Municipal Mutual Insurance Limited, in the matter of Municipal Mutual Insurance Ltd [2009] FCA 378

REASONS FOR JUDGMENT 1 The applicant, Municipal Mutual Insurance Limited (MMI), has applied to the Court for orders under Division 3A of the Insurance Act 1973 (Cth) (the Act), which consists of ss 17A to 17I inclusive. Section 17B(1)(a) provides that no part of the insurance business of a general insurer may be transferred to another general insurer except under a scheme confirmed by the Federal Court. Section 17E(1) provides that any of the bodies corporate affected by a scheme may apply to the Federal Court for confirmation of the scheme, which, under s 17E(2), must be made in accordance with the Prudential Standards, as determined by Australian Prudential Regulation Authority (APRA) pursuant to s32 of the Act. Under s 17E(3), APRA is entitled to be heard on any such application. 2 Section 17F(1) provides that the Court may confirm a scheme without modification, confirm the scheme subject to such modifications as it thinks appropriate or refuse to confirm the scheme. Under s 17G, when a scheme is confirmed it becomes binding on all persons and has effect in spite of anything in the constitution of any body corporate affected by the scheme. The body corporate on whose application the scheme was confirmed must cause a copy to be lodged in the office of Australian Securities Investments Commission (ASIC) in each state and territory in which a company affected by the scheme carries on business. 3 MMI is incorporated in England and Wales as a company limited by guarantee without any share capital and is registered in Australia as a foreign corporation. Such registration does not change its identity as a company incorporated in England and Wales. 4 One of the functions of APRA is to protect policy holders in Australia of companies carrying on insurance business in Australia. Section 28 of the Act requires that an insurer maintain assets in Australia having a total value at least equal to the value of its liabilities. The Prudential Standards qualify that general proposition in the case of foreign insurers, requiring them to maintain assets in Australia having a value in excess of their liabilities in Australia in an amount at least equal to the minimum capital requirement as defined in Prudential Standard GPS 110. For that reason, a foreign insurer such as MMI must maintain a separate balance sheet in respect of its Australian operations. Separate accounts are also maintained in respect of the Australian operations of a foreign insurer. The Australian operations are usually referred to as a branch of the insurer. 5 The notional division between the Australian operations of a company such as MMI and its other operations are reinforced by restrictions placed by APRA on the ability of the company to deal with its Australian assets. Thus the Australian assets may not be reduced without the approval of APRA. In that way, assets sufficient to meet the foreign insurers' Australian liabilities are, in a sense, quarantined within Australia and the non-Australian assets and liabilities can, for all relevant purposes, be ignored. While that quarantining effect does not create a separate legal entity, it is sometimes convenient to treat the Australian branch as having separate legal existence. 6 In September 1992, MMI ceased writing new business and its United Kingdom business went into runoff. In 1994 MMI entered into a scheme of arrangement with its creditors. However, the insurance business of the Australian branch of MMI was expressly excluded from that scheme. MMI ceased writing new business in Australia in March 1992 and it has been in runoff since then. MMI is authorised by APRA to conduct an insurance runoff business in Australia and no more. At present, MMI has one employee in Australia and its business is managed by that one employee. 7 As at 30 June 2008 MMI, the company incorporated in England and Wales, had liabilities that exceeded its assets. However, as at December 2008, MMI had a net asset position of $9,903,000. 8 Gordian Runoff Limited (Gordian) is an Australian corporation. Gordian is a wholly owned subsidiary of AG Australia Holdings Limited, which was formerly known as GIO Insurance Limited. Gordian's ultimate Australian parent is Enstar Australia Holdings Pty Limited (Enstar), a non-operating holding company for the purposes of the Act. Enstar is a wholly owned subsidiary of Cumberland Holdings Limited, a Bermuda company. 9 Gordian is also authorised under the Act to conduct a general insurance runoff business in Australia. Its business consists of both direct insurance and inwards reinsurance. The direct insurance was mostly written in the 1990s and included professional indemnity, directors and officers, public liability, construction, short tail risk and financial risks business. Its inwards reinsurance business was mostly written between 1987 and 1999 and consists of directors and officers, liability, aviation, space, marine and property treaties business. Gordian has been in runoff since September 1999. As at 30 September 2008, Gordian had total assets of in excess of $920,000 and liabilities under $420,000, giving a net asset position of approximately $505 million. As at 31 December 2008, Gordian's position had improved over that of 30 September 2008. 10 Section 17C of the Act specifies a number of steps that must be taken before making an application for confirmation of a scheme. On 12 December 2008 the Court ordered, pursuant to s 17C(5) of the Act, that the need for MMI to comply with some of those requirements be dispensed with, subject to MMI complying with further requirements that were ordered by the Court at that time. In my reasons of that day for making those orders, I outlined the circumstances that justified dispensing with compliance with the relevant provisions of s 17C. Subject to certain minor matters, which are of no materiality, I am satisfied that the steps required by s 17C, except to the extent to which they have been dispensed with, have been complied with by MMI. 11 The present application is based on affidavit evidence by Ian Albert Willett of 20 February 2009, Ingrid Irena Barbaresco of 23 February 2009, Geoffrey Michael Atkins of 23 February 2009, Robert Conry Brauer of 24 February 2009, Richard Charles Wilkinson of 24 February 2009, Sandra Vincenza Isabella O'Sullivan of 23 February 2009, James Andrew Maiken of 26 February 2009 and Mark Andrew Thornton of 26 February 2009. That evidence persuades me that the procedural steps have been satisfactorily complied with. 12 There are two matters of substance to which I should refer. The first is the form of the scheme, the confirmation of which is sought by the Court; the second is the actuarial report upon which the Court's discretion to confirm the scheme is to be based. 13 The scheme for which confirmation is sought is to be found in the document which has been marked Exhibit 2 in the hearing of MMI's application. That document consists of two parts, described as Part A and Part B. Part A is described as "Introduction and Overview of Scheme". Part B is described as "Terms of Scheme". An important part of Part B is an annexure consisting of a deed of transfer of insurance business dated 23 January 2009 between MMI and Gordian. Part A, as it says, describes the scheme by way of overview. The terms of the scheme in Part B purport to be operative and to a considerable extent re-enact certain of the provisions of the deed of transfer of insurance business. The structure of the documentation is slightly unusual but it is desirable that the whole of the document, which I have marked as Exhibit 2, be treated as the scheme to be confirmed pursuant to Part 3A of the Act. 14 The effect of the scheme, as so defined, is that, on the Transfer Date, being the first business day falling 14 days after the date on which the Court confirms the scheme, the Transferring Business is to be transferred and vested in Gordian. The Transferring Business means all the general insurance business carried on by MMI that was written through or by MMI in Australia prior to the Transfer Date. On and with effect from the Transfer Date, and subject to compliance with clause 5.1 of the Transfer Agreement, to which I shall refer shortly, the Transferring Liabilitiesare to be transferred to and become liabilities of Gordian. Transferring Liabilities are all liabilities of MMI under Transferring Policies, which consist of every policy written by MMI in Australia prior to the Transfer Date. 15 In addition, on and with effect from the Transfer Date, Gordian is to assume and take over all the obligations of MMI under the Transferring Policies and is to be substituted for MMI in all Transferring Policies. The rights, benefits and liabilities of policy holders under the Transferring Policies are to be the same as if those policies had been issued by Gordian instead of MMI. In addition, on and with effect from the Transfer Date, the Transferring Assetsare to be transferred to and vested in Gordian. The Transferring Assets are defined as all rights, benefits and powers of MMI under, or by virtue of, the Transferring Policies, together with all claims of MMI against a policy holder, under or by virtue of, the Transferring Policies and the records of MMI, as defined, consisting, shortly, of all claims, personal information and other client files of MMI in relation to the Transferring Policies. 16 Part B also contains a provision for further assurance, whereby MMI and Gordian are to use reasonable endeavours to procure that any necessary third party will promptly execute and deliver such documents and perform such acts as may be reasonably required for the purpose of giving full effect to the scheme and all matters incidental to, and connected with, the scheme. The Transfer Agreement, being the deed of transfer of insurance business of 23 January 2009, mirrors those provisions but also provides, in clause 5.1, for the payment by MMI to Gordian of the sum of $1,850,000 on the Transfer Date and, in clause 5.3, for the payment by Gordian to MMI on the Transfer Date of the sum of $2. 17 The basic operative provision of the Transfer Agreement is to be found in clause 2.1, whereby MMI agrees to transfer to Gordian and Gordian agrees to assume the Transferring Business and the Transferring Liabilities as consideration for the Transfer Sum of $1,850,000. In addition, as consideration for the sum of $2, MMI agrees to transfer to Gordian and Gordian agrees to assume the Transferring Assets. 18 The rationale for the scheme is to enable MMI to achieve finality in relation to its Australian business. Once the scheme is confirmed and consummated, MMI will be in a position to close its Australian branch. The management of MMI has determined that that objective is best achieved by transferring its business to Gordian pursuant to the scheme. Gordian already holds a large runoff portfolio and has the economies of scale necessary to handle the runoff more efficiently than it can be handled by MMI as a separate enterprise. 19 In addition to benefits that may be thought to arise for MMI's policy holders as a result of the transfer to Gordian, to which I shall refer shortly in dealing with actuarial reports, the effect of the transfer will be to save significant regulatory costs, audits and other expenses. For example, MMI's annual claims handling expenses and administrative costs are between $100,000 and $150,000. The transfer is expected to result in significant savings in that regard. So far as MMI is concerned, the scheme will also facilitate the repatriation of excess capital from the Australian branch of MMI to MMI in the United Kingdom. Following the consummation of the scheme, MMI intends to apply to APRA to have its insurance authorisation revoked, thus allowing such a repatriation of excess capital. 20 The financial condition of both MMI and Gordian is set out in an actuarial report by Mr Richard Wilkinson dated 22 January 2009. Mr Wilkinson is a fellow of the Institute of Actuaries Australia and a fellow of the Institute of Actuaries in the United Kingdom. He is a director of KPMG Actuaries Pty Limited (KPMG). Mr Wilkinson has prepared the report on behalf of KPMG. KPMG was engaged by MMI to prepare the report in connection with the proposed scheme, for the purpose of s 17C (2)(a) of the Act, which relevantly provides that an application for confirmation of a scheme may not be made unless a copy of the scheme and any actuarial report on which the scheme is based, have been given to APRA in accordance with the Prudential Standards. KPMG's report was based on financial information provided in respect of the Australian branch of MMI and in respect of Gordian as at 30 September 2008. Since issuing the report, Mr Wilkinson has made all further inquiries that he believes are desirable and appropriate and, in his affidavit, says that no matters of significance that he regards as relevant have, to his knowledge, been withheld from the Court. 21 Mr Wilkinson's conclusion, based on the review he has conducted, is that the financial security of Gordian remains well above the minimum APRA levels after the proposed scheme has been completed. Furthermore, that level of security supporting the MMI Australian policy holders is stronger in terms of APRA's requirements, once the scheme is completed, than the position of MMI policy holders prior to the scheme. He assumes, as is the case, that the scheme will not alter the policy terms and conditions in respect of MMI or Godian policy holders in any material way and that there are not expected to be any material additional operational risks arising for MMI Australian policy holders following the proposed scheme. In summary, Mr Wilkinson concludes that neither the policy holders of MMI in Australia nor the policy holders of Gordian will be detrimentally affected by the proposed scheme in any material way. Indeed, he concludes that the scheme appears to provide advantages for policy holders of MMI in Australia. In his report, Mr Wilkinson provides more detailed figures concerning the respective financial positions of MMI policy holders and Gordian policy holders. In short, the MMI policy holders will be much better off in terms of the solvency coverage required by APRA following the completion of the scheme than they are at present. 22 Mr Wilkinson has, in his report, projected the position of Gordian, on the assumption that two other schemes similar to the scheme proposed by MMI are completed. One of those schemes, that in relation to Cavell Insurance Co Limited, has been confirmed by the Court by order made on 22 December 2008, see Cavell Insurance Co Ltd, in the matter of Cavell Insurance Co Ltd (2008) FCA 1984. Another scheme in respect of Sphere Drake Insurance Limited is listed before the Court in several weeks for the hearing of an application for confirmation. Mr Wilkinson projects the position of Gordian following completion of all three schemes and concludes that the position of all policy holders of Gordian, including the transferring policy holders in respect of the three transferring companies, will be well in excess of the minimum solvency coverage required by APRA. 23 The evidence before the Court includes updated management figures in respect of the position of MMI and Gordian as at 31 December 2008. Those figures indicate that the solvency coverage of policy holders is even stronger than it was as at 30 September 2008. Gordian's financial position will not be materially affected at all by the transfers and the figures indicate that Gordian's financial position may not have been materially affected by recent events throughout the world. 24 In general, the effect of the scheme is that MMIs policy holders will be transferred from a company with a solvency ratio of 190% to a company with a solvency ratio in excess of 400%. There are to be no changes in the policy terms and conditions of the policy holders. The effect of the scheme, as I have said, is simply to substitute Gordian as the insurer under each policy. 25 The Court must also have regard to the effect on the policy holders of the transferee, although they are not affected, within the meaning of Part 3A of the Act. The figures derived from Mr Wilkinson's report indicate that the solvency ratio of Gordian may decline marginally from about 470% to 468%. 26 Mr Geoffrey Atkins is also a fellow of the Institute of Actuaries in Australia and is a director and chairman of Finity Consulting Pty Limited (Finity). Finity is a specialist insurance and actuarial consulting form. Mr Atkins was asked to undertake an independent peer review of the actuarial report provided by Mr Wilkinson on behalf of KPMG. Mr Atkins has expressed the opinion that the KPMG actuarial report is sound. On the basis of the information presented in that report, Mr Atkins concurs with the opinion of Mr Wilkinson that there is no material detriment or disadvantage to the policy holders of MMI or Gordian resulting from the proposed scheme. 27 On the hearing of the application today, APRA was represented by its solicitor. APRA has indicated that it has no objection to the proposed scheme and that the scheme appears to be beneficial for the policy holders of MMI. The critical factor governing the exercise of the Court's discretion is whether affected policy holders will be detrimentally affected by the implementation of the scheme. I am persuaded by the evidence to which I have referred that none of the MMI policy holders will be detrimentally affected by the scheme. To the extent that it is relevant, I am also satisfied that none of the policy holders of Gordian will be materially detrimentally affected by the scheme. In all of the circumstances I therefore propose to make an order confirming the scheme in terms of the document which has been marked Exhibit 2. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.