NRMA Limited (Application of); NRMA Insurance Limited (Application of) [2000] NSWSC 82 - NSWSC 2000 case summary — Zoe

NSWNSWSC

NRMA Limited (Application of); NRMA Insurance Limited (Application of) [2000] NSWSC 82

[2000] NSWSC 82

Supreme Court of NSW|2000-02-24|Before: Santow J

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Court

Supreme Court of NSW

Decision date

2000-02-24

Before

Santow J

Source

Original judgment source is linked above.

Judgment (231 paragraphs)

[1]

introduction 1 Few organisations in Australia have commanded such a depth of member loyalty over so many years as the NRMA Group. The Group now comprises in NRMA Limited ("Association") what the NRMA's information memorandum describes (at p28) as Australia's largest motoring organisation and in NRMA Insurance Limited ("Insurance") as Australia's largest general insurer. Insurance itself also conducts a growing financial services business offering financial advisory products and services and manages $7.4 billion in funds. The connection between members within the NRMA Group arises from the fact that both Association and Insurance are mutual companies and membership of Association is, generally speaking, a pre-requisite for Insurance membership. Association, furthermore, has special constitutional rights as a member of Insurance, including practical control over the management of Insurance's businesses and the right to any surplus assets on a winding-up of Insurance. 2 It is now proposed that members should have the opportunity to vote on a radical restructuring of the NRMA Group, itself of some complexity. In so doing, they become the decision-makers in an act of corporate democracy. 3 The Court's task when ordering, as I have done on 14 February 2000, the convening of scheme meetings under s411(1) of the Corporations Law is simply this. The Court must be satisfied, at least at a prima facie level, as to the legality of what is proposed, that there has been proper disclosure with nothing misleading or deceptive in any material sense and that the scheme will, if and when approved by members, be likely then to be approved by the Court, as being "so far fair and reasonable as an intelligent and honest man" may approve. It is not for the Court otherwise to be concerned with the merits of the proposal or to inhibit consideration by members so that they can form their own judgment whether to vote for or against. 4 The boards of NRMA Group and senior management have a special responsibility, with a complex proposal such as this directed to such an enormous and widespread membership, to let the documents speak for themselves. They must therefore avoid undue partisanship or oversimplification. Phone queries from members should be handled with strict neutrality. Individual directors too have a special responsibility to avoid saying anything which could mislead or deceive, though subject to that, they are not precluded from participating in public debate. Otherwise, there is a danger that the care that has gone into the meticulous preparation of the Information Memorandum with its Yes and No case, directors' recommendation (by majority in the case of Association), experts' reports and the statement "the future is in your hands" will count for little. I should add in relation both to the board and to individual directors, that these strictures apply equally to any paid or inspired publicity. 5 On 19 April 2000, members will vote upon the schemes including a number of associated steps to give effect to that restructuring and upon which the Schemes are conditional, with the further demutualisation resolution to follow. To facilitate that process, the Schemes provide for a proxy, revocable if the member chooses to attend and vote otherwise, for the passing of a subsequent resolution leading to the demutualisation of Insurance; the Schemes are also subject to that demutualisation taking effect by no later than 31 December 2000, failing which they terminate. 6 What follows are my reasons for making those orders with an explanation why issues so far raised, including by several objectors, were not such as to prevent these arrangements going to members for their consideration and either approval or rejection. What will go to members is an information memorandum (the "Information Memorandum") containing an explanatory statement for each scheme which I also approved on 14 February 2000. The Information Memorandum is of some 160 pages explaining these extremely complex proposals and giving the background to them as well as both a Yes and a No case. There is, helpfully, an opening outline giving the wood for the trees, as well as a detailed index at the back. 7 It is fair to say that there is strong division of opinion amongst members as to the desirability or otherwise of the proposed restructuring of NRMA Group leading to the demutualisation of Insurance but retaining Association as a mutual. This is in circumstances where the arrangement severs the constitutional links between them replacing them by ongoing "Business Relationship Agreements". These, inter alia, govern continued use of the NRMA brands in the respective businesses of Association and Insurance, prevent competition between them in defined areas and provide for ongoing administrative and other services by Insurance to Association at cost plus 5 per cent. 8 The current boards of both Association and Insurance recommend that members support this restructuring, in the case of Association by majority. Ranged against that support are those members who would prefer to maintain the status quo. 9 The objectors to the scheme, who include those represented at the hearings before me, contend that the proposals are fundamentally flawed, that the disclosure in the documentation is inadequate and that these proposals should not go forward to members for consideration because of these and other legal impediments including those said to flow from the mutual character of Insurance. 10 I have considered these contentions and the particular issues that have been raised of a legal nature, including but not limited to those raised by objectors. I have reached the conclusion, on what I emphasise is the material presently before me, that no impediment has yet been identified which should prevent members from considering these proposals and either voting for or against them. ASIC, appearing as amicus curiae, has stated that it is satisfied at a prima facie level with the disclosure contained in the information memorandum. It considers that the demutualisation decision should now be left to the members. ASIC, as is its policy but without pre-empting the Court's independent consideration, will only at that time state to the Court whether it has any objection to each arrangement, pursuant to s411(17)(b) of the Corporations Law. If the relevant statutory majorities are obtained, the Court may again hear from objectors at the approval hearing under s411(6) of the Corporations Law, though it would not ordinarily be expected that matters already dealt with would again be ventilated. The Court then exercises the statutory discretion which it still retains to approve or withhold approval to the relevant arrangements, or impose conditions. It does so in the light of the then prevailing circumstances, taking into account any intervening events and with the result of the voting then before it. The Court can be expected to accord respect to the commercial judgment of members, as expressed in their vote if it be in favour, unless circumstances emerge sufficiently serious to vitiate that vote. Thus, for example, matters of material non-disclosure or improper canvassing could arise in that context. 11 What follows supplants my earlier interim reasons of 14 February 2000. I start with a more detailed explanation of the role of the court and the procedures generally involved in an application by a company to the court under s411(1) of the Corporations Law. This is for an order that a meeting of members be convened for the purposes of voting in appropriate classes on schemes of arrangement and to approve the explanatory statement in respect of each scheme embodied in the Information Memorandum. In that context, I deal briefly with the role of objectors before the court. I then turn to the principal threshold issues properly to be considered at this point as affecting the present application, insofar as they go to the overall legality of these proposals or otherwise potentially affect disclosure. To assist the reader to follow the flow of argument, I have put into three appendices some of the more detailed analysis backing up the conclusions reached.

[2]

the role of the court in ordering a scheme meeting 12 The making of orders pursuant to s411(1) of the Corporations Law places a court in an unusual position. This is insofar as the process, being supervisory, is to a degree inquisitorial. It is also potentially adversarial, where the scheme is opposed. Thus objectors are entitled at the court hearing to voice their concerns with a scheme of arrangement. This is subject to the court's responsibility to maintain fairness and coherence in that process. That in turn requires that objections be articulated with sufficient precision that they can be properly appraised within a reasonable time frame. That appraisal can be expected to lead to rejection of objections which are clearly irrelevant or without foundation, but so that the court does not become a mere rubber stamp for the proponents of the scheme. Courts do not give merely perfunctory consideration to the schemes, often complex, put before them. This is more especially schemes such as these which effect radical extinction and transformation of members' property and rights along with a major restructuring of the corporate entities themselves. The court may gain assistance not only from the proponents of the scheme, but, as here, from ASIC as well as those objectors who have taken the trouble to try to understand the scheme and to articulate their concerns in a coherent way. Sometimes, as here, this process results in improvements to the structuring of the scheme, in its level of disclosure and in the clarity of its presentation. 13 A distinction should be drawn between the role of the court prior to approving the scheme meeting (that is, at the "convening stage") and the role of the court in considering whether to approve the scheme of arrangement after the members have voted in favour of the scheme ("the approval stage"). At the approval stage, the court, pursuant to s411(6) has a discretion to make orders approving the scheme. Following court approval, the arrangement generally takes immediate effect in accordance with its terms. Unusually, in the present case, each arrangement though approved by the Court, is still subject to termination if certain conditions subsequent are not fulfilled relating to the demutualisation steps. I return to that aspect later. Finally, the considerations influencing the court at the approval stage are dealt with, being essentially those I have earlier identified. 14 There are at the outset a number of procedural and substantive requirements of which the court must be satisfied before it should order a meeting pursuant to s411(1) at the convening stage. The first of these threshold requirements is proper disclosure.

[9]

23 The principle in Re Guardian Insurance has receded in importance now, given the wide scope of a company's objects, and the present state of the doctrine of ultra vires. 24 The proper purpose requirement, however, still has bearing on the approval of the scheme: "No scheme of arrangement will be confirmed if it is not bona fide and this will include the situation where the majority are endeavouring to prefer their own interests over those of the minority": Re Theatre Freeholds op cit. at 1,157. Generally, proper purpose is a matter for the court at the s411(6) stage. There is precedent, however, for a court to refuse to make an order under s411(1) where an improper purpose emerged at the outset. For example, in Re Norfolk Island & Byron Bay Whaling Co Limited (1969) 90 WN (Pt 1) (NSW) 351 at 354, Street J would not convene a meeting to consider a scheme whose only purpose was the barring of unknown claims. 25 On the material presently before me, I would not conclude that the proposals are conceived for an improper purpose. It was contended by one of the objectors, Mr Talbot, that the directors and senior management shared an improper purpose in seeking to list a new holding company ("NIGL") for Insurance, to be owned by former members of Insurance (including members of Association who were to be made members of Insurance). The impropriety was said to lie in their seeking the advantage of some kind of share or option plan, though none has yet been promulgated but merely foreshadowed (see p 43 of Information Memorandum, para 8.17). I am satisfied that as any such scheme would have to be approved by shareholders or members at the time. And as there is nothing intrinsically improper in putting in place such a plan on proper terms, this affords no basis for attributing any improper purpose to directors or senior management. Nor, as I later explain, were there any other matters raised which substantiated any improper purpose on the part of directors or executive officers.

[10]

Reasonable opportunity for ASIC to examine terms 26 Finally, there is a statutory requirement in s411(2) that the court shall not make an order to convene a meeting unless it is satisfied that ASIC has had a reasonable opportunity to examine the terms of the proposed arrangement and to make submissions to the court. The requirements of s411(2) are met if, in all the circumstances of the case, it can be said that the ASIC has had reasonable time to examine the terms of the proposal and make submissions to the court: see Re Stockbridge Limited (1993) 9 ACSR 637 at 639 per Murray J. Clearly enough ASIC have no complaint about the time given to it for that purpose. ASIC appeared and made helpful submissions as amicus curiae. Its position is recorded in its concluding written submissions of 11 February 2000 (MFI20): "ASIC, by its Counsel Mr T D Castle, has appeared as amicus curiae during the hearing under section 411(1) of the Corporations Law. Mr Castle advised the Court that ASIC was satisfied at a prima facie level with the disclosure contained in the Information Memorandum, with particular regard being paid to the assumptions made and methodology adopted in the various expert reports. ASIC has made specific submissions in relation to the issue of the Scheme Proxy, the general issue of the demutualisation and the question of releasing draft information memoranda prior to the making of orders convening the meetings. Otherwise, ASIC has not made submissions in relation to other matters raised by the Court with the Scheme proponents about the elements of the proposed Schemes or the Information Memorandum. ASIC's silence in relation to any of these issues does not signify ASIC's consent to the propositions advanced by the Scheme proponents and ASIC specifically reserves the right to re-argue any of the points which in relation to this Scheme, or any other Scheme having similar features, should that need arise. Reserving its rights in this way is appropriate given the fact that the nature of the hearing being conducted under section 411(1) is a hearing "in a summary way" in which there has been no party appearing as a contradictor to answer most of the submissions put by NRMA, a role which is not ASIC's in the context of schemes of arrangement."

[19]

38 In Re Stockbridge Murray J was willing to approve the scheme meeting on the grounds that "the scheme seems to … present a commercial arrangement which reasonable persons within the classes of members and optionholders in Stockbridge might well approve." 39 Murray J, therefore, contemplates a reasonably wide ranging investigation at the convening stage. Section 411(17) places a burden on the court thereafter not to approve a scheme where it was proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6 of the Corporations Law (s411(17)(a)) or where ASIC has not issued a statement to the effect that the Commission has no objection to the scheme (s411(17)(b)). The words of s411(17) suggest that it was envisaged that these be best dealt with at the scheme approval (s411(6)) stage. This is especially because the court cannot know whether ASIC will give its "no objection" under s411(17)(b) until after the members have voted, as ASIC in practice declines to take a position in advance. However that issue does not appear to arise here because it is clear that these proposals could not proceed as a conventional Ch 6 takeover. 40 While Murray J and Street CJ appear to be extending the role of the court somewhat at the convening stage, the distinction between their approach and a more conservative supervisory approach is not so clear as first appears. Thus if there were a significant aspect of unfairness it will almost certainly have disclosure implications and may in some cases portend illegality. By seeking to deal with the entirety of the scheme, including such issues of fairness as may have disclosure or legality implications raised by objectors, the court ensures that later arguments about the adequacy of disclosure and legality can be avoided or foreshortened, though without pre-empting the court's decision at the approval stage. 41 When the approval stage is reached, the court's task is well settled, and accurately set out in I A Renard and J G Santamaria in Butterworths "Takeovers and Reconstructions in Australia", looseleaf at 15,061: "… the court will determine: (1) whether all the conditions required by CLs411 have been complied with; (2) whether the majority of members or creditors, though acting regularly, have acted in good faith and not in pursuit of some illegitimate purpose; and (3) whether the proposal was 'at least so far fair and reasonable, as that an intelligent and honest man, who is a member of that class, and acting alone in respect of his interest as such member, might approve it'.10 Fundamentally, the jurisdiction is supervisory; the court is concerned to be satisfied that there has been an absence of oppression and that the compromise or arrangement is one which is capable of being accepted: see Re Dorman Long & Co Ltd [1934] Ch 635; Scottish Insurance Corp Ltd v Wilsons and Clyde Coal Co Ltd [1949] AC 462 at 486. 10 Per Fry LJ in Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch 213 at 247. [Footnote abbreviated.]

[39]

What is being put to the members and the court for approval? Interrelationship of schemes. 50 Under s411(1) of the Corporations Law the Court may order a meeting or meetings in relation to a Pt 5.1 body where a "compromise or arrangement" is proposed between the body and its members (or any class of its members). Under s411(4)(b) of the Corporations Law the Court may ultimately grant its approval to a "compromise or arrangement". 51 For each company (Association and Insurance) there is a single scheme document which embodies several separate arrangements. 52 In the case of Association, the document on pages 64 to 67 of the Information Memorandum contains three arrangements: · The First Association Scheme (consisting of Parts II, III and IV of the document); · The Second Association Scheme (consisting of Parts II, III and V of the document); and · The Third Association Scheme (consisting of Parts II, III and VI). 53 In the case of Insurance the document on pages 96 to 99 of the Information Memorandum contains two arrangements: · The First Insurance Scheme (consisting of Parts II, III and IV of the document); · The Second Insurance Scheme (consisting of Parts II, III and V of the document). 54 The arrangements set out more particularly in the scheme documents each provide that the members to whom the relevant scheme relates are, as against the relevant company and among themselves, bound to suffer such detriments and entitled to derive such advantages and enjoy such benefits "as arise from the due implementation of the Proposal": Association document Part IV clause 1.1, Part V clause 1.1 and Part VI clause 1.1; Insurance document Part IV clause 1.1 and Part V clause 1.1. 55 In the case of the three Association arrangements, the Proposal is defined in Part II to mean "the proposal outlined in clause 3.1 of Part III". It follows that all of the detriments, advantages and benefits of the steps set out in clause 3.1 of Part III of the Association document are part of "the arrangement" which is sought to be submitted to the members, or relevant class of members, of Association for approval and to that extent the members or the class of members are approving those steps. In the same way, the Court considers the effect of those steps on the members, and thus the steps themselves, in approving the arrangement. 56 The same process of reasoning applies in relation to the Proposal defined in Part II and outlined in clause 3.1 of Part III of the Insurance document (in each case in identical terms to the Association document). 57 The Proposal as defined in clause 3.1 of Part III of the Association and Insurance arrangement, is as follows (the Insurance Scheme has the converse wording): "The Association Schemes, with the Insurance Schemes, embrace a series of steps together constituting a proposal under which: (a) the Association Only Members will become Insurance Members; (b) Insurance will, through the Insurance Change of Status, convert from a public company limited by guarantee to a public company limited by shares;

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Agency and proxy issues 65 There are two issues. The first is the legal efficacy of the proxy whereby the demutualisation and associated resolutions are to be passed, after the scheme is approved. It is obtained from each member by virtue of an agency conferred by the scheme, rather than individually given by each member, as is the conventional and generally preferred course. 66 The second issue, assuming validity, is whether such a scheme proxy should be treated as so objectionable as at this stage to be seen as a fatal impediment to approving the scheme. 67 For the reasons developed in Appendix B to this judgment, I am satisfied that, if the scheme were approved, the scheme proxy would be legally effective. 68 That leads to the question, is such a scheme proxy conferred by an agency granted pursuant to the scheme, instead of a proxy given individually prior to the scheme to enable it to be passed, such as should lead to the Court to treat the scheme itself as thereby legally objectionable or intrinsically unfair and, if so, with what consequences? That prompts the anterior question, can or should the Court answer that question now, or should it wait the voting results upon the schemes? 69 ASIC in its submissions concludes that the Court should defer its answer, save in concluding that use of the scheme proxy is not of itself a threshold impediment to convening the meetings. The Court should, submits ASIC, first take into account the level of support above 75% for the scheme and for the associated special resolutions to be passed on 19 April 2000 and also take into account the factors listed below. This is to answer whether the scheme and associated resolutions of Insurance and Association, if passed on 19 April 2000, could fairly be considered valid "surrogates" for the later demutualisation special resolution, this time passed via the scheme proxy. 70 The enumerated factors bearing on this are conveniently listed by ASIC in its written submissions of 4 February 2000 (MFI 16): "(a) Whether the composite nature of the plan is such that it is fair to assume no reasonable person would vote differently at the later meeting. ASIC accepts that this is such a case; (b) What was the level of shareholder turnout at the scheme meetings, and whether a different turnout might have occurred if an unlinked Demutualisation meeting had been held, or whether the class of membership has changed or is likely to change significantly between the scheme and Demutualisation meetings; (c) Was there a lack of choice on the part of shareholders to separate the (non-proxy) scheme resolutions from the Demutualisation resolution. This has been addressed in part by the inclusion of a provision enabling a shareholder to subsequently "opt out" of the Deemed Proxy; (d) Whether shareholders were provided with appropriate and adequate information in scheme documents which enable them to make an informed decision about how to vote on the Demutualisation resolution, including an appreciation of the significance of the Deemed Proxy proposal; (e) Whether there is any risk or stated intention that the Deemed Proxy mechanism will be relied upon at a meeting which is to occur after a significant passage of time following the date of issue of the scheme meeting documents."

[48]

I would adopt that cautious approach. It accommodates legitimate concern about general use of scheme proxies, conscripting as they do, shareholder apathy in support of the scheme or its associated resolutions. 71 As I said in Re Advance Bank Australia Ltd (1997) 22 ACSR 513 at 535: "….. The saving grace of the scheme proxy is not that it was needed to amend the entrenched provisions, as argued by Advance's Counsel but rather that in the end it may not have been. 6. This is a feature of the present situation which is unlikely to be replicated in future cases unless the scheme were such that it commanded an overwhelming majority. In saying that I would not wish to be understood as suggesting that such a scheme proxy should be a feature of schemes of arrangement or selective reductions of capital where such a device may give an unfair advantage to the group or management in favour of a particular proposal. In that regard the following statement from the leading work on securities law in the United States, Loss: Fundamentals of Securities Regulation (1983) at 509-10, is particularly apt: "Corporate practice has come a long way from the common law's nonrecognition of the proxy device. The widespread distribution of corporate securities, with the concomitant separation of ownership and management, puts the entire concept of the stockholders' meeting at the mercy of the proxy instrument. This makes the corporate proxy a tremendous force for good or evil in our economic scheme. Unregulated, it is an open invitation to self-perpetuation and irresponsibility of management. Properly circumscribed, it may well turn out to be the salvation of the modern corporate system. .... Management had every advantage, moreover, if insurgent groups should have the temerity to wage a "proxy fight". It had the stockholders' lists. It stood to gain from stockholder inertia. And it had the overwhelming strategic advantage of access to the corporate treasury for the sometimes substantial costs of solicitation. As a British writer has put it, "it is easier to upset a Ministry than a Board of Directors, so long as a company remains a going concern." In short, if management can conscript the benefits of shareholder apathy, not merely by avoiding their vote against a proposal but by borrowing their vote in favour, there is a fundamental shift in shareholder power in favour of entrenched management."

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77 See also the tests applied in Nordic Bank Plc v International Harvester (Aust) Ltd (sub nom Re International Harvester (Australia) Limited (1983) 7 ACLR 796) and Re Bond Corporation Holdings Ltd (1991) 5 ACSR 304. 78 The principle in Sovereign Life was applied by Street J in Re Jax Marine Pty Ltd and the Companies Act 1961 [1967] 1 NSWR 145, at 148. It was held in that case that the fact that a particular group clearly had a special interest in the promotion of the scheme, additional to the interests of the ordinary creditors, did not make their rights so dissimilar from those of ordinary creditors as to make it impossible for them to consult together. 79 The interests to be assessed with a view to establishing whether the interests of persons represented at a meeting of the class are not so dissimilar as to prevent those persons meeting and voting in one class, are interests arising from the legal character of the rights and obligations of the members of creditors against the company and also interests in how those rights and obligations will be affected by the implementation of the scheme. Divergent commercial interests extrinsic to the share membership are ordinarily not a factor which should differentiate classes: Re Bond Corporation Holdings Ltd at 317; Re Credit Reference Association of Australia Ltd (1998) 16 ACLC 491, at 494, though this will be a question of degree. This is both as to the extent of the divergence of interest and the extent these interests are extrinsic to the share membership. 80 The "splitting" or "fracturing" of classes into smaller groups can undermine the object of obtaining decision by a large majority, by giving one group an effective veto over the wishes of the majority. That itself can be oppressive. In Re International Harvester, Lush J (Murphy and Fullaghar JJ concurring) said (at 799): "... To break creditors up into classes, however, will give each class an opportunity to veto the scheme, a process which undermines the basic approach of decision by a large majority, and one which should only be permitted if there are dissimilar interests related to the company in its scheme to be protected. The fact that two views may be expressed at a meeting because one group may for extraneous reasons prefer one course, while another group prefers another, is not a reason for calling two separate meetings. ..."

[60]

83 NRMA submitted that the proposed classes set out above are the correct classes. It was submitted that it would be unnecessary as a matter of law, and undesirable, to split members into numerous classes by reference to such lesser differences as there are between the various types of membership which exist (for example, those members in any proposed class who are employees and those who are not) or to attempt to categorise members by reference to numbers of years of membership or the number of Insurance policies held by them. 84 There is a particular significance in the categorising of members by reference to years of Association membership or number of insurance policies held. That is, because shares are allocated according to a formula which takes account of these matters giving more shares, speaking broadly, to those who are longer standing members or who have more insurance policies. A question may arise as to whether that fact should lead to yet further differentiation of classes, with the obvious consequence that the differentiation would become so fractured and create so many classes as may leave the scheme hostage to the veto of a very small group. The problem arose obliquely in Re Credit Reference Association of Australia Ltd (supra) where members of a co-operative were to receive shares based on a formula related to the volume of business done by the relevant member. Based on the limited information then before me I stated that (at 494): "…. I would not conclude that this does give rise to separate classes though it poses the issue which Adam J dealt with in Re Chevron (Sydney) Ltd [1963] VR 249. That is to say, it poses the issue that members of a relevant class, though not so differentiated as to make it impossible for them to consult together as a single class with a view to their common interest, may yet have divergent commercial interests extrinsic to their share membership; a reality which the court approving the scheme should take into account in looking at the size and composition of the approving majority over and above 75 per cent."

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85 Necessarily the matter can and should be re-visited at the approval hearing once the voting results are known and having regard to any information that may then arise as to the significance to be attributed to any particular category of member. 86 Further, it was submitted that to divide the proposed classes into numerous smaller classes by reference to those types of characteristics would fracture the classes and tend to give a greater power to smaller groups to veto the arrangement. It was submitted that, having regard to the legal principles set out above, there was no such dissimilarity in the interests of the various sub-groups of members as to make it impossible for them to consult together. In the circumstances I am satisfied that this submission can be accepted. 87 In answer to an inquiry from the Court, NRMA submitted that Association Only Members who hold an Insurance policy do not constitute a separate class for the purposes of the Association schemes. Pursuant to the Share Allocation Rules (Rules 2 and 3.2), such persons are treated as Dual Members for share allocation but not for voting purposes. A person would be an Association Only Member who held Insurance policies if he or she were a Dual Member as at 25 February 1999 (the cut-off date) but his or her policies subsequently terminated. By reason of the Insurance membership cut-off, it would not then be possible for that person to be readmitted as a member of Insurance upon buying a replacement policy. However, in being an Association member and upon buying a replacement policy, such a person emulated the conditions for Insurance membership and consequently the NRMA considered that any such person should be treated as an Insurance member for share allocation purposes. NRMA submitted, and I accept, that there is sufficient similarity of interests between Association Only Members with Insurance policies and those without to permit them to meet and consider the Second Association Scheme together. 88 Counsel for NRMA also noted an issue as to whether Insurance Only members should be a separate class. As noted in the draft Information Memorandum, those members (apart from Association itself) fall primarily into three categories:

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94 I accept that the present proposal is exactly the sort of "major reorganisation of the structure of the whole organisation" which the Full Court contemplated in the passage last quoted (at 55 FCR 482). 95 The Full Federal Court did not suggest that the Re Tivoli Freeholds [1972] VR 445 principle would prevent an otherwise lawful demutualisation proposal being put to the members of Insurance. The Court's dicta were solely directed to a question raised hypothetically in the submissions concerning the members' power to amend the constitution of Insurance to provide for the payment of dividends to members (see 481 at B). 96 In the absence of an express provision in the constitution that Insurance cannot change its company type, it is untenable to argue that Insurance cannot do so. Australian company law has provided for many years the power for a company, including a company limited by guarantee, to change its type (see the current s162 of the Corporations Law). 97 Even if the Re Tivoli Freeholds principle had some application to the current circumstances, a complete answer to it is that it is possible to achieve change of company type (including changes of the corporate constitution connected therewith) by the machinery provided in the Corporations Law, relevantly s136 and Part 2B.7. 98 Whatever may have been the "general intention and common understanding" of the members of Insurance at the time when its original memorandum and articles of association were first adopted (or at any subsequent time when they have been considered or amended by the members) this provides no basis for a conclusion that the present members of Insurance when they joined have any such "general intention" or "common understanding" and certainly not one that was forever to be unchanging. In a company like Insurance, with some 1.2 million members, asserting the existence of, let alone determining, the "general intention" or "common understanding" of members is problematic. In any event, the best way of determining any such general intention or common understanding in a contemporary sense is to examine the results of the vote of the members on the Proposal. 99 Indeed whatever may be said to have been the "general intention and common understanding" of the Insurance members at the time when they became members, company law contemplates that those intentions and understandings may change over time and, when they change, so too may the members of the relevant company change their articulation in the constitution of the company (subject to the limitations described by the High Court in Gambotto v WCP Limited (supra): s136 Corporations Law. Gambotto, as I have said, has no application in the context of an application under s411 of the Corporations Law in relation to a composite proposal because a scheme of arrangement is appraised for fairness by the court itself: Gambotto 182 CLR at 446, followed in Re Advance Bank Australia Ltd (No 2) at 532 and Re Credit Reference Association of Australia Ltd at 494. It should be noted that Pt 3 of each Association scheme (mutatis mutandis Insurance) begins: "The Association Schemes, with the Insurance Schemes, embrace a series of steps together constituting a proposal under which: ….. (b) Insurance will, through the Insurance Change of Status, convert from a public company limited by guarantee to a public company limited by shares."

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Release of the draft explanatory statement to the media 120 Owing to the interest of the media in the proposed restructuring of the NRMA, there was discussion with counsel during the hearing as to whether the then draft Information Memorandum ought be released to the representatives of the media or, if not, when. 121 Counsel appearing for ASIC, Mr Castle, informed the Court that it was not ASIC's practice to release such documents as ASIC received in draft form, prior to the making of orders convening the relevant meetings. However, as he submitted, the Court retains a discretion to direct the release of drafts of the Information Memorandum or other documents as would be necessary to enable those present at a Court hearing to fully understand the nature of the discussion occurring between Bar and Bench in relation to the proposed Scheme, and to enable any media representatives to fairly report the discussions which took place at those hearings. 122 NRMA submitted that release of the Information Memorandum in draft form to the media would be undesirable. It was submitted that to release a version of the document which was liable be redrafted (in accordance with suggestions from the Court or simply to incorporate updated information), this rather than facilitating accurate reporting, could infect public debate with confusion or misconception. It would be inimical to the clear purpose of the Corporations Law in prescribing the information to be included in the document to permit members' analysis of the material contained in the Information Memorandum to be pre-empted or confused by media discussion of a possibly different document. To give full effect to the legislative purpose behind those provisions of the Corporations Law which regulate the content of the Information Memorandum, and the role of the Court in reviewing a company's compliance with those requirements before the Information Memorandum is distributed to members, the role of the media should be confined to an informed discussion of the final version, not earlier versions of that information. There was the additional complication in the present case, of potentially defamatory matter being included in earlier drafts and later excluded, further underlining the problem of premature disclosure.

[92]

Accounting and related Issues - submission of Mr Parker 124 Mr Parker complained that Insurance's accounts include within the reported profit and loss since 1994 amounts which he describes as "not monetised" or, in other words, unrealised gains and losses on Insurance's investment portfolio. From this he constructed an argument that the proposal to list was a "fraudulent scheme". This was, he said, because there was no way the NRMA Group legally could pay dividends. This he said was because dividends would then be paid illegally out of unrealised gains, or a mixture of realised gains with earned profits and unrealised gains, likewise illegal. This was, he said, because then dividends would not paid out of profits, contrary to the requirements of s254T of the Corporations Law. (In that submission he relied on my judgment in NRMA Limited v Ian Francis Yates ([1999] NSWSC 859, Santow J, 20 August 1999, unreported) at 41-2, but overlooked the fact that I was speaking of the illegitimacy of aggregating an unrealised profit from an earlier year of income to the realised profit of a later year.) For reasons below, I conclude to the contrary that it would be unlawful for Insurance not to include unrealised gains in its accounts; second, that dividends may be so paid out of a combination of realised and unrealised gains (with any earned profits) without being in contravention of s254T of the Corporations Law, provided such combination produced a profit overall. 125 Section 296(1) of the Corporations Law requires that the financial report of a public company for any financial year must comply with the Australian accounting standards. In the case of a public company, the requirement that its financial report comply with accounting standards is absolute and unqualified. Prior to amendments to the Corporations Law in 1991, the directors' duty to ensure compliance with accounting standards was subject to an over-riding requirement that the accounts of the company must give a "true and fair" view of the matters with which they deal. Accordingly before 1991 it was lawful for directors not to apply accounting standards if they were satisfied that to do so would render the accounts misleading. 126 Between 1991 and 1998 the Corporations Law provided that, if financial statements would not give a true and fair view by reason of the application of particular accounting standards, the directors were obliged to add such information or explanation (usually by way of notes) as would give a "true and fair view" of the relevant matters. If necessary, this might include information contradicting the financial statements. As it is put in "Ford's Principles of Corporation Law" (para 10.170): "the legislative policy was evidently that consistency of financial disclosure, and the achievement of minimum standards, demands a statutory duty to comply with the accounting standards, even if on occasion distorted outcomes are produced."

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In the overwhelming majority of cases, compliance with the accounting standards will lead to the presentation of a "true and fair" view. 127 Since 1998 ss297 and 305 of the Corporations Law (which contain the true and fair view requirements for both annual and half yearly financial statements) state that those sections do not affect the obligation for financial statements to comply with Australian accounting standards. The legislative notes to these provisions state that, if financial statements prepared in compliance with the accounting standards would not give a true and fair view, additional information must be included in the notes to the accounts under ss295(3)(c) and 303(3)(c) respectively of the Corporations Law. 128 The applicable accounting standard to which Mr Parker takes exception (or, at least, contends Insurance can and should ignore) is AASB 1023: "Financial reporting of general insurance activities". 129 When it was first promulgated in December 1990, AASB 1023 was quite controversial. Indeed a number of Australian insurance companies (including the NRMA) issued proceedings challenging the lawfulness of the standard: QBE Insurance Group Limited v ASC (1992) 38 FCR 270. In that case, Lockhart J. concluded that AASB 1023 was a valid and lawful accounting standard, not inconsistent with the then applicable requirements of the Corporations Law and not likely to create a misleading effect in the accounts of a general insurance company. 130 Matters similar to those which underlay Mr Parker's submissions were submitted by the applicants in the QBE case (see at 282f). Lockhart J carefully analysed the law relating to the ascertainment and reporting of profits, starting with the often quoted passage from the judgment of Fletcher Moulton LJ in Re Spanish Prospecting Co. Ltd. [1911] 1 Ch. 92 at 98 (38 FCR at 284). Lockhart J noted that those dicta had been approved by the High Court of Australia in Commissioner of Taxation v Slater Holdings Pty Ltd (1984) 156 CLR 447 and had been followed in many subsequent cases. 131 In QBE Lockhart J concluded that the relevant assets of the insurance companies from which the profits had been derived were assets held for the purposes of investment and thus were part of the "circulating capital" of those companies, as that concept had been explained and applied in earlier decisions concerning the ascertainment and reporting of profits (38 FCR at 287). A substantial number of earlier authorities were cited in support of that conclusion. 132 As Lockhart J noted at 38 FCR 288, the question whether directors should declare or pay dividends out of such profits is a different question and may require different analysis in appropriate cases. However, as Lockhart J also noted, that question has nothing to do with the undoubted requirement of Australian insurance companies to declare and report their profits in accordance with the standard. But whatever be the result of that analysis and in particular whether an insurance company required so to calculate its profit must achieve a permanent accretion to the value of assets before dividend can be paid out of profits consisting of such an unrealised gain, it does not follow that NRMA could not pay a dividend legally, where reliant on unrealised gains to do so. Certainly, an analysis of the NRMA accounts (Information Memorandum at 110-11) indicates no deficiency in paid up capital or shortage of cash to do so nor any lack of profits lawfully ascertained in accordance with AASB 1023; compare Dimbula Valley (Ceylon) Tea Ltd v Laurie [1961] Ch 353 at 371-2. I am satisfied that there is nothing of legal or factual substance in Mr Parker's criticisms of the Insurance accounts or in the implications for dividends he draws and those criticisms should be disregarded. 133 The NRMA submitted that four major Australian accounting firms have considered and relied upon the accounts in question in their reports in the draft Information Memorandum and it is inconceivable that they would have done so if they believed that the accounts were materially misleading in any respect. I adopt what Lockhart J said in QBE (38 FCR at 289): "the identification of what in relation to the affairs of a particular company constitutes its profits is determined by the courts with close regard to the views of the accountancy profession. The courts are influenced strongly by the views adopted by professional accountancy bodies and men of business and the evidence of accountants is given great weight by the courts: Commissioner of Taxes (SA) v Executor Trustee and Agency Co. of South Australia Ltd (Carden's case) (1938) 63 CLR 108 per Dixon J at 153-154", and other cases there cited.

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Availability of s411 procedure 136 Mr Parker also submitted that the NRMA was not entitled to approach the Court under s411 of the Corporations Law because recourse to that provision was a "privilege" which was only accorded to companies which were experiencing some kind of difficulties. A variant on that submission was that Insurance and Association, or their boards, lacked clean hands so were precluded from applying. But there is no basis for attributing that equitable requirement of clean hands where no equitable remedy is sought. In any event lack of clean hands has not been demonstrated and could only arise within the ambit of what is required by statute, such as disclosure requirements. 137 There is no such qualifying requirement within the words of s411 of the Corporations Law or in the case law upon that section and its predecessors of the kind suggested by Mr Parker's submissions. Recourse to s411 is not a privilege. 138 Section 411 of the Corporations Law confers jurisdiction on the Court to grant its approval to a "compromise or arrangement", provided the requirements of the section (as interpreted by the Courts) are satisfied. 139 The Courts have tended to give the word "compromise" its ordinary narrower commercial meaning, that is, the settlement of a dispute: Sneath v Valley Gold Limited [1893] 1 Ch 477; Re ED White (1929) 29 SR (NSW) 389; Mercantile Investment & General Trust Company v International Company of Mexico [1893] 1 Ch 484. 140 However, the word "arrangement" has been held to be a word of wide import, and in no way limited by the word "compromise": Re Guardian Assurance Co (supra). It can simply mean to put in order, and does not imply a dispute. The broad scope of "arrangement" is brought out in this passage from the judgment: "almost any arrangement otherwise legal which touches or concerns the rights of the company or its members or creditors may be come to under sec. 153." ( Re International Harvester Co of Australia Pty Ltd [1953] VLR 669, at 672)

[99]

Mutual Issues 145 It was argued by Mr Talbot that Insurance, as a mutual company, could not at all, or at least in the circumstances it was now in, lawfully demutualise. Those circumstances were said to be the past accumulation of surpluses and profits beyond those needed to provide prudentially for liabilities. Such accumulation was said to be the result of a failure in the directors' alleged obligations (after setting aside to reserves what was prudent or required for the 15% solvency margin brought in by the Insurance Act 1973 (Cth)). Those obligations were said to be either to give premium rebates or price as a mutual rather than add to profits beyond requirements of prudentiality. That accumulation in fact occurred from the early 1970's till 1991 and then it appears from 1995 (Information Memorandum at 26). 146 For reasons which I have elaborated below, I do not consider that contention has been made out. In dealing with overseas experience, it is clear from the trend to demutualise in other countries (including New Zealand, United Kingdom, United States and South Africa) that no legal impediment of the kind alleged here was ever encountered; see as to the latter two countries, Appendix C. That itself is a powerful reason to doubt the presence of legal impediment here, based on general principle. 147 I should emphasise that all I am considering is whether there is in the present case any threshold legal impediment to demutualise, based on what have been termed mutuality principles. Even if answered favourably to the schemes, that is not to say that demutualisation on the present terms is - or is not - commercially desirable; that is for members to decide. There is a danger that in affirming the absence of legal impediment by reference, inter alia, to the trend of overseas experience, a misleading impression may be conveyed that demutualisation is somehow an inevitability because of the prevalence of examples of it. It is not; some mutuals continue to operate successfully whilst in other cases members have elected to change that status.

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162 Although the directors of Insurance are appointed by the board of Association, the directors of Association are elected by members and members can ultimately control the policies of the NRMA group by deciding who is elected to the board of Association. 163 Even in cases where the members have specific membership entitlements, the directors have a very wide discretion in relation to the exercise of their powers: see for example the Equitable Life Assurance Society v Alan David Hyman, (UK Chancery Division, 7 July 1999, unreported). That case related to the discretionary power of directors of the Equitable Life Assurance Society to allocate bonuses to with-profits policy holders (paras 94 ff). During the course of the court's judgment it was noted that the Society's assets at 31 December 1998 exceeded £28 billion of which sum, over £21 billion represented the fund built up over the years from the premiums and contributions paid in respect of with-profits policies. 164 It is clear, in any event, that the provision of financial benefits to members of Insurance have been within the contemplation of the board. During the period 1992 to 1995, this was reflected in the provision of rebates on policy premiums and the present proposal has been under consideration for a considerable period. The proposal provides a means for members of Insurance and Association to access the wealth of insurance. The Information Memorandum expressly addresses the question of how the proposal compares with premium rebates (see pages 13-14). The view of the majority of the directors of Association and all of the directors of Insurance is that the proposal contained in the draft Information Memorandum is more beneficial to the members of Association and Insurance than the provision of insurance premium rebates. Right or wrong as they may be, this proposal enables members to make up their own minds. Further, as is noted in section 2 of the Information Memorandum, apart from the provision of rebates, both Insurance and Association are currently limited in the manner and the extent to which they can deliver financial benefits to members.

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168 Accordingly, it is strictly incorrect to state that the profit that has been accumulated by Insurance as a result of its trading activities over recent years is the property of the members. It is currently the property of Insurance. Insurance has no current ability to pay these monies to the members in the form of dividends, and if Insurance were wound up, any surplus would be paid to Association. 169 An analysis of the cases relating to the mutual insurance companies indicates that the rights and obligations of members are determined by reference to the constitution of the company as well as terms of the policies and applicable legislation, rather than by reference to any general legal principle: see for example the analysis in Re RAC Motoring Services Ltd: re Royal Automobile Club Ltd (UK Chancery Division, Neuberger J, 8 July 1998 unreported). The cases indicate that the rights of members of a mutual insurance company are no greater than the rights conferred by the constitution and the terms of the relevant policies: see for example English and Irish Church and University Assurance Society (No. 2) (1863) 1 H&M 85 at 102, 104; The Lion Mutual Marine Insurance Association Limited v Tucker (1883) 12 QBD 176 at 186-7, 193; New York Life Insurance Company v Styles (1889) 14 App. Cas. 381 at 392-3. The position in Canada appears to be the same: see "The Nature, Source and Extent of Participation Rights in Mutual Insurance Companies" (1995) 25 Canadian Business Law Journal 337, 343-4; Wunderlich Brothers v Northwestern Mutual Fire Association [1936] 1 WWR 297 at 301, 302 and 304. 170 The constitution of Insurance contains no provisions relating to pricing policies or distribution of profits or contribution to losses during the life of the company. On winding up, any surplus must be paid to Association. The constitution of Association expressly provides that the profits of Association are not divisible amongst members and members have no right to receive any part of the surplus on a winding up. Any surplus on a winding-up of Association must be transferred to another institution having similar objects to Association's objects or as directed by the Court. The provisions of the constitution of Insurance in this respect are similar to those which the court considered in the Californian case of Pierce Insurance Co. v Maloney 269 P2d 57 (Cal.App., 1954) (see also Appendix C). There it was held that the assets of the company were owned by the mutual company as an entity and policy holders were not entitled to share in the profits of the company. Accordingly, neither the members nor former members of Insurance have any rights to the surplus which has been created. 171 By the terms of its constitution, current members of Insurance have no greater rights in respect of the assets of the company than do shareholders in a company limited by shares. Indeed, they have less rights as they have no right to dividends or to receive any distribution on a winding-up or to accumulated surplus. There is no basis for concluding that the rights of Insurance Members cannot be varied or substituted in the context of a scheme of arrangement. Nor is there any basis for treating such a scheme as intrinsically unfair, in giving present members only, access to the value accumulated in Insurance. In particular, for the reasons set out below, there is nothing intrinsically unfair in leaving out former members. 172 The constitution of Insurance confers no rights on former members and there is no other basis on which it can be argued former members may have rights in respect of the company's property. 173 In Faulconbridge, it was argued that the relevant company was not a mutual concern at all because of constant and continuous change of policyholders and, therefore, of members so that the large annual surpluses which had arisen in the past would not, in a great number of cases, be paid to those whose contributions made those surpluses but to their successors. Upjohn J at 37 rejected that proposition as he did the suggestion that such payment would be precluded because made only to successors of the original members. 174 This aspect of the judgment in Faulconbridge was cited with approval by Gibbs J in The Social Credit Savings and Loan Society Limited v The Commissioner of Taxation of the Commonwealth of Australia (1971) 125 CLR 560, at 572.

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Other Jurisdictions 177 A recent example of demutualisation by way of scheme of arrangement in the United Kingdom is Re RAC Motoring Services Ltd: re Royal Automobile Club Ltd (supra). The relationship between the various arms of the Royal Automobile Club and terms of the constitutions bear some similarity to Insurance and Association. RAC Motoring Services Ltd ("RACMS"), a company limited by guarantee and the company which provided the breakdown service for the Royal Automobile Club, had a provision in its constitution which provided that: "Upon the winding up of the company the surplus assets (if any) of the company or funds arising from the realisation thereof which shall remain after payment of all the debts and liabilities of the company shall not be paid to or distributed among the members of the company but shall be paid to the Associate section of [the Royal Automobile Club Limited] for its general purposes ... ". 178 It was argued that the above provision of RACMS's memorandum conferred a benefit on Associate members of RAC amounting to resulting trust or something akin thereto which could not be varied. Neuberger J rejected this contention concluding: "The Memorandum and Articles of Association are always subject to amendment, therefore, either under the specific statutory powers authorising amendment or, as in this case, by a scheme of arrangement." 179 Neuberger J acknowledged that the primary issue was whether the scheme was fair as between the members of RACMS (see pages 7-8). 180 Another example of a scheme of arrangement this time relating to a mutual insurance company in the United Kingdom is Re London Life Association Ltd; Re Australian Mutual Provident Society (supra). This scheme involved amendments to the constitution of London Life to permit the disposal of all of the assets of London Life to AMP and the members of London Life becoming members of AMP. No mutuality principle was a barrier to that form of "demutualisation" and the precise form was a matter for the board and ultimately for the members (see page 3 per Hoffmann J). 181 In New Zealand, Guinness Peat Group International Insurance Ltd v Tower Corporation [1999] 1 NZLR 153 is a recent example of demutualisation in that country. In the course of its judgment, the Court of Appeal noted: "It was submitted by the appellants and contested by the respondents that, accordingly, the only "owners" of a mutual association are those who contribute to its assets and the reserves built from those assets. Statements of principle confirming this position but needing, we think, to be read in the context of the particular factual situation before each Court, are found in New York Life Insurance Co v Styles (1889) 14 App Cas 381 and Ohio State Life Insurance Co v Clark 274 F2d 771 (1960)."

[126]

188 There is no longer any concept of a share being "paid up" in the sense that a particular amount referable to par value has been contributed to the company in cash or kind in relation to the particular share. Section 254A(1)(a) confirms a company's power to issue "shares for whose issue no consideration is payable to the issuing company". When the Corporations Law speaks of a "fully paid share" it is now indicating merely that no amount remains unpaid for the share according to the terms on which it was issued (see the definition of "fully paid share" in s9). 189 Turning next to the issue of NIGL shares, it is necessary to look to the Implementation Deed and the related Deed Poll executed by NIGL. By clause 4.1(b) of the Implementation Deed, NIGL covenants with each of Association and Insurance that it will issue shares to the former members of Insurance (or, as appropriate, to a trustee for overseas members) in accordance with the Share Allocation Rules. That covenant is repeated in favour of the members of Insurance in the NIGL Deed Poll. 190 Value will clearly pass from these allottees to NIGL. Upon extinguishment of their Insurance memberships, the allottees will lose their interests in the net worth of Insurance and "ownership" of that net worth will accrue to NIGL by reason of its becoming the sole shareholder of Insurance. It "inherits the earth". Both these results will be produced simultaneously by operation of s166(2), and the effect of the votes cast (mainly through the scheme proxies, it is expected) upon the s162(1) special resolution whereby the Insurance members become committed to the transfer of value from themselves to NIGL. And it will be in recognition of this that shares in NIGL are issued. In these circumstances, I accept that the Insurance members, as a body, are properly regarded as having provided consideration for the issue of the NIGL shares, the value of that consideration being equal to the net assets of Insurance. 191 In recognition of the position (and for the consideration) described above, the accounting entries to be made in NIGL's books of account in consequence of the effect of the steps above are (assuming that net assets of Insurance are $X) DR Investment in Insurance $X CR Share capital $X 192 The NIGL shares will be "fully paid shares" in the sense noted above, because no sum will remain to be paid in respect of them after issue. But, for reasons discussed above, it will not be possible to point to any part of the $X share capital which is "paid up on" any of the fully paid shares, that being a concept which no longer exists. 193 Issue of the NIGL shares will produce a requirement to lodge a return of allotment under s254X. Because the consideration referred to above is "non-cash consideration", s254X(1)(e) will apply. Because of the operation of the Implementation Deed and NIGL Deed Poll noted above, s254X(1)(e) will require copies of those documents to accompany the return of allotment.

[153]

The changes effected by the Proposal at the time that the Effective Date under the Insurance Schemes (which is necessarily later than the Effective Date under the Association Schemes) would be as follows: · New rule 52A of Association's constitution - this rule would have been inserted by a special resolution of the members of Association at a special general meeting held prior to the Association scheme meetings. The rule imposes a qualified duty on the Association directors to cause to be done everything which it is necessary for Association and its directors to do in order to implement and conclude the Proposal, including causing Association to consent to abrogation of its rights as a member of Insurance. The rule includes sub-rule (4), which provides that the duty created no longer applies if any of the schemes of arrangement (for either company) is terminated for any reason. If, however, the directors have acted pursuant to the qualified duty prior to termination, the breakdown in the sequence caused by the termination would produce the result that any prior consent to abrogation of Association's rights as a member of Insurance implemented by the directors would be ineffective. This is because the abrogation can only take effect through repeal of Insurance's constitution by special resolution (being one of the Insurance Demutualisation Resolutions). The repeal of Insurance's constitution will not take effect until ASIC changes the details of Insurance's registration, this being the final condition subsequent under all schemes. It follows that rule 52A can have no continuing effect if any of the conditions subsequent is not satisfied. · Alteration to Association's rule A(b)(iv) - this alteration would also have been effected by special resolution passed at the special general meeting of Association prior to the Association scheme meetings. By its terms, this alteration will have substantive operation and meaning only if Insurance changes to a company limited by shares, so that it also has no effect if the change of type of Insurance does not eventuate. · New rule 38A of Insurance's constitution - this rule would have been inserted by a special resolution of the members of Insurance at a special general meeting held prior to the Insurance scheme meetings. Like rule 52A of Association's constitution, the rule imposes a qualified duty upon the directors of Insurance to implement the Proposal. Sub-rule (3) provides that the duty ceases to have any effect if any of the schemes of arrangement (for either company) is terminated for any reason. If the directors have acted pursuant to the duty prior to termination, then any such acts will be ineffective if ASIC does not ultimately effect a change of Insurance's corporate type to a company limited by shares. The same considerations apply to this rule as apply to rule 52A of Association's constitution. · Alteration to Insurance's rule C - this rule, which would also have been inserted following a special resolution of Insurance at the special general meeting held prior to the Insurance scheme meetings, provides for its own reversion to its original form if the Second Association Scheme fails to come into effect, or if any of the five schemes of arrangement is terminated, or if ASIC does not register a change of Insurance's type by 31 December 2000. · New rule 57D of Insurance's constitution - this rule, also effected by a special resolution of Insurance at the special general meeting held prior to the Insurance scheme meetings, provides for Insurance to publish in a newspaper circulating generally throughout Australia any notice of general meeting containing a resolution to change the status of the company. If a condition subsequent is not satisfied, this provision would continue, but is of no significance and has no adverse impact on the members of Insurance. · New rule 3(a)(iv) of Insurance's constitution - this rule, which would also have been effected by a special resolution of Insurance at the special general meeting held prior to the Insurance scheme meetings, allows for the admission of Association Only Members as members of Insurance. The rule provides that every person so admitted will immediately cease to be a member if the Second Association Scheme fails to come into effect, or if any of the five schemes is terminated, or if ASIC does not register a change of Insurance's type by 31 December 2000. If Association Only Members have become members of Insurance under this rule prior to termination of the schemes for failure to satisfy a condition subsequent, then the Association Only Members will retain a liability to contribute $1.00 if Insurance is wound up within one year thereafter. This is one of the two exceptions referred to above. This potential liability is disclosed in the Information Memorandum at pages 26 and 38. · Provisions of the First Association Scheme - these essentially sanction the Proposal as it affects Association and its members, which would not be implemented unless the final step of change of Insurance's type is achieved. · Provisions of the Second Association Scheme - these provisions also sanction the Proposal as it affects Association and Association Only Members and in addition create two unconditional agencies: see clause 2.1 of Part V of the Association document. The two agencies are, first, to agree to the member's becoming a member of Insurance and, in due course a member of NIGL and, secondly, an agency for Association to appoint a proxy to vote for the member on the Insurance Demutualisation Resolutions, once the member has become a member of Insurance. These agencies will subsist until 31 December 2000 (ie. the "End Date") and constitute, with the agencies created under the Insurance schemes, the second of the two exceptions referred to above. · Provisions of the Third Association Scheme - these provisions also sanction the Proposal as it affects Association and the Dual Members. The same considerations apply to them as to the provisions of the First Association Scheme. · Provisions of the First Insurance Scheme - in addition to sanctioning the Proposal as it affects Insurance and the Insurance Members (other than Association), these provisions create an agency under which Insurance has authority to appoint a proxy to vote for each such member upon the Insurance Demutualisation Resolutions. The agency will continue until the End Date even if a condition subsequent has earlier not been satisfied. · Provisions of the First Insurance Scheme - in addition to sanctioning the Proposal as it affects Insurance and the Insurance Members (other than Association), these provisions create an agency under which Insurance has authority to appoint a proxy to vote for each such member upon the Insurance Demutualisation Resolutions. The agency will continue until the End Date even if a condition subsequent has earlier not been satisfied.

Legislation Cited (3)

Fair Trading Act 1987(NSW)

Insurance Act 1973(Cth)

ASIC Act 1989(Cth)

Cases Cited (19)

CITATION : NRMA Limited (Application of); NRMA Insurance Limited (Application of) [2000] NSWSC 82 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 5131/99; 5132/99 HEARING DATE(S) : 31/01/00, 01/02/00, 07/02/00, 08/02/00, 11/02/00, 14/02/00 JUDGMENT DATE : 24 February 2000

A Archibald, QC/N O'Bryan/A G Bell (NRMA Limited) J R Sackar, QC/P M Wood/L McCallum (NRMA Insurance Ltd) T D Castle (ASIC) COUNSEL : B J Camilleri (for Richard Talbot) David Lewis Parker (in person) Earle Robinson (in person) Tony Allen (in person) Corrs Chambers Westgarth (NRMA Limited) SOLICITORS : Freehill Hollingdale & Page (NRMA Insurance Limited) Mallesons Stephen Jaques (the Proposal) Ms Kathy Cuneo (ASIC) CATCHWORDS : CORPORATIONS - Members' scheme of arrangement in relation to NRMA Limited ("Association") and NRMA Insurance Limited ("Insurance") associated with the demutualisation only of Insurance and with various structural changes between Association and Insurance - Court's function in convening scheme meetings and approving information memorandum in relation to complex proposals involving 1.8 million members of Insurance and 1.2 million members of Association - Responsibilities of board and senior management to let documents speak for themselves - Disclosure obligations in relation to company not limited by shares - Role of ASIC - Degree to which Court looks at ultimate fairness of scheme at meeting convening stage and later scheme approval stage - role of objectors - Cost orders for and against objectors only made after they have been heard - Other potential legal impediments - Scope of "arrangement" - What is approved by court when arrangements embrace associated steps for demutualising and implication of Gambotto principles concerning expropriation of membership rights - Effect of conditions subsequent - Legitimacy of scheme proxy to enable passing of later demutualisation resolutions - Relevant considerations when time gap between scheme resolutions and later demutualisation resolutions - Is former surrogate for later - Identification of classes of members - No equitable constraint based on supposed common understanding of members that should remain forever a mutual - No trust of Insurance's assets such as to preclude demutualisation - Qualified duty of directors to do only what was lawful in carrying out obligation to implement demutualisation steps - Cut-off of membership involves no legal contravention - When should draft information memorandum be released to media where subject to change or potentially defamatory - Legal capacity of Insurance and its parent NIGL to pay dividends out of unrealised gains combined with realised gains and earned profits without contravening s254T of the Corporations Law - Accounting standard AASB 1023 mandatory on Insurance - No foundation for submission that Insurance's proposed new parent could not be listed on supposition that it could not pay dividends when that supposition not made out - s411 procedure not a privilege or requiring clean hands beyond its statutory preconditions including proper disclosure - This an "arrangement within s411" - No basis to preclude demutualisation if members so decide in what comprehended in "mutuality principles" or by reason of past accumulation of profits rather than "mutual pricing" or premium rebates - Relevance of trend overseas to demutualise - No basis for treating demutualisation as inevitable when this a matter for members' decision - Shares issued by NIGL are fully paid - Par value now abolished - Position at court approval stage where court's discretion remains. ASIC Act 1989 (Cth) s12DA Corporations Law s9, s112, s136, s162, s163, ss164-166, s250A and B, s254A, s254T, s254X, s295, s296, s297, s303, s305, s411, s412, s485, s501, s995, Pt 2B, Pt 2E LEGISLATION CITED : Corporations Regulation Regulation 8301 Fair Trading Act 1987 (NSW) s42, s67 Income Tax Assessment Act (Cth) Division 9AA Re A & C Constructions Pty Ltd [1970] SASR 565 Re ACM Gold Limited Re Mt Leyshon Mines Limited (1992) 7 ACSR 231 Re Advance Bank Australia Ltd (1997) 22 ACSR 513; 22 ACSR 476 Re AGL Sydney Ltd (1994) 13 ACSR 597 Re Ampol (1989) 14 ACLR 772 ANZ Executors & Trustee Company Ltd v. Qintex Australia Ltd (1990) 2 ACSR 676 Re Archaean Gold NL (1997) 23 ACSR 143 Re Arrowfield Group Limited (1995) 17 ACSR 649 Re Australian Consolidated Press Ltd (1994) 14 ACLR 639 Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 Re the Bank of Adelaide (1979) 22 SASR 481 Birne v Public Service Mutual Casualty Company 77 NYS 2d 446) Re Bond Corporation Holdings Ltd (1991) 5 ACSR 304 Bray v Commissioner of Taxation (1968) 117 CLR 349 Re Calgary and Edmonton Land Co Ltd [1975] 1 All ER 1046 Re Castlereagh Securities Limited [1973] 1 NSWLR 624 Cleary v Australia Co-operative Foods Ltd and Ors (Nos. 2 and 3) (1999) 32 ACSR 701 Commissioner of Taxation v Slater Holdings Pty Ltd (1984) 156 CLR 447 Re Credit Reference Association of Australia Ltd (1998) 16 ACLC 491 Re Crusader Ltd (1995) 17 ACSR 336 Dimbula Valley (Ceylon) Tea Ltd v Laurie [1961] Ch 353 Re Dorman Long & Co Ltd [1934] Ch 635 Re ED White (1929) 29 SR (NSW) 389 English and Irish Church and University Assurance Society (No. 2) (1863) 1 H&M 85 Equitable Life Assurance Society v Alan David Hyman, (UK Chancery Division, 7 July 1999, unreported) Faulconbridge v National Employers Mutual General Insurance Association [1952] 1 Lloyd's List Law Reports 17 Federal Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR 447 Fidelity & Casualty Co. v Metropolitan Life Insurance Company 42 Misc 2d 616, 248 NYS 2d 559 (NY Sup. Ct. 1963) Fraser v NRMA Holdings Limited (1995) 55 FCR 452 FT Eastment & sons Pty Ltd. v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 Gambotto v WCP Ltd (1995) 182 CLR 432 Re Garner's Motors Ltd [1937] Ch 594 Greeff v Equitable Life Assurance Society 54 NE 712 (N.Y 1899) Re Guardian Assurance Co. [1917] 1 Ch 431 Guinness Peat Group International Insurance Ltd v Tower Corporation [1999] 1 NZLR 153 H A Stephenson & Son Ltd (in liq) v Gillanders, Arbuthnot & Co (1931) 45 CLR 476 Re Hill Samuel Life Assurance Ltd [1998] 3 All ER 176 (Ch) Huber v Martin 105 NW 1031 (1906, Wisc) Re International Harvester Co of Australia Pty Ltd [1953] VLR 669 Isles v The Daily Mail Newspaper Limited (1912) 14 CLR 193 Re Jax Marine Pty Ltd and the Companies Act 1961 [1967] 1 NSWR 145 Kempe v Ambassador Insurance Co [1998] 1 WLR 271 CASES CITED : Re Leamon Consolidated (Vic) Pty Ltd (1985) 10 ACLR 263 Ex parte Liberty Life Association of Africa 1976 (1)SA 58 (W) The Lion Mutual Marine Insurance Association Limited v Tucker (1883) 12 QBD 176 Lipsman v Reich 16 N.Y.S 2d 892 (S.C, 1939) Re London Life Association Ltd; Re Australian Mutual Provident Society (UK Chancery Division, 21 February 1989, unreported) McRae v Coulton (1986) 7 NSWLR 644 Re Matine Limited (1998) 28 ACSR 268 Re MB Group Plc [1989] BCLC 672 Mercantile Investment & General Trust Company v International Company of Mexico [1893] 1 Ch 484 Motel Marine Pty Ltd v IAC (Finance) Pty Ltd (1964) 110 CLR 9 Municipal Mutual Insurance Ltd v Hills (Inspector of Taxes) [1932] All E.R. Rep. 979 Mygatt v New York Protection Insurance Company, 21 NY 52-66 Re National Bank Ltd [1966] 1 All ER 1006 National Chiropractic Insurance Co v United States, 494 F2d 332, 333 (1974), Court of Appeals, Eight Circuit Re Neman Pastoral Co (No 2) Pty Ltd (1981) 5 ACLR 510 New York Life Insurance Company v Styles (1889) 14 App. Cas. 381 Re NFU Development Trust Ltd [1973] 1 All ER 135 Nordic Bank Plc v International Harvester (Aust) Ltd (sub nom Re International Harvester (Australia) Limited (1983) 7 ACLR 796) Re Norfolk Island & Byron Bay Whaling Co Limited (1969) 90 WN (Pt 1) (NSW) 351 NRMA Limited v Ian Francis Yates ([1999] NSWSC 859, Santow J, 20 August 1999, unreported) Osborne v Steel Barrel Co Ltd [1942] 1 All ER 634 Pierce Insurance Co. v Maloney 269 P2d 57 (Cal.App., 1954) QBE Insurance Group Limited v ASC (1992) 38 FCR 270 Quatro v Argo Investments and Ors (1999) 32 ACSR 480 Re R M Eastmond Pty Ltd and the Companies Act (1972) 4 ACLR 801 Re RAC Motoring Services Ltd: re Royal Automobile Club Ltd (UK Chancery Division, Neuberger J, 8 July 1998 unreported) Re Savoy Hotel Ltd [1981] 3 All ER 646 Re Scottish and Australian Chartered Bank [1893] 3 Ch 385 Re SDR Apparel Pty Ltd and the Companies Act (1977) 3 ACLR 162 Sneath v Valley Gold Limited [1893] 1 Ch 477 The Social Credit Savings and Loan Society Limited v The Commissioner of Taxation of the Commonwealth of Australia (1971) 125 CLR 560 Re Sonodyne International Ltd (1994) 15 ACSR 494 Re The South African Mutual Life Assurance Society, unreported, per Comrie J, Capetown High Court, 29 March 1999) Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 Re Spanish Prospecting Co. Ltd. [1911] 1 Ch. 92 Re Stockbridge Limited (1993) 9 ACSR 637 Sun Alliance Insurance Ltd v Inland Revenue Commissioners [1972] Ch 133 Re Telford Inns Pty Ltd (1985) 3 ACLC 660 Re Theatre Freeholds (1996) 14 ACLC 1,150 Thorby v. Goldberg (1964) 112 CLR 597 Re Tivoli Freeholds [1972] VR 445 Wunderlich Brothers v Northwestern Mutual Fire Association [1936] 1 WWR 297 Re Wondoflex Textiles Pty Ltd [1951] VLR 458 DECISION : Convening of meeting approved.

(2000) 156 FLR 349

(1993) 177 CLR 485

(1979) 22 SASR 481

(1968) 117 CLR 349

(1984) 156 CLR 447

(1995) 55 FCR 452

(1995) 182 CLR 432

(1931) 45 CLR 476

(1912) 14 CLR 193

(1986) 7 NSWLR 644

(1964) 110 CLR 9

(1992) 38 FCR 270

(1971) 125 CLR 560

(1964) 112 CLR 597

(1915) 19 CLR 714

(1938) 63 CLR 108

[1999] NSWSC 859