Norwich Union Life Australia Limited, in the matter of Norwich Union Life Australia Limited (No 2) [2010] FCA 1054

Introduction 1 The plaintiffs seek confirmation under s 194 of the Life Insurance Act 1995 (Cth) ("the Act") of a scheme under Part 9 of the Act for the amalgamation of the life insurance business of Norwich Union Life Australia Limited ("Norwich") with the life insurance business of MLC Limited. 2 Mr F. Gleeson SC, who appeared this morning for the plaintiffs, took me in some detail to the evidence in support of the application. He also provided me with comprehensive written submissions, which I will mark as MFI1. 3 I am satisfied, largely for the reasons set out in the outline of written submissions and in what Mr Gleeson said to me this morning, that I ought to make the orders which are sought. I will give my reasons as briefly as possible, having regard to the comprehensive nature of the submissions which have been provided. 4 Each plaintiff is a registered life insurance company. National Australia Bank is the ultimate parent company of both plaintiffs. The corporate structure was explained by Emmett J in his reasons for judgment dated 6 August 2010, Norwich Union Life Australia Limited, in the matter of Norwich Union Life Australia Limited [2010] FCA 946, on an application for a dispensation order under s 191(5) of the Act. See in particular [5] - [6] of the reasons given by Emmett J. 5 The scheme is comprised of a scheme document and an Amalgamation Deed. The scheme is intended to take effect at 12.01 am on 2 October 2010, which is the Effective Time of the scheme.

The Court's discretion 6 The Court's discretion to confirm a scheme is not at large. It is to be exercised on the evidence, having regard to the objects of the Act, principally the protection of the interests of policyholders and prospective policyholders. This was explained by Gyles J in Re MetLife Insurance Limited (2007) 63 ACSR 492 at [28]. There are other authorities to the same effect. 7 In the Application of Commonwealth Insurance Holdings Limited and The Colonial Mutual Life Assurance Society Limited [2007] FCA 1012 at [13], Edmonds J pointed out that there are two aspects in respect of the protection of the interests of policyholders which arise on such an application. The first is the procedural aspect and the second is a substantive aspect. 8 As Edmonds J pointed out at [14], the question of whether policyholders would be adversely affected by a scheme is largely actuarial and involves a comparison of their security and reasonable expectations without the scheme with what they would have been if the scheme were implemented. 9 The attitude of APRA is a material factor in the exercise of the Court's discretion. This was explained by Katz J in Re Royal and Sun Alliance Life Assurance Limited (2000) 104 FCR 37 at [6]ff. His Honour there referred in some detail to the relevant authorities and this approach has been followed in more recent decisions of the Court.

Procedural requirements 10 I am satisfied upon the basis of the affidavit evidence of Mr Vincent Watt affirmed 3 August 2010, and the affidavit of Mr Kuldip Singh affirmed 20 September 2010, that subject to a matter to which I will refer below, all of the necessary procedural steps have been satisfied. The evidence is set out in MFI1 and I need not refer to it in any more detail. 11 The evidence deals with, amongst other things, the public inspection of the proposed scheme. It shows that none of the persons who made contact with the plaintiffs expressed any objections to the scheme, except in respect of one person, Mr Stephen Downs. 12 Mr Downs is the owner of a Norwich Traditional Participating Business policy referable to Norwich Fund No 1. He corresponded with the plaintiffs by email and set out a number of objections to the scheme. The essence of what he said in his emails was that he did not wish the amalgamation to go ahead and did not wish to be subject to any changes in the terms of his policy. 13 Mr Downs indicated that he wished to appear on today's application and arrangements were made for a video link to Adelaide to enable Mr Downs to address me on his objections. Mr Downs did not appear in Adelaide to take advantage of the video link, but I have considered his emails and I do not consider that they are a reason for withholding the approval of the scheme. The essential reasons are set out in section 19 of the actuarial report of Mr Kevin Allport dated 22 July 2010. 14 I will refer to the details of the changes in the terms of the policies in more detail later. But it is sufficient to say that Mr Allport points out in section 19 that the change in investment strategy for Norwich Traditional Participating Business should not adversely impact upon the reasonable expectations of the Norwich traditional policyowners in respect of benefits under their policies. 15 Mr Allport says that the basis of amalgamating traditional participating business is that it seeks to: · distribute the existing excess assets (including policyowner retained profits) of MLC at the Effective Time to the existing MLC policyowners on a fair basis; · distribute the existing excess assets (including policyowner retained profits) of Norwich at the Effective Time to the existing Norwich policyowners on a fair basis; and · distribute the future profits allocated to policyowners between MLC and Norwich on a fair basis. 16 Mr Allport also deals, in section 19 of his report, with the question of the determination of the capital growth bonus. As Mr Gleeson observed this morning, the effect of what Mr Allport says is that presently Norwich holds back more than MLC in determining the capital growth bonus, but the effect of the scheme will be that MLC will now treat the policyowners more equitably, so as to effect an increase in the capital growth bonus. 17 It seems to me that these statements by Mr Allport effectively address all of the matters raised by Mr Downs in his emails.

Application for confirmation 18 Regulation 9.02 of the Life Insurance Regulations 1995 (Cth) provides, in subregulation (1), that for the purposes of s 191(2)(b) of the Act, an applicant to the Court for confirmation of a scheme must publish a notice of intention to make the application in a form approved by APRA. APRA has approved the form of the notice for this application, which was published. 19 Subregulation (2) of regulation 9.02 provides that the notice must state that an affected policyowner may get a copy of the scheme from the nominated place within the times and for the period set out in subregulation (4). That subregulation states that a copy of the scheme must be open for public inspection from 9 am until 5 pm every day, except weekends and public holidays, for a period of at least 15 days. 20 Regulation 9.03 provides that, for the purposes of s 193(2) of the Act, an application to the Court for confirmation of a scheme may be made no earlier than the date which is the later of the dates stipulated. This effectively provides for a 15 day viewing period during which the approved summary of the scheme must be available, and the approved scheme summary must be given to affected policyholders 15 days prior to the application for confirmation of the scheme. 21 On its proper construction, s 191(2) and regulation 9.03 refer to the date on which the Court is moved for an order, not the date on which the application is filed; see for example Royal and Sun Alliance Life Assurance Limited at [7] - [12]. There are other authorities to the same effect. 22 Subject to what I say below, I am satisfied that the plaintiffs have complied with s 191(2) because the inspection period referred to under subregulation 9.02(4) ended on 16 September 2010, and more than 15 days have passed since the mail-out which concluded on 26 August 2010.

The scheme 23 As I said earlier, the scheme is comprised in the scheme document and the Amalgamation Deed. The Amalgamation Deed is expressed to be subject to a number of conditions. One of the conditions is that the scheme is confirmed by the Court. The other conditions deal with the Insurance Acquisitions and Takeovers Act 1991 (Cth), to which I will refer later, and to parent company approvals and warranties. I am satisfied that those conditions have been complied with. 24 Condition 1.1(e) provides that MLC and Norwich have each received a certificate from the appointed actuary of MLC and Norwich to the effect that, as at 31 March 2010, the relevant statutory funds comply with the Life Prudential Standards which are the Solvency Standard and the Capital Adequacy Standard and that there has not, in the period from the accounts date until immediately before the Effective Time, been any material change in circumstances of MLC and Norwich that would adversely affect their respective solvency and capital adequacy positions. 25 This latter condition cannot be satisfied until 2 October 2010. That condition is accommodated by a provision which has been inserted into the scheme in clause 2.4 as a condition subsequent. It provides that, in the event that condition 1.1(e) of the Amalgamation Deed is not satisfied by the Effective Time, then the scheme has no further operation. 26 That provision follows the approach which was adopted by Hely J in The Application of GE Mortgage Insurance Pty Limited [2004] FCA 154 at [31]. I am satisfied that this effectively deals with all of the conditions precedent stated in the Amalgamation Deed. 27 The effect of the scheme is that the whole of the life insurance business of Norwich, including all assets and liabilities referable to the life insurance business, other than the shareholders fund of Norwich, will be amalgamated with the life insurance business of MLC. 28 The amalgamation is described diagrammatically in Mr Allport's report, and the diagrammatic representation is reproduced in paragraph 16 of MFI1. The effect of it is that the statutory funds of Norwich will be amalgamated with what may be seen to be comparable statutory funds of MLC. The only fund which is not to be transferred is the Norwich Shareholders Fund, which totalled $11 million as at 31 March 2010.

Policy amendments 29 The scheme provides for two amendments to the terms of the MLC Investment Account policies referable to MLC Fund No 5. These amendments were described by Emmett J at [10] - [11]. 30 The first amendment relates to the determination of the interest crediting rate by reference to the earnings of a segregated pool of assets. Essentially what is involved is that the MLC fund assets will be segregated from the assets of the Norwich funds. The effect of this amendment is neutral so far as the position of policyholders is concerned. 31 The second amendment relates to the removal of a discretion to withhold up to a third of interest credits on MLC Investment Account policies. Mr Gleeson pointed out this morning that this discretion has never been exercised. However, the provision is to be amended so that 100% of the interest credits will be guaranteed in all cases. This is therefore of benefit to the policyholders.

Actuarial reports 32 The scheme is based on the actuarial report of Mr Kevin Allport dated 22 July 2010. Emmett J summarised at [14] - [15] the conclusions reached by Mr Allport. Mr Gleeson took me this morning through Mr Allport's report. I do not need to refer to any of the matters to which I was taken. 33 An independent actuarial report by Mr Clive Aaron of Towers Watson dated 27 July 2010 was also prepared. Emmett J referred to this at [16] of his judgment, and Mr Gleeson took me to the relevant parts of Mr Aaron's conclusions this morning. 34 Mr Allport has filed an updated report in the form of an affidavit which is dated 22 September 2010. I was taken to that this morning, and the relevant parts of it are referred to in the written submissions. Importantly, all of the statutory funds of Norwich and MLC continue to meet the capital adequacy and solvency standards of APRA as at 31 August 2010. 35 Mr Allport prepared an estimated excess asset position as at 31 August 2010. It showed that the assets of the Norwich Statutory Fund No 4 were $2 million short of the contingency margin set by Norwich. However, this is merely an internal figure, and the documents prepared by Mr Allport annexed to his affidavit show clearly that all of the funds were estimated to be in excess as at 31 August 2010, of the capital adequacy requirements set by APRA. 36 Mr Allport's document, which is Annexure B to his affidavit of 22 September 2010, shows a pro forma of the combined estimated position as at 31 August 2010, and demonstrates the excess of assets above capital adequacy requirements and contingency margins for each of the combined Norwich and MLC statutory funds. 37 In his second affidavit affirmed 23 September 2010, Mr Aaron confirms that his opinion on security of policyowners remains valid upon the basis of the updated assessment of the regulatory capital requirements and internal target capital requirements of Norwich and MLC.

APRA 38 The consent of APRA to the scheme is not required under the Act, but APRA indicated in its usual terms in a letter that it did not object to the application being made to the Court for approval. Also, Mr Sun who appeared this morning for APRA, informed me that APRA does not object to the scheme. This is a matter that I can take into account in the exercise of my discretion.

Insurance Acquisitions and Takeovers Act 1991 (Cth) 39 One of the conditions precedent to which I referred above was the need for notice to the Minister under the Insurance Acquisitions and Takeovers Act 1991 (Cth) of a trigger proposal within the meaning of s 36(c) of that Act. The Minister's delegate has given notice that the Commonwealth Government has no objection to the trigger proposal, subject to the condition that the Court approves the scheme. That condition will therefore be satisfied by the order which I propose to make.

The Cincom agreement 40 An issue which arose prior to this morning's hearing was a question of the status of a software licence agreement which Norwich had entered into in 2003 with a company known as Cincom Systems of Australia Pty Limited ("Cincom"). 41 Mr Allan D'Elton explains in his affidavit of 16 September 2010 the importance of that licence agreement, which is essential to the life insurance business of Norwich because it enables Norwich to administer and maintain information concerning certain of the life policies it has issued. 42 Cincom initially raised a query as to whether the agreement was novated, or would be novated, upon the confirmation of the scheme under s 194 of the Act. 43 This would have raised an interesting question of construction as to whether the novation was effected. However, the question no longer arises because a new licensing agreement dated 23 September 2010 has been entered into between MLC, Norwich and Cincom which provides for the relevant licence to be granted to MLC upon the confirmation of the scheme with effect from the Effective Time of 2 October 2010. Accordingly, I do not need to consider the question which previously arose.

Additional dispensation relief 44 One further question with which I need to deal is additional dispensation relief under s 191(5) of the Act. This applies in respect of 125 new Norwich policyowners. 45 Norwich continues to write new business, and 125 new policyholders became affected policyowners during the period from 8 to 9 September 2010. The effect of this was that those policyholders received only 12 days' notice instead of 15 days' notice under the Act. However, there is a 28 day cooling-off period in respect of new policies that are issued by Norwich, and indeed, the evidence establishes that one new policyholder exercised their cooling off rights in respect of two affected policies on 11 September 2010. 46 It seems to me that, in accordance with the well-established authorities which deal with the exercise of the discretion to grant a dispensation order, I ought to exercise my power. 47 Of course, in doing so, I should not be taken to be rubber stamping the application. Nevertheless, it seems to me, for reasons set out in the outline of written submissions, having regard in particular to the actuarial evidence and the attitude of APRA, I ought to make the dispensation order which is sought.

Conclusion 48 Finally, I should say that I propose to make the orders confirming this scheme in accordance with the draft short minutes of order which have been provided to me. The reasons I do so are, in summary, set out in paragraph 47 of the outline of written submissions. 49 As I have said, the Cincom issue no longer arises, and the principal consideration is the actuarial one. I have referred to the opinions expressed by the appointed actuary and the independent actuary. 50 I should add that, consistently with the obligation of full disclosure which arises on an application such as this, Mr Gleeson has taken me in some detail to all matters which appear to be relevant to the exercise of my discretion, and I take that into account as a further reason for making the orders which are sought. 51 Accordingly, I will make orders in terms of the draft short minutes of order, which I will initial and date.

I certify that the preceding fifty-one (51) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.