REASONS FOR JUDGMENT
1 The applicants have applied to the Court for an order pursuant to s 194 of the Life Insurance Act 1995 (Cth) (the Act) confirming the amalgamation of the life insurance business of the first applicant, Norwich Union Life Australia Limited (Norwich), with the life insurance business of the second applicant, MLC Limited (MLC).
2 Section 190(1) of the Act relevantly provides that no part of the life insurance business of a life company may be transferred to another life company or amalgamated with the business of another life company, except under a scheme confirmed by the Court. Under s 193(1) any of the companies affected by a scheme may apply to the Court for confirmation of the scheme. Any such application is to be made in accordance with the Life Insurance Regulations (the Regulations), and the Australian Prudential Regulation Authority (APRA) is entitled to be heard on any application. Under s 194(1) the Court may confirm a scheme without modification, or confirm the scheme subject to such modifications as it thinks appropriate, or refuse to confirm the scheme. Section 195 relevantly provides that when a scheme is confirmed, it becomes binding on all persons, and it has effect in spite of anything in the constitution of any company affected by the scheme.
3 The proceeding is before me today for consideration of an application by Norwich and MLC pursuant to s 191(5) of the Act. Section 191(2) relevantly provides that an application for confirmation of a scheme may not be made unless:
(a) a copy of the scheme and any actuarial report on which the scheme is based have been given to APRA in accordance with the Regulations,
(b) notice of intention to make the application has been published by the applicant in accordance with the Regulations, and
(c) an approved summary of the scheme has been given to every affected policyholder.
4 Affected policyholder is defined as the owner of a policy that is referable to a statutory fund affected by the scheme. An approved summary is a summary approved by APRA. However, under s 191(5) the Court may dispense with the need for compliance with s 191(2)(c) in relation to a particular scheme, if it is satisfied that, because of the nature of the scheme or the circumstances attending its preparation, it is not necessary that the paragraph be complied with. In order to put the present application into context, it is desirable to say something about the background circumstances that have led to the substantive application.
5 MLC is a wholly owned subsidiary of MLC Holdings Limited. National Australia Bank Limited (NAB) is the ultimate parent company of MLC. On 1 October 2009, Norwich became part of the NAB group of companies. MLC is incorporated in New South Wales and has been carrying on business since 1886. It is a company limited by shares. MLC is registered under the Act to carry on a life insurance business. It writes and has written a range of investment policies, permanent and term life insurance, disability insurance, and critical illness policies. MLC currently has five statutory funds designated as follows:
(a) Number 1 Statutory Fund: non-linked business;
(b) Number 2 Statutory Fund: investment-linked superannuation business;
(c) Number 3 Statutory Fund: investment-linked non-superannuation business;
(d) Number 4 Statutory Fund: investment-linked allocated pension business; and
(e) Number 5 Statutory Fund: participating non-linked business (ordinary branch) and other non-linked business (general branch).
6 Norwich is incorporated in Victoria. It has been carrying on business since 1987. It is also a company limited by shares. Norwich is also registered pursuant to the Act to carry on the business of life insurance. It writes and has written a range of investment policies, permanent and term life insurance, disability insurance and critical illness policies. Norwich has four statutory funds designated as follows:
(a) Number 1 Statutory Fund: non-linked business;
(b) Number 2 Statutory Fund: investment-linked superannuation business;
(c) Number 3 Statutory Fund: investment-linked non-superannuation business; and
(d) Number 4 Statutory Fund: investment-linked allocation pension business.
7 Under the proposed scheme for the amalgamation of the business of Norwich with the business of MLC, the traditional participating business and investment account business of the Norwich Number 1 Fund will be amalgamated with MLC Number 5 Fund. The remainder of the business of the Norwich Number 1 Fund will be amalgamated with the MLC Number 1 Fund. The business of the Norwich Number 2 Fund will be amalgamated with MLC Number 2 Fund. The business of the Norwich Number 3 Fund will be amalgamated with MLC Number 3 Fund, and the business of Norwich Number 4 Fund will be amalgamated with MLC Number 4 Fund. If the scheme is confirmed, Norwich will retain all assets and liabilities relating to the Norwich Shareholders' Fund.
8 On 26 March 2010, a subcommittee of non-executive directors of Norwich met to discuss the proposed scheme and scheme proposals. On 21 July 2010, the subcommittee resolved to approve the proposed scheme, subject to the consent of NAB. On 26 March 2010, a subcommittee of non-executive directors of MLC met to discuss the proposed scheme, and on 21 July 2010 they resolved to approve the proposed scheme, subject to NAB's consent. On 21 July 2010, NAB notified both Norwich and MLC that it consented to the proposed scheme.
9 As part of the proposed scheme, the traditional participating business of Norwich Number 1 Fund will adopt the investment strategy of MLC ordinary branch of the MLC Number 5 Statutory Fund. The assets of the MLC Number 5 Statutory Fund will be segregated to support the MLC investment account business of MLC Number 5 Statutory Fund.
10 It is proposed that the terms of the MLC investment account policies will be amended in two ways. The first is that a reference in an MLC investment account policy to returns or earnings referable to the assets of the statutory fund as a whole will be read as a reference to returns or earnings referable to the pool of assets maintained from time to time in the MLC Number 5 Statutory Fund in respect of the MLC investment account policies. That does not involve any change in substance. At present the MLC policies constitute a fund of their own. The purpose of the amendment is simply to segregate the MLC policies from the Norwich policies.
11 The second respect in which the terms of the MLC investment account policies will be amended is that, where an MLC investment account policy is expressed to guarantee to the policy owner only a proportion of the interest credited to the relevant investment account, the policy terms will be amended so that 100% of the interest credited to that investment account policy is guaranteed. Such an amendment can only be for the benefit of the policyholders.
12 The pivotal provisions of the proposed scheme are to be found in clauses 2 and 3. The scheme is to take effect at 12:01 am on 2 October 2010. At that time all of Norwich's life business, other than its shareholder's funds, will be amalgamated with the life insurance business of MLC. MLC will obtain and assume all rights and benefits and all obligations and liabilities of the Norwich business on the basis set out in the scheme.
13 Under clause 3, MLC becomes the issuer of the Norwich policies and the Norwich policy owners cease to be policy owners of Norwich and become policy owners of MLC. MLC assumes all liabilities and obligations of Norwich under or in respect of the Norwich policies.
14 Mr Kevin Allport, the appointed actuary for MLC and Norwich, has provided a report concerning the proposed merger, dated 22 July 2010. In the report Mr Allport expresses his opinion that:
(a) No owners of policies continuing in MLC will have the terms of their contracts altered or affected by the implementation of the scheme, other than in the way that I have briefly described, and no owners of policies continuing in MLC will have the accrued benefits under the policies adversely affected as a result of the scheme;
(b) The reasonable expectation for the MLC policyholders in respect of the benefits under their policies should not be adversely affected as a result of the scheme;
(c) The security of the MLC policyholders' benefits is expected to remain adequate after the implementation of the scheme;
(d) No owners of policies issued by Norwich will have the terms of their contracts altered or affected by the implementation of the scheme or will have the accrued benefits under their policies adversely affected as a result of the scheme;
(e) The reasonable expectations of Norwich policyholders in respect of the benefits under their policies should not be adversely affected as a result of the scheme; and
(f) The security of the Norwich policyholders' benefits is expected to remain adequate after the implementation of scheme.
15 In the detailed part of his report, Mr Allport deals with the impact on MLC policyholders of the scheme and with the impact on Norwich policyholders of the scheme. He deals in his report with each of the funds of each of MLC and Norwich, setting out in detail the precise effect of the scheme on the assets as a proportion of determination values and other liabilities of policies in each fund. He expresses the view that the impact of the scheme on the security benefits to policyholders of the respective funds is not considered to be material.
16 Mr Clive Aaron of Towers Watson Pennsylvania Inc was engaged by Norwich and MLC to review the scheme and to assess and provide opinions on the impact of the scheme on the entitlements and reasonable benefit expectations of the policyholders of Norwich and MLC and on the security of their benefits. In his report of 27 July 2010 Mr Aaron expresses the opinion that the scheme should not adversely affect the security of Norwich policy owners' benefits in any material respect. He also expresses the opinion that the scheme should not adversely affect the security of MLC policy owners' benefits in any material respect.
17 By letter of 27 July 2010, written to MLC, APRA confirmed that it has approved the proposed scheme summary submitted to APRA, the notice of intention pursuant to subregulation 9.02(1) of the Regulations, the locations where copies of the scheme will be available for public inspection pursuant to the Regulations as specified in the notice of intention and the list of newspapers in which the notice of intention is to be published. The letter also attached a "go ahead" decision made under s 44(1) of the Insurance Acquisitions and Takeovers Act 1991 (Cth) which is a precondition for the scheme. The letter also indicated that APRA has no objection to Norwich and MLC proceeding with an application to the Court for confirmation of the scheme.
18 That brings me to the matter presently before the Court, namely the application for an order for dispensation with the requirements of s 191(2)(c). By letter of 30 July 2010 to MLC, APRA confirmed that it has no objection to MLC applying for that dispensation. APRA was represented on the hearing before me today.
19 The dispensation now sought is in relation to owners of policies issued by MLC or Norwich who are affected by the scheme, but for whom MLC or Norwich, as the case may be, has no record of a current mailing address. The application also relates to a matter of logistics in relation to proposed new business that might be written by Norwich, such that it will not be feasible to give such new policyholders the requisite notice of the proposed scheme.
20 Thus, dispensation is sought in relation to Norwich policyholders in respect of the obligation to give an approved summary of the scheme to them, referable to any of its four funds for whom Norwich has no record of the current mailing address, or who cease, on or after the date of mailing the scheme summaries, to maintain the mailing address noted in the records of Norwich. It is also sought in respect of all persons who become Norwich policyholders less than 15 days prior to the final hearing of the application for confirmation, and up to the effective date of the scheme.
21 Dispensation is also sought in respect of the obligation to give an approval summary of the scheme to MLC's policyholders other than MLC Investment Account policyholders referable to Fund Number 5, and MLC Investment Account policyholders, referable to MLC's Fund Number 5 for whom MLC has no record of the current mailing address, or who cease, on or after the date of mailing of the scheme summaries, to maintain a mailing address noted in the records of MLC.
22 Dispensation is not something that is granted as a matter of course, but requires the exercise of a considered and informed discretion on the part of the Court. Some of the factors that are relevant for the exercise of the Court's discretion are:
(a) Changes in contractual benefits or entitlements of policy owners, in respect of whom dispensation is sought;
(b) The impact on security of the policy owners in respect of whom dispensation is sought;
(c) Whether the interests of the policyholders in respect of whom dispensation is sought have been considered by qualified actuaries;
(d) The publication in appropriate newspapers of notices of intention to make the application to the Court for confirmation;
(e) The attitude of APRA;
(f) The efforts made in relation to, but relevant difficulties in, tracing policyholders for whom an applicant has no current mailing address;
(g) The cost of sending approved summary to policyholders in respect of whom dispensation is sought.
23 Norwich has published policies and procedures by which it ascertains current mail addresses, deals with changes of addresses and returned mail, and attempts to determine the correct address for returned mail. Norwich has also adopted, for the purposes of the proposed scheme, additional procedures to locate policy owners. As at 20 July 2010, the number of policyholders referable to Norwich funds is 105,175. Of those, Norwich does not have a current mailing address for some 2,666 policy owners.
24 Norwich has four products that are open to the public for new business, referable to its Number 1 Fund. One of those products is likely to be withdrawn from new business as from 30 September 2010. It is proposed that all new Norwich policy owners for products referable to its Number 1 Fund will be provided with a copy of the scheme summary. A cooling-off period of 28 days currently applies to new owners. An extended cooling-off period of 28 days, in lieu of the statutory 14 day period, will be offered by Norwich to new owners of certain of its products, during which period they may elect to terminate the policy into which they have entered.
25 MLC has also established policies and procedures by which it ascertains current mail addresses, deals with changes of address and return mail and attempts to determine the correct address for return mail. As at 20 July 2010, there were 3,419 MLC Investment Account policyholders referable to MLC's Fund Number 5. Of those, MLC does not have current mailing addresses for 178 policyholders. Norwich contends that the relief sought in respect of its policyholders for whom no current address is available, or who cease to maintain a current mailing address, is appropriate, having regard to the return mail procedures that it adopts and the advertising program, and other steps, proposed to be taken to bring this proposed scheme to the attention of policyholders.
26 In the case of new policyholders of Norwich, referable to its Number 1 Fund, who become affected policyholders less than 15 business days prior to the hearing of the application for confirmation of the scheme and up to the date on which the scheme becomes effective, it is impracticable for Norwich to comply with the notification procedures required by s 191 without suspending the issue of new business by Norwich. Norwich contends that the dispensation relief sought in respect of those policyholders is appropriate, having regard to the alternative notification procedures to which I have referred, including the extended cooling-off period.
27 In view of the proposed changes to the terms of the MLC Investment Account policies, it is proposed to give a copy of the scheme summary to those policy owners. MLC contends that it is appropriate to dispense with the requirement of forwarding scheme summaries to all other MLC policyholders, referable to its five statutory funds. It advances the following reasons:
(a) The scheme does not alter the policy terms or conditions of MLC policyholders other than the MLC investment account policyholders;
(b) The interests of MLC's policyholders have been considered by the actuaries, who conclude that the scheme should not prejudice or materially affect MLC's policyholders;
(c) APRA has indicated that it has no objection to the dispensation sought;
(d) It is intended to advertise the proposed scheme and the confirmation application in newspapers throughout Australia. The proposed notice will inform policyholders where they may inspect or obtain copies of the scheme. The proposed advertising program has been approved by APRA;
(e) Details of the scheme will be available on the MLC website and copies of the scheme and scheme summary will be sent to policyholders upon request, free of charge; and
(f) There would be a significant cost saving, in that a mailing of the scheme summary to approximately 508,000 MLC policyholders would cost around $479,620.
28 The dispensation relief sought in respect of the MLC Investment Account policy holders for whom no current address is available, or who cease to maintain a current mailing address, is appropriate, having regard to the return mail procedures adopted by MLC and the advertising program to which I have referred. In all of the circumstances, I consider that it is appropriate to accede to the application by Norwich and MLC for dispensation under s 191(5) of the Act.
I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.