants: Mallesons Stephen Jaques

Solicitor for the First Respondent: Australian Government Solicitor

Date of Hearing: 13 October 1999

Date of Judgment: 17 December 1999