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[2002] FCA 1303
procedural. The Court waived aspects of Order 55, directed that no meeting of contributors be required, ordered the administrator to send postal notice to each contributor and to advertise the application in...
The Federal Court, sitting in directions, allowed the administrator of the Goldfields Medical Fund to avoid holding costly meetings of contributors and ordered that contributors be notified by post and that creditors and other interested persons be notified by newspaper advertisement. The Court exercised its discretion under the National Health Act to tailor notice procedures appropriate to the post-1999 administration regime, and warned that a deed clause purporting to nominate a court for appeals from an administrator's decisions likely cannot confer jurisdiction and will need alteration before the scheme can be approved.
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PHIAC appointed an administrator to Goldfields Medical Fund Incorporated (GMF) because of serious prudential concerns about GMF's capital adequacy and governance (see paras [4]-[6]). The administrator, Mr Peter Hedge, investigated and recommended that GMF's fund be merged into Healthguard Health Benefits Fund Limited by a scheme of arrangement (paras [8], [30]-[34]). PHIAC accepted that recommendation and directed the administrator to apply to the Federal Court for orders to give effect to the scheme under s 82XZE of the National Health Act 1953 (paras [8], [27], [28]). The administrator filed an application in the Court seeking substantive orders to implement the deed and, importantly for this hearing, sought procedural directions about notification and whether meetings of contributors were required (paras [9], [10]).
At the directions hearing the administrator asked the Court to waive Order 55 rules that historically required meetings of contributors or creditors in judicial management contexts, to permit notice to contributors by mail rather than physical meetings, and to give directions for notice to creditors (paras [10], [38]). The Court, by French J, accepted the administrator's proposal for contributors but queried the precise form of notice to creditors (paras [40]-[41]). The Court ordered: waiver of relevant aspects of Order 55; no requirement to hold meetings of contributors; postal notice to each contributor using a draft notice and explanatory materials; a newspaper-notice regime (national, State and local) inviting any interested person (including creditors) to enter an appearance and file affidavits within set timeframes; and ancillary directions (the formal orders are set out at the head of the reasons and implemented after the directions hearing). The Court also signalled a legal difficulty with a provision of the deed which purported to nominate a court to hear appeals from administrator determinations of claims (para [36]).
The decision turns on three principal strands of reasoning.
First, the statutory regime changed in 1999. The Health Legislation Amendment Act (No 3) 1999 replaced the judicial management framework with a statutory administration and prudential structure centered on PHIAC, solvency/capital standards and an administrator-driven process culminating in a report to PHIAC and, if PHIAC so directs, an application to the Federal Court under s 82XZE (see paras [17]-[23], [26]-[29]). Order 55 was made in the context of the pre-1999 judicial management regime. The Court therefore read Order 55 as not mandatory in the new statutory context where s 82XZE gives the Court a broad discretion to make orders it considers to be in contributors' interests (paras [15]-[16], [28]).
Second, practical considerations about fairness and efficacy shaped the outcome. The administrator demonstrated that GMF had become a large, geographically dispersed fund (circa 69,600 contributors across multiple States) and convening meetings would be costly and likely not serve contributors' interests given the statutory rights to be heard and the fact that PHIAC had already accepted the administrator's recommended course (paras [5], [31], [38]). The Court accepted that contributors could be adequately informed and afforded an opportunity to be heard by sending the explanatory material and application by post and by allowing contributors to file appearances and affidavits if they wished to be heard (paras [38]-[40]).
Third, the Court treated creditors as 'other persons interested' under s 82XZE(2) (para [41]). But because GMF was solvent, and because many trade creditors could expect to be paid in full (and new debts could be incurred in ordinary trading), the Court concluded individual notification to all creditors was unnecessary and that an advertisement regime in specified newspapers would be sufficient to inform creditors and other interested persons of the application and the procedure for entering appearances (paras [40]-[41]).
Finally, the Court identified a legal limitation: a private deed cannot, by itself, create federal jurisdiction or bind persons to the court chosen by the deed. Consequently, a clause in the deed nominating a court for appeals from the administrator's decisions (schedule 2, cl 2.10) is of doubtful validity and would require reconsideration at the approval stage (para [36]). The Court cited earlier authority for this general rule (Minister for Health v Trustees of the Ancient Order of Foresters (1985) 10 FCR 27) (para [36]).
Before 1999 the Act allowed the Minister and the Court-ordered judicial management regime: Order 55 of the Federal Court Rules provided a tight, formalised process including formal meetings of contributors and creditors for matters of judicial management (paras [11]-[16]). The 1999 amendments fundamentally restructured prudential supervision: PHIAC was given stronger powers, solvency and capital adequacy standards replaced old minimum reserve rules, administrators replaced judicial managers, and a new statutory path to court approval for certain courses (including schemes of arrangement) was enacted (paras [17]-[26]).
This judgment applies the post-1999 statutory scheme to procedural practice. It confirms that the Court may, under s 82XZE, exercise broad discretion to adapt process to the new administration regime and to fashion procedural directions (including waiving Order 55 requirements) to meet the statutory aim of acting in contributors' interests (paras [28], [38]). The decision does not abolish Order 55, but it treats those rules as rooted in the earlier judicial management context and therefore subject to adaptation when the statutory scheme now confers different powers and priorities (paras [15]-[16], [38]).
A further post-1999 implication is the limits on what a private deed can achieve: where the statute sets the bounds of jurisdiction and court process, parties cannot, by contract, confer federal jurisdiction or fix exclusive review routes inconsistent with statute (para [36]).
Para [28]: The Court summarises s 82XZE: "On an application for such an order ... the Court may make such order or orders ... as it considers to be, in all the circumstances, in the interests of persons who are contributors to the fund concerned." Plain English: The Court has a broad, interest-based power to make whatever orders are needed to protect contributors when asked to approve a scheme. That is the statutory anchor for procedural flexibility.
Para [36]: "No deed can confer jurisdiction on the Court." Plain English: A contract or deed between parties cannot create legal power for a court that the law does not already grant. If a deed tries to make a court decide certain disputes, that clause may be ineffective without a statute that gives the court that jurisdiction.
Para [38]: The administrator's practical reasons for avoiding meetings are set out: contributors are widely dispersed and meetings would be costly, whereas contributors retain statutory rights to be heard. Plain English: It can be unfair and wasteful to force expensive, multiple in-person meetings when a written notice and a real chance to be heard achieves the same fairness.
Para [41]: The Court: "I will not require notices to be sent individually to creditors ... I think it sufficient therefore that a notice be placed in specified national, State and local newspapers..." Plain English: Where the fund is solvent and creditors are not likely to be prejudiced by the timing of payment, a general newspaper notice can be an adequate way to tell creditors about the application.
This decision is directly relevant where:
A registered health benefits fund under administration proposes a scheme of arrangement under the National Health Act post-1999, and an administrator applies to the Federal Court under s 82XZE for approval (paras [26]-[29]).
The fund has a geographically dispersed membership such that holding in-person meetings would be burdensome, costly, and unlikely to add substantive value beyond written notice and the opportunity to be heard (paras [5], [31], [38]).
The fund is solvent and creditors are ordinary trade creditors unlikely to be prejudiced by publication notice, or where ongoing trading means new debts may arise before a hearing such that individual notices would be impractical (paras [6]-[7], [41]).
A proposed scheme/deed contains procedural clauses which purport to nominate a particular court to resolve disputes about proofs of debt or similar decisions taken by an administrator (para [36]).
In short, where the balance of contributor interests and practicalities favour tailored notice and procedural efficiency over the formal meeting regime, this ruling shows the Court will permit alternative procedures provided adequate opportunity to be heard is preserved.
This reasons judgment itself does not catalogue subsequent judicial treatment. The judgment cites Minister for Health v Trustees of the Ancient Order of Foresters (1985) for the general principle that a deed cannot confer jurisdiction (para [36]). For how later courts have adopted, distinguished or refined French J's approach to notice, meetings and deed clauses under the post-1999 scheme, the present text does not provide subsequent authorities. A practitioner seeking to rely on this decision should therefore conduct targeted research for later decisions that have applied s 82XZE, considered Order 55 post-1999, or addressed the validity of deed clauses nominating courts in the administration context.
The limits of procedural adaptation: The judgment accepts waiving meetings in these circumstances. It does not set rigid tests for when meetings must be held rather than notice by post. Practitioners will want clearer criteria on when the Court will insist on meetings of contributors or creditors as opposed to written notice.
Adequacy of advertisement as notice to creditors: The Court approved advertisement in this case because the fund was solvent and practical considerations weighed against individual notices (paras [40]-[41]). It remains open how the Court would approach advertisement-only notice if the fund were insolvent or where significant unsecured creditor classes might be adversely affected.
The scope of appeals from administrator determinations: The Court flagged that a deed's clause nominating a court for appeals from an administrator's decisions is of doubtful efficacy (para [36]). What precise statutory mechanism, if any, permits judicial review or appeal of an administrator's determination of claims under a scheme remains to be authoritatively resolved in a contested substantive hearing or higher appellate adjudication.
Interaction with Corporations Act provisions: The administrator relied on s 447A of the Corporations Act as applied by s 82XB. The directions judgment accepted the administrator could rely on that path, but did not finally resolve the scope or limits of applying Corporations Act administration provisions to registered organisations under the Act. Further litigation could clarify the extent to which specific Corporations Act remedial powers are available in this specialised statutory setting.
Procedural timetables and fairness: The Court imposed firm but relatively short timetables for appearances and affidavits (see orders). The balance between expedition (to protect contributor interests and fund viability) and giving interested persons meaningful time to prepare fully argued opposition remains a topic for case-by-case assessment.
Practitioners should treat this directions judgment as useful authority for procedural flexibility in s 82XZE applications, but should analyse the specific facts, insolvency profile, geographic spread of contributors, and the terms of any proposed deed when advising on notice strategies and the drafting of dispute-resolution clauses.
The requirements of Order 55 Rules 4 and 5, to the extent that they apply, be waived.
The Applicant not be required to hold a meeting or meetings of contributors of Goldfields Medical Fund Incorporated (Administrator Appointed) ("GMF").
The Applicant shall, by 30 October 2002, send to each contributor of GMF by normal pre-paid post:
(a) a notice substantially in the form of the draft notice annexed to the affidavit of Peter James Hedge sworn 3 October 2002 as annexure "PJH8";
(c) a notice setting out the substance of paragraphs 4, 5 and 9 of this order.
If any contributor of GMF seeks to be heard on the application, the contributor must, by 20 November 2002:
(a) enter an appearance by filing a notice of appearance in accordance with Form 15 at the Western Australian District Registry, Commonwealth Law Courts Building, 1 Victoria Avenue, Perth in the State of Western Australia; and
(b) serve a copy of the notice of appearance at the Applicant's address for service.
If any contributor of GMF enters an appearance in accordance with paragraph 4: (a) the contributor must, by 4 December 2002, file and serve any affidavit setting out the matters in respect of which it wishes to be heard; (b) the Applicant have leave to file and serve any affidavit in response within 7 days thereafter; and (c) the matter be listed for further directions as soon as possible thereafter. 6. The Applicant shall, as soon as practicable after the date of this order, give notice of this application in the Australian Newspaper, the West Australian Newspaper and the Kalgoorlie Miner Newspaper, including: (a) the date and time of the hearing of the application; (b) the manner in which a copy of the Explanatory Statement relating to the proposed merger can be obtained; (c) the requirement that any interested person wishing to be heard must file an appearance by no later than 20 November 2002; and (d) the further requirement that any interested person who has entered an appearance file and serve on the administrator at an address for service specified in the advertisement, by 4 December 2002, any affidavit setting out matters in respect of which that person wishes to be heard. 7. The Applicant shall provide, within 48 hours of a request from any interested person, a copy of the Explanatory Statement relating to the proposed merger free of charge. 8. The Applicant have liberty to file and serve any affidavit in reply within 7 days after the filing of an affidavit by an interested person. 9. If no contributor of GMF or interested person enters an appearance in accordance with paragraph 4 or the advertisement referred to in paragraph 6 respectively: (a) the application be listed for hearing before a Judge at 10.15am on 22 November 2002 with an estimated hearing time of half a day; and (b) the Applicant have leave to file and serve any further or supplementary affidavits on the day of the hearing. 10. The costs of this directions hearing be the costs and expenses of the administration. 11. There be liberty to apply, including liberty to apply to vary the order set out in paragraph 6 above.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
BETWEEN: PETER HEDGE in his capacity as Administrator of the Goldfields Medical Fund Incorporated (Administrator Appointed)
REASONS FOR JUDGMENT ON DIRECTIONS FOR SCHEME OF ARRANGEMENT APPROVAL
Introduction 1 The Goldfields Medical Fund Incorporated ("GMF") is a registered organisation under the National Health Act 1953 (Cth) ("the Act"). As a result of a decision of the statutory regulator, the Private Health Insurance Administration Council ("PHIAC") it has been under administration since November 2001 because of concerns about its diminishing capital. The administrator has recommended to PHIAC that GMF enter into a scheme of arrangement with another registered health insurance organisation called Healthguard Health Benefits Fund Limited ("Healthguard"). Under the scheme of arrangement the bulk of GMF's assets and liabilities would be transferred to Healthguard. This is proposed on the basis that the merged organisation would meet and continue to meet the capital adequacy requirements prescribed by PHIAC. PHIAC has directed the administrator to apply to this Court for an order giving effect to the scheme of arrangement. Directions for notification to contributors have been sought by the administrator who also submits that a meeting of contributors is not necessary and, in effect, seeks a direction that he not be required to hold such a meeting. The question of the notification of creditors of GMF has been raised by the Court at the directions hearing, although it is accepted that the fund is solvent and continues to comply with the solvency adequacy standard prescribed by PHIAC. 2 The following reasons set out the background against which the relevant directions are sought and against which the ultimate relief of an order giving effect to the scheme of arrangement is sought.
Factual Background 3 The GMF has conducted a health insurance business out of Kalgoorlie in Western Australia for over 45 years. It is a registered organisation under the Act. 4 On 28 November 2001, PHIAC, a body corporate established under the Act with prudential regulatory functions, appointed Peter Hedge, a Chartered Accountant and Registered Liquidator, as an investigator under s 82R of the Act to investigate the affairs of GMF. The appointment was based on the following grounds: (a) Information provided to PHIAC by GMF's actuary and by GMF raised serious concerns about the reported level of claims, decreasing reserves, liquidity, the carrying value of assets and whether or not the management of the business of GMF was in conflict with the actuary's recommendations to preserve the financial stability of GMF; (b) PHIAC's review of financial information provided by GMF led PHIAC to suspect that GMF's reserves may, or may in the near future, become insufficient to satisfy the capital adequacy requirements under the Act; (c) PHIAC had been informed that GMF had lost several key executive staff including the Chief Executive Officer, the accountant and an experienced senior manager; (d) PHIAC suspected that GMF may not have experienced internal managers to effectively manage the operations of the Fund in the interests of contributors. Mr Hedge was appointed on 23 December 2001 as administrator of GMF under s 82XF of the Act. 5 Although GMF had been established and had operated for many years as a health insurer for contributors predominantly based in regional Western Australia, over the two years up to the appointment of Mr Hedge as investigator, the fund conducted by GMF had grown by more than 400%. It now services approximately 70,000 contributors with more than 50% of the membership located in the States of Victoria, New South Wales and Queensland. Mr Hedge's examination of the business and affairs of GMF led him to conclude that what he described as "the phenomenal growth in membership of the GMF fund" was attributable to uneconomic pricing decisions that resulted in the fund breaching capital adequacy standards prescribed under the Act. His examination also disclosed inadequate management and corporate governance and continued substantial losses and breaches of the capital adequacy standards. 6 The audited financial statements of GMF for the year ended 30 June 2002 disclosed a net loss of $8,309,386 against a net profit in the preceding year of $4,838,854. While total revenue had increased by over $7 million, benefits expenses had increased by more than $17 million. Salaries and employee expenses had increased by $1 million and professional services expenses increased by about $1.2 million. Asset writedowns represented $1.695 million As at 30 June 2002, the balance sheet showed net assets of $7,065,186 against a net asset position in the previous year of $15,374,572. Notes to the financial statements indicated that although the Fund was solvent at 30 June 2002, it had breached its capital adequacy requirement as defined by PHIAC under the Act by $4,550,000. 7 A subsequent report to PHIAC from GMF showed that as at 31 August 2002 GMF's solvency was $2.443 million in excess of the full solvency requirement. However its capital position was $3.399 million less than the full capital adequacy basis required by PHIAC. 8 On 12 September 2002, Mr Hedge provided PHIAC with a final report under s 82XZC of the Act. In that report he recommended, pursuant to s 82XZC(8)(a)(i) that the fund conducted by GMF be merged with the fund conducted by Healthguard in accordance with a scheme of arrangement deed to be executed by Healthguard, GMF and Mr Hedge as administrator. PHIAC considered the report at a meeting of its board on 13 September 2002 and concluded that the course of action recommended by the administrator would be in the best interests of the contributors of the fund conducted by GMF. On 16 September, PHIAC announced that it had accepted the administrator's recommendation to merge the GMF fund with that conducted by Healthguard. It issued a statement to all GMF contributors on that date. It foreshadowed that the administrator would be seeking approval from this Court for the merger in accordance with procedures laid down by the Act. On 4 October 2002, an application was filed in this Court by Mr Hedge accordingly.
The Application 9 The primary relief claimed in the application is in the following terms: "1. Pursuant to section 82XZE of the National Health Act 1953 ("the Act") the scheme of arrangement set out in the Scheme of Arrangement Deed between Healthguard Health Benefits Fund Limited, Goldfields Medical Fund Incorporated (Administrator Appointed) ("GMF") and the Applicant dated 2 October 2002 (the "Deed") be given effect to in accordance with the terms of the Deed. 2. Pursuant to section 447A of the Corporations Act (as applied by section 82XB of the Act), the operation of section 82XZJ(3)(e) of the Act be varied and Part IVA of the Act operates so that, notwithstanding the order in paragraph 1, the administration of GMF ends on the earlier of: (a) when the Applicant has completed all his obligations under clause 13 of the Deed; or (b) 6 months from the date of this order. 3. The Applicant shall, in accordance with the terms of Schedule 2 of the Deed, within 1 month and 5 business days of the date of this order: (a) cause to be published in a newspaper or newspapers circulating generally in each State and Territory of Australia in which GMF conducts business an advertisement substantially in the form of that set out in Schedule 3 of the Deed; and (b) send to each known creditor of GMF at their last known address a notice substantially in the form of that set out in Schedule 3 of the Deed. 4. That the 28 day period prescribed in paragraph 2.2 of Schedule 2 to the Deed be the date on or before which creditors of GMF are to prove their debts or claims against GMF in accordance with the terms of Schedule 2 and after which any unproved debts or claims will be forever extinguished. …" An order is also sought that the costs of the application be the costs and expenses of the administration of GMF.
The Proposed Directions 10 At the first directions hearing on the return of the application, orders in the following terms were sought: "1. The requirements of Order 55 Rules 4 and 5, to the extent that they apply, be waived. 2. The Applicant not be required to hold a meeting or meetings of contributors of Goldfields Medical Fund Incorporated (Administrator Appointed) ("GMF"). 3. The Applicant shall, within 5 business days after the date of this order, send to each contributor [of] GMF by normal pre-paid post: (a) a notice substantially in the form of the draft notice annexed to the affidavit of Peter James Hedge sworn 3 October 2002 as annexure "PJH8"; (b) a copy of the application; and (c) a notice setting out the terms of paragraphs 4, 5 and 6 of this order. 4. If any contributor of GMF seeks to be heard on the application, the contributor must, within 21 days of the date of the notice referred to in paragraph 3(a): (a) enter an appearance by filing a notice of appearance in accordance with Form 15 at the Western Australian District Registry, Commonwealth Law Courts Building, 1 Victoria Avenue, Perth in the State of Western Australia; and (b) serve a copy of the notice of appearance at the Applicant's address of service. 5. If any contributor of GMF enters an appearance in accordance with paragraph 4: (a) the contributor must, within 14 days of the expiry of the 21 day period referred to in paragraph 4, file and serve any affidavit setting out the matters in respect of which it wishes to be heard; (b) the Applicant have leave to file and serve any affidavit in response within 7 days thereafter; and (c) the matter be listed for further directions as soon as possible thereafter. 6. If no contributor of GMF enters an appearance in accordance with paragraph 2 (sic): (a) the application be listed for hearing before a Judge at am/pm on November 2002 with an estimated hearing time of half a day; and (b) the Applicant have leave to file and serve any further or supplementary affidavits up to the day of the hearing. 7. The costs of this directions hearing be the costs and expenses of the administration. 8. There be liberty to apply."
Statutory Framework - The National Health Act 1953 - Judicial Management Provisions Prior to 1999 11 Section 67(1) of the Act provides that: "A person (other than a registered organization) shall not carry on health insurance business." Prior to 1999, applications for registration of organisations were made to and determined by the Minister for Health. Such applications were referred first to a Registration Committee (ss 70 and 71) which would report to the Minister (s 72). The Minister, after considering the report of the committee, was empowered to grant or refuse the application (s 73(1)). 12 A body called the Private Health Insurance Administration Council was established (s 82B) which had a variety of functions including the receipt of regular reports from registered organisations about their financial affairs (s 82G(1)(bb)), the examination of the financial affairs of such organisations (s 82G(1)(d)), the determination whether a registered organisation was or was about to be in breach of a minimum reserve condition specified under s 73BAB, (s 82G(1)(f)), and the making of recommendations, including recommendations that the Minister apply for the judicial management or winding up of a fund (s 82G(1)(g)(ii)). 13 Part VIA, as it stood prior to 1999, provided for the conduct and supervision of the affairs of registered organisations. By s 82R the Minister could serve a notice on a registered organisation requiring it to show cause within fourteen days or more as specified, why an inspector should not be appointed to investigate the affairs of the organisation (s 82R(1)). The powers of such inspectors and the duties of persons to comply with their requirements were set out in ss 82S and 82U. The inspector was required to report to the Minister on the completion or termination of an investigation (s 82W). 14 After consideration of an inspector's report or any recommendation of PHIAC, the Minister, if of opinion that it was necessary or proper to do so, could apply to the Court for an order for the fund conducted by the organisation to be placed under judicial management or to be wound up. Section 82ZA provided for the Court to make orders for the judicial management of a fund and for the appointment of a judicial manager in whom management of the fund would vest. The Court could issue directions to the judicial manager who would act under the control of the Court and could apply to the Court at any time for instructions as to the manner in which he or she should conduct the judicial management or in relation to any matter arising in the course of that judicial management. There was also provision for the cancellation of judicial management orders (s 82ZB) and the filing with the Court of a report by the judicial manager stating which of certain specified courses was, in the circumstances, in the judicial manager's opinion, most advantageous to the general interests of the contributors to the fund. These options included the transfer, in accordance with a scheme to be prepared by the judicial manager, of the business of the fund to the fund conducted by another registered organisation (s 82ZE). The judicial manager could make an application to the court for an order to give effect to the recommended course. On such an application, the Court could make such order as it considered to be most advantageous for the interests of the contributors to the fund (s 82ZE(6)). Where an order was made by the Court for the transfer of the business of a fund to the fund conducted by another registered organisation, the judicial manager was to prepare a scheme for the transfer, submit the scheme to the proposed transferee organisation for its approval and when the scheme had been so prepared and approved, was to apply to the Court for its confirmation (s 82ZF(1)). 15 Order 55 of the Federal Court Rules was made to deal with applications for judicial management orders. That order attracts to applications under Part 6A of the Act as it stood, the same provisions about the commencement of the proceedings by application and the conduct of directions hearings as apply to applications generally. Order 55 rules 4 and 5 contemplate the calling of meetings of contributors or creditors or any other person or class of persons whose interests may be affected in such manner as the Court directs. Order 4 requires such evidence to be adduced by an applicant at a directions hearing as is necessary to enable the Court to order a meeting or meetings of any of those classes of person. The evidence should include a form of notice of meeting, forms of proxy, proposed forms of advertisement, the proposed scheme, an explanatory statement, the consent of the proposed chairman and the most recent audited accounts and balance sheets of the fund. Order 55 rule 5 requires that in every notice summoning the meeting given by advertisement there shall be included a notification of the day to which the application stands adjourned by order of the Court under rule 7 and a notification of the place at which, and the manner in which, contributors or creditors or others entitled to attend the meeting may obtain copies of the explanatory statement. Order 55 rule 7 provides that upon directions being given by the Court, the application will stand adjourned to such day as the Court may appoint. On the further hearing of the application the rule requires evidence as to due compliance with the Court's directions, the report of the chairman of the meeting or meetings by affidavit and evidence of the views expressed by any interested person who opposes the scheme. 16 Order 55 was made in the context of the regulatory scheme as it existed prior to 1999. Statutory Framework - The National Health Act - Prudential Regulation after 1999 17 The preceding regulatory provisions were substantially altered by the Health Legislation Amendment Act (No 3) 1999 (No 159 of 1999). An overview of the changes was given in the Second Reading Speech for the Bill. It was said, inter alia, to address concerns of the government, consumers and the private health industry about the prudential regulation of the private health insurance industry which had been identified in the 1997 Industry Commission report on private health insurance. The Second Reading Speech went on: "In 1989, the Private Health Insurance Administrative Council, PHIAC, was established under the National Health Act 1953 to provide advice on the prudential regulation of the private health industry. In line with the Industry Commission recommendations, the government amended the act so that PHIAC now has an independent board. However, up until now PHIAC's powers have been limited, in that it is essentially an advisory and administrative body and as such may only make recommendations. This bill will make essential regulation of the private health industry more efficient. The transfer of the function of approving registration and mergers from my department to PHIAC and the strengthening of deregistration provisions will make PHIAC's roles consistent with other insurance regulators. This move from the government to an independent regulator will take any politics out of the equation and put independent expert decision-making in." (Parl Deb H of R 11/3/1999 p 3731) 18 The essential features of the new prudential regulation provisions were set out in the Explanatory Memorandum for the Bill. It described the main items contained in the schedule to the Bill dealing with the prudential regulation of registered organisations as including the following:
The Proposed Scheme of Arrangement - Overview 30 The scheme of arrangement deed is executed between GMF, Healthguard and Mr Hedge. Recital H of the deed describes it as setting out the terms on which the proposed transaction will, subject to PHIAC's approval under s 82XZD of the Act and the Court making orders in relation to the matter under s 82XZE of the Act and s 447A of the Corporations Act as applied by s 82XB of the Act, be effected by the parties. 31 The key aspects of the scheme of arrangement are described in Mr Hedge's affidavit of 3 October 2002 thus: (a) All GMF contributors will be transferred to Healthguard together with the liabilities associated with their policies. (b) The assets of GMF will be transferred to Healthguard, excluding amounts estimated to meet GMF's remaining liabilities and any other assets agreed by the parties. It is estimated that assets valued in excess of the estimated liabilities associated with the GMF contributors will be transferred to Healthguard at the time the GMF contributors are transferred. (c) The balance of assets held by GMF are to be realised and the proceeds used to discharge GMF's remaining outstanding liabilities. The balance of the proceeds will then be paid to Healthguard. (d) Healthguard undertakes, unless otherwise agreed by PHIAC, to maintain GMF's operations in Kalgoorlie, with trading continuing under the GMF brand. (e) All GMF staff will be offered new employment contracts. (f) Healthguard undertakes that at least two non-executive directors from the board of HBF and at least two non-executive directors residing in the Goldfields region will be appointed to the Healthguard board. (g) Healthguard will convert GMF's information technology systems to the "WHICS" health insurance management software system without adversely affecting the services to GMF contributors. (h) Healthguard will accept each GMF contributor on terms no less favourable than the GMF policy held by the GMF contributor. (i) Each GMF contributor that transfers to Healthguard will be deemed to have a continuous period of membership with Healthguard (including for the purposes of waiting periods). (j) Premiums payable by and benefits offered to each GMF contributor under policies held will remain unchanged until 31 March 2003 unless requested earlier by PHIAC for solvency or capital adequacy reasons. 32 Mr Hedge contends that the merger of the GMF fund with the Healthguard fund should provide GMF contributors with established, experienced and proven management and a board of directors which will enable it to meet PHIAC's requirements. The merger should also provide GMF contributors with a financially viable fund with improved capital reserves. He would expect the merged fund to meet the prudential requirements under the Act. He states his opinion that in all the circumstances the best interests of the contributors of GMF are served by merging the fund conducted by GMF with the fund conducted by Healthguard in accordance with the scheme of arrangement outlined in the deed. If the scheme of arrangement is not approved by the Court then, in Mr Hedge's opinion, the administration will continue subject to PHIAC and the Act. He believes the fund would continue to be in breach of its prudential requirements under the Act. Under these circumstances PHIAC had indicated that it is likely that it would not be in a position to renew the fund's registration and operating licence. 33 The scheme contemplated under the deed involves a two step process for the transfer of GMF's net assets and liabilities to Healthguard. In the first step, which occurs on the "Effective Date", a defined "Base Amount" is paid to Healthguard when all liabilities of GMF for "Transferring Contributors" are transferred to Healthguard. In the second step, Mr Hedge would proceed to realise the "Balance Assets", discharge GMF's remaining liabilities and pay the "Realised Amount" to Healthguard. There are two principal reasons for structuring the scheme using this two step process. The first is that there are certain GMF assets designated "problem" assets which the parties consider would be better dealt with and realised by Mr Hedge as administrator, rather than transferred to Healthguard. These involve GMF's interests in contracts to purchase three apartments at Mounts Bay Village in Mounts Bay Road, Perth, WA. A dispute has arisen with the vendor under these contracts which will need to be settled by the courts if it cannot be resolved by agreement. 34 The second reason is that Healthguard is reluctant to assume all the liabilities of GMF in circumstances where it could not determine the extent of those liabilities. Mr Hedge says he is informed by Healthguard that it is particularly concerned about presently unknown and unforeseen liabilities emerging and claims being made against the merged fund after the transfer. He believes a procedure established in cl 13.4 and schedule 2 to the deed will enable GMF's outstanding liabilities to be finally determined and discharged. This would achieve the finality and certainty necessary in the interests of the contributors of GMF and the merged fund.
The Proposed Scheme of Arrangement - Determination of Outstanding Liabilities of GMF 35 Clause 13.4 of the deed provides that: "The procedures for the Administrator satisfying the outstanding liabilities of GMF is as set out in Schedule 2." Schedule 2 provides for the administrator to create a "Admitted List of Admitted Claims by Creditors". Within one month of the Effective Date under the deed, the administrator must, under schedule 2, place an advertisement in the form of that set out in schedule 3 once in a newspaper or newspapers circulating generally in each State and Territory of Australia in which GMF conducts business and send to each named creditor at their last address a notice substantially in the form of that set out in schedule 3 requiring each creditor asserting a claim to notify the administrator in writing, within twenty eight days of the date of the advertisement, of the asserted claim. The administrator, under cl 2.6, must determine whether all or part of an asserted claim should be entered on the Admitted List. There is provision under cl 2.10 for a creditor who receives a notice from the administrator of the admission of none or all or part of a claim on the Admitted List to commence a "proceeding in a court nominated by the administrator appealing the administrator's decision". Unless the creditor commences a proceeding within a twenty one day period or any further period the Court allows, the administrator's decision would be final. 36 It does not appear that this provision has any statutory support. During the directions hearing, counsel suggested that there might be a specific provision in the Corporations Act applying the appeal provisions in respect of a liquidator's rejection of a proof of debt (contained in reg 5.6.54 of the Corporations Regulations) to an administrator. Counsel has advised subsequently that having researched the position, there is no such provision in the Corporations Act or Regulations. The problem is more fundamental than that. No deed can confer jurisdiction on the Court. The Act does not in terms authorise applications to the Court to resolve questions relating to or arising out of the discharge of the scheme administrator's duties and powers. And if there be jurisdiction to challenge a decision of the administrator, parties cannot be bound to the choice of court nominated by the administrator - see generally Minister for Health (Cth) v Trustees of the Ancient Order of Foresters Friendly Society in Queensland (1985) 10 FCR 27 (Pincus J). It may be the case of course that the deed being made "binding on all persons" by virtue of s 82XZE(1), that federal jurisdiction may be attracted in respect of disputes arising under the deed by virtue of s 39B(1A) of the Judiciary Act 1903 (Cth). Plainly this aspect of the proposed deed of arrangement will require consideration when it comes to the question of Court approval. It is doubtful that it could be approved in that form. At this point it is also relevant to the issue whether or not the Court should require notice of the application for approval to be given to creditors. 37 A further aspect of the orders sought in the application is an extension of the administration for a further period of six months to allow Mr Hedge to complete his obligations under the deed. Under s 82KZJ(3)(e) of the Act, the administration of GMF would come to an end upon the Court making the orders sought in the application. It is for that reason that Mr Hedge seeks the orders set out in par 2 of his application. In that respect he would rely upon s 447A of the Corporations Act as applied by the Act. 38 Mr Hedge says in his affidavit that he does not consider it necessary to hold a meeting or meetings of contributors to consider the scheme of arrangement set out in the deed. Instead he proposes sending a notice to each contributor. The notice would attach a statement explaining the effect of the scheme and the rights of the contributors in relation to the scheme and the application. He points out that PHIAC has accepted his recommendation and has informed him that it is satisfied that his recommended course of action is in all the circumstances, in the best interests of the GMF contributors. Any resolution passed at a meeting of contributors would not be binding on GMF, the administrator, PHIAC or the Court. He points out that Order 55 of the Federal Court Rules, which appears to require the calling of meetings of contributors, has not been amended to reflect the amendments to the Act. GMF contributors are entitled under the Act to be heard on the application. They are therefore not denied an opportunity to express any objections or concerns by reason of the fact that no meeting is held. And to the extent that GMF contributors consider it not in their interests to continue as contributors of the merged fund, they are entitled and free to transfer to any other registered fund or organisation. This is on the basis of the statutory rights of transferability under the health insurance regime regulated by the Act. Mr Hedge says that given the geographical spread of the GMF contributors, the cost of organising and holding what would most likely be multiple meetings of contributors in different State capital cities, would be significant. The current membership profile of GMF as at 31 August 2002 is summarised as follows: State Number of Contributors Percentage of Contributors NSW and ACT 5,126 7.4% Vic 30,096 43.2% Qld 4,014 5.8% SA 1,384 2% WA and other 28,980 41.6% Total 69,600 100%
Given the deteriorating financial position of GMF, Mr Hedge did not consider the incurring of such significant costs to be in the best interests of GMF contributors or contributors to the merged funds. 39 In support of the urgency of the application, he says that the currently marginal trading performance of the GMF fund is unlikely to improve in the immediate future. As a result it is likely that GMF's capital position will continue to fall below the capital adequacy standard. The administration of the fund has introduced a degree of uncertainty about its future among employees and contributors. The sooner the scheme of arrangement under the deed is implemented then, it is said, the sooner contributors and employees of GMF can be part of a normally trading fund not tainted by the uncertainty of administration.
The Proposed Directions 40 I accept the force of Mr Hedge's contentions as to the suggested procedure for notifying contributors of the application and am prepared to make directions accordingly. My concern is whether or not creditors should be notified. 41 Under s 82XZF(2), on an application for an order for approval of a scheme of arrangement, PHIAC "and any other person interested" are entitled to be heard. There is no doubt about the interests of the creditors. There is no suggestion that GMF is insolvent, the evidence is to the contrary, and the proposed procedures under the scheme make provision for what amount to "proofs of debt" and the paying out of all creditors by the administrator. There are, however, some uncertainties attached to that process including, as already mentioned above, the appeal provision for creditors in schedule 2. In my opinion, it is desirable that notice of the proposed application be given generally so that any interested person may seek leave to appear. I will not require notices to be sent individually to creditors of GMF as many ordinary trade creditors might expect to be paid out in full prior to the hearing of the application and in the meantime new debts may be incurred in the ordinary course of GMF's trading. I think it sufficient therefore that a notice be placed in specified national, State and local newspapers inviting any person interested to file a notice of appearance and affidavits within the same timeframes as provided for contributors, save that the time limited for filing a notice of appearance shall run from the date of publication of the latest newspaper advertisements. Subject to that addition, I am prepared to make the directions set out in the minute. I certify that the preceding forty one (41) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French.
Minister for Health (Cth)
Trustees of the Ancient Order of Foresters Friendly Society in Queensland
(1985) 10 FCR 27
The Court waived aspects of Order 55, directed that no meeting of contributors be required, ordered the administrator to send postal notice to each contributor and to advertise the application in specified newspapers inviting interested persons (including creditors) to file appearances and affidavits by fixed dates, preserved rights to seek to be heard, allowed limited leave to file affidavits in reply and made the costs of the directions hearing costs of the administration (see formal orders at head of file and paras 40-41).