MMIA Pty Limited and QBE Insurance (Australia) Limited [2008] FCA 1239

Federal Court of Australia|1997-02-18|Before: Sheppard J, Lindgren J, Gyles J

Introduction 1 On 6 March 2008 I made an order under s 17F(1) of the Insurance Act 1973 (Cth) (the Act) confirming a Scheme for the transfer and amalgamation of the insurance business of MMIA Pty Limited to QBE Insurance (Australia) Limited. My reasons for confirming the Scheme are set out below. 2 I also refer in this judgment to an order made on 29 November 2007 dispensing with compliance with the provisions of s 17C(2)(c) of the Act which requires an approved summary of a scheme to be given to every affected policyholder. On 20 February 2008 I varied my earlier order. This judgment contains brief reasons why I made those orders.

The Legislation 3 The statutory framework for the transfer of general insurance business is contained in Division 3A of Part III of the Act. 4 The relevant provisions of Division 3A and prudential standards determined by the Australian Prudential Regulation Authority (APRA) for the Transfer and Amalgamation of Insurance Business for General Insurers were referred to in some detail by Lindgren J in Re Insurance Australia Ltd (2004) 139 FCR 450 at [10]ff. It is unnecessary to repeat the details of those provisions or the relevant provisions of the standards which are contained in APRA Prudential Standard GPS 410.

Background to the Scheme 5 Mercantile Mutual Insurance Company Limited was a well-known general insurer. It was incorporated in New South Wales in 1878 but, after a number of corporate reorganisations, its insurance liabilities were ultimately assumed by MMIA Pty Limited ("MMIA"). 6 MMIA has had a long history of writing general insurance and reinsurance business in Australia. It managed all of the classes of business that it wrote or acquired until 1999. 7 In October 1999, MMIA entered into a joint venture with QBE Mercantile Mutual Limited ("QBEMM"). Under the joint venture MMIA transferred the management of its general insurance business, subject to certain exceptions, to QBEMM. 8 QBE Insurance (Australia) Limited ("QIA") is the main general insurer of the QBE Group. In June 2004 QBE purchased the general insurance interests of ING Australia which was a shareholder of both MMIA and QBEMM. From about that time, QBEMM became a business unit of QIA. 9 MMIA has not issued any contracts of insurance since 31 December 2004. It has been in run-off since January 2005. However, its liabilities include long-tail liabilities under policies of insurance for workers' compensation business underwritten during the period from 1950 to 1999. 10 A large number of policies with both short-tail and long-tail liabilities were underwritten during that period. Approximately 400 claims are expected to arise from dust diseases claims made by workers or their employers through the policies. The run-off is expected to continue for at least another 30 years. 11 The purpose of the Scheme is described in [1.2] of the Scheme document as follows:- "MMIA has not issued any contracts of insurance since 31 December 2004 and wishes to be relieved of its liabilities and obligations under and in respect of all contracts of insurance that it has issued, underwritten or assumed in the course of carrying on general insurance business thereby reducing ongoing costs in administration enabling it to apply to have its authorisation to carry on general insurance business under the Insurance Act revoked, and to release excess capital." 12 The amount of the "excess capital" to be released is $196.4 million. This is a significant feature of the Scheme and I will refer to it again below.

The Scheme 13 The substance of the Scheme is to provide for the transfer of all policies of insurance issued or assumed by MMIA to QIA. Thus the Scheme is "in-house" and provides for the transfer of all existing insurance business from one member of the QBE Group to another. 14 Clause 3.1 of the Scheme provides for MMIA to transfer to QIA investment assets agreed by MMIA and QIA which have a market value equal to the "Transfer Amount". This is defined to mean the amount of the assumed liabilities (net of reinsurance recoveries) determined in accordance with Australian Accounting Standard AASB 1023. 15 Following the implementation of the Scheme, there will remain an investment balance of $196.4 million. The assets represented by that balance will be transferred to QBE, or a company within that Group for the use and benefit of the recipient.

Actuarial Evidence: Solvency Ratios 16 MMIA and QIA relied upon an actuarial report of Mr Laganiere, an employee of QBE Management Services Pty Ltd and the Approved Actuary for both MMIA and QIA. An independent actuarial report of Mr O'Dowd was also in evidence. Both reports addressed the question of the solvency coverage before and after the Scheme. They also addressed the question of minimum capital requirements for insurers under APRA's Prudential Standards GPS 110 and 310. 17 The actuaries' reports indicate that after the Scheme there will be a reduction in the capital coverage ratio from 4.78 to 1.91. However, both actuaries observe that the resulting level of coverage is well above APRA's minimum level of 1.2 and QBE's internal capital policy of 1.5 times APRA's minimum capital requirement. 18 Both the actuaries conclude that the interests of policyholders are adequately protected under the Scheme. Mr O'Dowd's conclusion is that "… no policyholders (or third party claimants who rely on their policies) would be adversely affected by the proposed transfer."

The dispensation orders 19 Section 17C(5) of the Act confers power on the Court to dispense with the need for compliance with s 17C(2)(c) if the Court is satisfied that because of, inter alia, the nature of the Scheme, it is not necessary for that paragraph to be complied with. 20 Section 17C(2)(c) provides 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. 21 The evidence was that approximately four million workers compensation policies were written by MMIA during the period from 1950 to 1999. Strict compliance with s 17C(2)(c) would therefore be onerous, if not impossible, and I considered it was appropriate to dispense with it provided that the applicants comply with a regime which was intended to bring the details of the Scheme to the notice of affected parties and relevant bodies including the Insurance Council of Australia and Work Cover and Motor Accident authorities. 22 I did, however, raise for consideration on 29 November 2007 the possibility of making a representative order for the appointment of counsel to represent a long-tail policy holder. I deferred consideration of that question but, ultimately, I decided it was not necessary to make such an order. It may be appropriate for an order to be made depending upon the facts and circumstances in another case. 23 On 20 February 2008 I varied the dispensation order to permit the applicants to send a copy of the approved summary of the Scheme to brokers or underwriting agents. It seemed to me that the terms of s 17C(5) of the Act do not preclude dispensation being granted on more than one occasion. 24 In exercising my discretion to make the dispensation orders, I took into account the fact that APRA did not object, that the Scheme is between companies in the same Group, and the widespread nature of the advertising: Re Calliden Group Ltd [2007] FCA 2019 at [62] (Lindgren J).

Issues arising on the confirmation order 25 There were a number of minor errors in the steps taken by the applicants in complying with the necessary pre-confirmation procedures. 26 First, there was a typographical error in the date of the application to the Court for confirmation of the Scheme, in the Notice of Intention published in various newspapers on 18 December 2007. The error was not apt to cause confusion or to mislead the ordinary reader. 27 Second, the Notice of Intention was published in two of the approved newspapers after the Scheme was open for public inspection. This was a breach of paragraph 11 of Prudential Standard GPS 410 which therefore resulted in a failure to comply with s 17C(2)(b) and s 17E(2) of the Act. 28 Whether or not this results in a failure to strictly comply with the requirements of those subsections, the short answer is that they are not conditions precedent to the existence of the jurisdiction to confirm a scheme: Re Armstrong Jones Life Assurance Ltd (1997) 74 FCR 160 at 161-162 (Emmett J); Re Royal & Sun Alliance Assurance Ltd (2000) 104 FCR 37 at [18] (Katz J); Re Insurance Australia Ltd 139 FCR 450 at [62]-[63] (Lindgren J). 29 Third, there was a further timing issue arising from the delayed provision of a summary of the Scheme to some affected policyholders. This resulted in a failure to comply with paragraph 15 of Prudential Standard GPS 410 and s 17E(2). It is sufficiently covered by what I said above. 30 The principal issue arising on the application was whether there was likely to be any material detriment to policyholders affected by the Scheme: Re GIO Personal Investment Services Ltd [2000] FCA 1871 at [27] (Emmett J). This accords with the main object of the Act which is expressed in s 2A(1), namely, to protect the interests of policyholders. 31 In the GIO case Emmett J was satisfied upon the basis of a joint actuarial report that there was not likely to be any material detriment to the owners of policies affected by the Scheme. His Honour therefore confirmed the Scheme under the provisions of s 194 of the Life Insurance Act 1995 (Cth). 32 Emmett J took a similar approach in Re Mercantile and General Reinsurance Company of Australia Ltd [2004] FCA 1773 at [19]-[20] and Re PMI Indemnity Ltd (No 2) [2005] FCA 1842 at [71]-[74]. In PMI [2005] FCA 1842 at [72] his Honour observed that even if the Scheme did not proceed, policyholders would not be guaranteed that the company would retain its excess capital because insurance companies are permitted to reduce their capital, subject to the approval of APRA. 33 It seemed to me that I should take the same approach in the present application in view of the conclusion reached by the actuaries as to the financial position of QIA after the Scheme and in view of the lack of opposition from any affected policyholder. 34 I also took into account the fact that APRA was represented before me and that it has expressed no objection to the Scheme. As Sheppard J said in The Application of Advance Insurance Ltd (unreported, Sheppard J, 18 February 1997) at 16-18, the Court relies on persons in the position now occupied by APRA, to place any evidence, including actuarial evidence, before the Court if it chose to do so. This is not to suggest that the Court abdicates the decision to APRA (cf, in a similar context, Re Metlife Insurance Ltd (2007)63 ACSR 492, [2007] FCA 1327 at [28], [30] and [37]). 35 The relevant authorities were collected and referred to by Katz J in Re Royal & Son Alliance 104 FCR 37 at [25]-[27]. The same approach was taken by Hely J in The Application of Zurich Insurance Co [2003] FCA 1519 at [4]. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gyles.

Counsel for the Applicants: Mr R S Hollo, Mr D Mitchell

Solicitor for the Applicants: Minter Ellison

Solicitor for Australian Prudential Regulation Authority: Mr D Sullivan

Date of Orders: 6 March 2008

Date of Reasons: 14 August 2008

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