Macquarie Life Limited, in the matter of Macquarie Life Limited [2016] FCA 973

ALLSOP CJ: 1 This is an application under s 193 of the Life Insurance Act 1995 (Cth) (the Act) for an order under s 194 of the Act confirming a scheme for the transfer of certain life insurance business of Macquarie Life Limited (MLL) to Zurich Australia Limited (ZAL). 2 Before the Court is an interlocutory application for certain dispensations of steps that would otherwise be required by s 191(2)(c) of the Act. 3 Both MLL and ZAL are authorised under the Act to carry on life insurance business and do so through their various statutory funds as prescribed under the Act. 4 An important background consideration to appreciate is the operation of statutory funds under Part 4 of the Act. A statutory fund is a fund that is established in the records of a life company and relates solely to the life insurance business of the company or a particular part of that business: s 29 of the Act. Section 30 of the Act provides an outline of requirements regarding statutory funds. The principal requirements of Part 4 in relation to statutory funds may be summarised as follows from s 30: (a) all amounts received by a life company in respect of the business of a fund must be credited to the fund; (b) all assets and investments related to the business of a fund must be included in the fund; (c) all liabilities (including policy liabilities) of the company arising out of the conduct of the business of a fund must be treated as liabilities of the fund; (d) the assets of a fund are only available for expenditure related to the conduct of the business of the fund; (e) statutory funds may not be restructured or terminated without the approval of APRA; (f) profits and losses of a statutory fund may only be dealt with in accordance with Divisions 5 and 6 (the object of those Divisions being to ensure that such profits and losses are dealt with in a manner that protects the interests of policy owners and is consistent with prudent management of the fund). 5 The assets and life business of a statutory fund are to be kept separate from the assets and life business of other funds. To the extent that the life company has shareholders' funds, those shareholders' funds may be available for distribution to a statutory fund. Equally, if a statutory fund has retained profits, there may be a distribution of retained profits from the statutory fund to the shareholders: see ss 62 and 63 of the Act. 6 These are important considerations because if, as here, a statutory fund (both its assets and life business referable to those assets) is being sold or transferred to another company, that, of itself, cannot affect the asset bases of other statutory funds of the same life company since the statutory funds are, by force of Part 4 of the Act, separate and ring-fenced operational units of the overall life business of the company. 7 This consideration is important to appreciate when discussing and considering the requirements of s 191 and the notion of "affected policy owner". 8 The background to the scheme is that following a review of its business strategy, Macquarie Group concluded that MLL should discontinue its activities in term life and related risk insurance products because of the relatively small scale of the market share of that business. In furtherance of this decision, in March 2016, MLL and ZAL entered into a sale and purchase deed to effect the transfer of MLL's life insurance business referable to Statutory Fund No 4 to ZAL's Statutory Fund No 2, subject to the confirmation of a proposed scheme by the Court. 9 MLL is comprised of five statutory funds and a shareholders' fund. Under the scheme it is proposed that all of the life policies of MLL referable to its Statutory Fund No 4 that are in force or in respect of which a person has a guaranteed renewal right as at the transfer date, will be transferred to ZAL's Statutory Fund No 2. 10 ZAL is comprised of two statutory funds and a shareholders' fund. The two statutory funds maintain all the life insurance business of ZAL. Statutory Fund No 2 contains all insurance business covering mortality and morbidity risks. The No 2 fund also contains participating and non-participating traditional and investment account business. The ZAL Statutory Fund No 3 contains all investment-linked business. 11 The scheme will also involve the transfer of all of MLL's liabilities that relate to the MLL Statutory Fund No 4, except for various tax and Macquarie Group related liabilities. The transferred liabilities will include policy liabilities. 12 The assets of MLL Statutory Fund No 4 will transfer to ZAL Statutory Fund No 2. Under the proposed scheme, all MLL policies will be transferred with the same policy terms and conditions as applied prior to the transfer. ZAL will be substituted for MLL in all of the MLL policies as if ZAL was, and at all times had been, the insurer under the policies. MLL will be released from all of the life risk insurance liabilities. 13 The rights, benefits and liabilities of the owners of the MLL policies will be the same as if the MLL policies had been issued by ZAL rather than MLL, and as if all proposals and applications on which they were based had been made to and accepted by ZAL rather than MLL. 14 Claimants under the MLL policies will have the same claim against ZAL and substitution for their claim against MLL, irrespective of when the claim arose. 15 ZAL will be entitled to enforce all rights and remedies which would otherwise have been enforceable by MLL under the policies. 16 No assets or liabilities are to be transferred to ZAL's other statutory funds under the proposed transfer; nor is there any transfer of any assets or liabilities from any other of MLL's statutory funds. 17 MLL will transfer to ZAL its reinsurance contracts and treaties referable to the MLL's policies in Statutory Fund No 4. 18 The need for the dispensation hearing arises because of the terms of s 191 of the Act. Section 191(2)(c) provides: An application for confirmation of a scheme may not be made unless: … (c) an approved summary of the scheme has been given to every affected policy owner. 19 The phrase "affected policy owner" is defined in s 191(1) as meaning "the owner of a policy that is referable to a statutory fund affected by a scheme." 20 Section 10 of the Act is entitled "Issue and ownership of policies" and provides as follows: (1) For the purposes of this Act: (a) a life company issues a policy when the company enters into the contract that constitutes the policy; and (b) a policy is issued to the person with whom the life company enters into the contract. (2) For the purposes of this Act, the owner of a policy is: (a) the person to whom the policy is issued; or (b) if the rights of that person under the policy have been assigned under this Act or transferred by the operation of the policy, the person who has those rights. 21 It can be noted that these definitions that regulate compliance under the Act are different to those applicable in analogous applications under s 17C of the Insurance Act 1973 (Cth). In particular, the definition of "affected policy owner" as referable to a statutory fund affected by the scheme is not found in the Insurance Act. Similarly, there is no analogous definition of the "owner of a policy" as found in s 10 of the Act. Under s 17C, the equivalent provision is that an application for confirmation of a scheme may not be made unless an approved summary of the scheme has been given to every affected policyholder: s 17C(2)(c). 22 The phrase "affected policyholder" is defined as meaning the holder of a policy affected by a scheme: s 17C(1). There is no further definition such as in s 10 of the Act, and thus, under the Insurance Act, there is perhaps not the limitation and linking to the person to whom the policy is issued and who is defined as the owner. The relevance of this is in the context of policies issued to trustees of superannuation funds or other policies issued to employers whereby the beneficiaries of the insurance may be individuals who might be seen to hold rights as third parties under the policies, but who are not the persons to whom the policies are issued or who own the policies. This is a relevant consideration in this application, and may have been a relevant consideration in applications under the Insurance Act (cf W.R Berkley Insurance (Europe) Limited, in the matter of Division 3A of Part III of the Insurance Act (1973) [2016] FCA 374). 23 An affected policy owner is a reference to a policy that was affected by the scheme, not an owner who was affected by the scheme: see the text of s 191(1) and the comments of Lindgren J in Re Insurance Australia Limited (2004) 139 FCR 450 at [19]-[20] on s 17C(1) of the Insurance Act. It is the effect on the policy that must be considered. 24 An issue may arise which does not need to be decided in this case because of the clear actuarial evidence to which I will refer. There may be circumstances where a policy referable to another statutory fund may be affected by the removal of another statutory fund, depending upon the financial strength or weakness of the statutory fund and policies referable thereto being transferred or remaining. Some discussion took place at the dispensation hearing about this. Mr Claxton, who appeared for the Australian Prudential Regulation Authority (APRA) indicated that it was unlikely that any such factual situation would ever arise. It certainly does not arise in this case, because of the clear strength, in terms of capital adequacy ratios, of all operating statutory funds of MLL and ZAL and the strength of the shareholders' funds of MLL and ZAL. 25 The consequence of the above is that I approach the dispensation hearing on the basis that the only potentially affected policy owners are those owners of policies being transferred from the Statutory Fund No 4 in MLL and the owners of policies in the transferee fund, that is ZAL's Statutory Fund No 2. Thus, there is no call, in my view, to consider the dispensation of giving the approved summary of the scheme to policyholders in the other statutory funds of MLL or ZAL. 26 The considerations which have been taken into account in the exercise of the discretion to grant dispensation include the nature of the scheme and whether it involves changes to the contractual benefits or entitlements and security of policy owners in respect of whom dispensation is sought; evidence by qualified actuaries as to whether policy owners in respect of whom dispensation is sought will be detrimentally affected by the scheme; the practical difficulties and the costs involved in providing approved summaries of the scheme to policy owners in respect of whom dispensation is sought; the extent to which the proposed scheme may be brought to the notice of policy owners by means other than the scheme summary being sent to each individually; and the involvement and attitude of APRA to the application. 27 The dispensation orders sought in the interlocutory application are greater in number than the dispensation orders which I will make, and that is because potential orders were put to me which commence with the phrase "If required", which sought dispensation from the requirements of informing members of superannuation funds who are insured under policies issued by MLL referable to the Statutory Fund No 4. As I have earlier indicated, the definition of "affected policy owner" in s 191(1) which read with s 10 makes it tolerably clear that persons who may have insured rights, such as members of superannuation funds, are not policy owners. Therefore, no dispensation is needed in relation to them. Another class of order sought in the interlocutory application that commenced with the words "If required", were similar persons, that is, those who had rights of insurance, in an underlying sense, in relation to policies issued by ZAL referable to the receiving fund. For the same reasons, no dispensation is required in respect of such persons. 28 A third form of dispensation order which commenced with the words "If required" was directed to persons who were owners of policies in the statutory sense, but which policies were not being transferred; that is, were policies not referable to Statutory Fund No 4 nor the receiving fund, ZAL Statutory Fund No 2. For the reasons earlier given, such dispensation is not required. Likewise there is no need for dispensation for underlying insureds in relation to policies issued by ZAL which are not referable to the receiving fund. 29 The dispensations that are sought are set out in orders 1 and 2, that being a dispensation to require an approved summary of the scheme to be given to owners of policies issued by MLL referable to Statutory Fund No 4 for whom MLL has no record of a current mailing address, or who cease to maintain a current mailing address with MLL after despatch of the scheme summary to owners of policies issued by MLL, and also who become owners of policies issued by MLL referable to the transfer Statutory Fund No 4 less than 25 days prior to the confirmation hearing of the scheme and up to the transfer date. 30 Dispensation is also sought from sending to policy owners issued by ZAL referable to ZAL's Statutory Fund No 2 for whom ZAL has no record of a current mailing address, or who cease to maintain a current mailing address with ZAL after despatch of the scheme summary to owners of policies issued by ZAL. 31 Dispensation is also sought for those who become owners of policies issued by ZAL referable to Statutory Fund No 2 (the receiving fund) less than 25 days prior to the confirmation hearing and up to the transfer date as defined by the scheme. 32 The evidence makes clear that there will be some people who will not be able to be contacted because of difficulties of addresses and the like. Further, unless MLL were to cease business for a significant period of time (over 100 days) prior to the transfer date, it would not be possible to strictly comply with the requirements of s 191(2)(c). 33 In respect of both problems, MLL and ZAL will undertake steps to mitigate what might be the disadvantage to people of the dispensation. These steps to be taken by MLL are as follows. 34 MLL will make as soon as reasonably practicable the scheme summary to: (a) policy owners referable to Statutory Fund No 4; (b) members of superannuation funds who are insured under policies referable to Statutory Fund No 4 held within the superannuation funds other than a self-managed superannuation fund ("Members"); (c) previous owners or members of life policies referable to Statutory Fund No 4 which were cancelled in the six month period prior to the publication of the Notice of Intention as a result of failure to pay required premiums; (d) previous owners or Members of life policies referable to Statutory Fund No 4 which were cancelled in the three month period prior to the publication of the Notice of Intention as a result of non-disclosure; (e) previous owners or members of life policies referable to the Statutory Fund No 4 which were cancelled upon payment of a trauma or total permanent disability benefit in the period 12 months prior to the publication of the Notice of Intention, but who have an entitlement to buy back or reinstate an amount of life cover; (f) previous owners or members of life policies referable to the Statutory Fund No 4 which have been cancelled but which are the subject of an unresolved dispute or on-going litigation for whom MLL has a current address. 35 In the event that the scheme summary sent by MLL to these persons is returned undelivered before the date of the confirmation hearing, and to the extent reasonably practicable, MLL will follow its returned mail procedure to identify a new address for that policy owner, and if identified, resend the scheme to the new address. 36 Up until the date of the confirmation hearing, and to the extent reasonably practicable, MLL will email the scheme to Statutory Fund No 4 policy owners for whom MLL has been able to ascertain a current email address, despite following its return mail procedure, and for whom MLL has an email address. 37 For all new statutory fund policy owners who become Statutory Fund No 4 policy owners after the date of the mail out, MLL will include the scheme summary in their "Welcome Pack" up until the transfer date. 38 As soon as reasonably practicable, after the dispensation hearing, MLL will email the scheme and an information bulletin to all financial advisers registered with MLL who write insurance business or are accorded as a servicing adviser in relation to Statutory Fund No 4 policy owners. 39 MLL will publish the Notice of Intention in all relevant publications in each State of the Commonwealth, together with the Special Notices Gazette. 40 The Notice of Intention will be available for inspection on a webpage of MLL's website containing contact numbers for MLL's insurance contact centre. 41 The relevant documents will also be available for inspection in every State of the Commonwealth. 42 ZAL will mail out the scheme summary to owners of policies referable to the receiving fund for whom ZAL has current addresses. 43 If any mail is returned undelivered before the date of the confirmation hearing and to the extent reasonably practicable, ZAL will follow its return mail procedures to attempt to identify a new address, and if such is identified, will resend the scheme. 44 Up until the date of the confirmation hearing and to the extent reasonably practicable, ZAL will email the scheme summary to receiving fund policy owners (that is, Statutory Fund No 2) for whom ZAL has not been able to ascertain a current address, but for whom ZAL has an email address. 45 For new receiving fund policy owners who become owners of policies after the mail out date, ZAL will include the scheme summary in their "Welcome Pack" until the transfer date of the scheme. 46 As soon as reasonably practicable after the dispensation hearing, ZAL will email the scheme summary and information to all financial advisers registered with ZAL who write business in relation to the receiving fund but have opted to receive email notifications from ZAL. 47 Relevant provisions are made for inspection and Customer Care Centre training. 48 I am satisfied that, on the evidence led before me, the provisions for mail out and ascertainment of addresses of persons who are or may be policy owners of policies referable to the two statutory funds (No 4 in MLL and No 2 in ZAL) are adequate to the extent possible to minimise any disadvantage to those people. 49 I am also satisfied from the three actuarial reports: from Mr Paino, the MLL actuary, Mr Howell, the ZAL actuary, and Ms Bennet, an independent actuary, that the proposed scheme will not adversely affect the contractual benefits or other rights of MLL transferring policyholders, nor adversely affect the contractual benefits or other rights of the ZAL policy owners; or that the transfer will not adversely affect the reasonable benefit expectations of MLL transferring policy owners or ZAL affected policy owners; nor that the proposed transfer will not adversely affect the security of MLL transferring policyholders' benefits and the policy owners' benefits of the ZAL policy owners. 50 I am also satisfied that under the scheme, the non-contractually specified or discretionary aspects of MLL policies will continue to meet the overall reasonable benefit expectations of the transferring policy owners. 51 I am also satisfied from that evidence that the ZAL No 2 fund and ZAL as a whole will remain in a sound financial position and the transferring policy owners' benefits security will remain adequate after the proposed transfer date. 52 The actuarial evidence satisfies me, at least for the purposes of the dispensation hearing, that the orders sought for dispensation ought to be made. I certify that the preceding fifty-two (52) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Allsop.