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

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.

Disclosure 15 Section 411(1) of the Corporations Law provides that where the Court orders that a meeting of members be convened to approve a scheme, "the court may approve the explanatory statement required by s412(1)(a) to accompany notices of the meeting or meetings". It can be assumed that no orders to convene a scheme meeting will be made without also the Court determining that the explanatory statement contained in the Information Memorandum may be approved. That is what has occurred in the present case. That approval requires the Court, so far as it practically can and remembering that applications are to be made "in a summary way", to be satisfied there has been proper disclosure in that explanatory statement as required by s411(3). It provides as follows: "(a) explaining the effect of the proposed compromise or arrangement and, in particular, stating any material interests of the directors of the body whether as directors, as members or creditors of the body or otherwise, and the effect on those interests of the proposed compromise or arrangement in so far as that effect is different form the effect on the like interests of other persons; and (b) setting out such information as is prescribed and any other information that is material to the making of a decision by a creditor or member of the body whether or not to agree to the proposed compromise or arrangement, being information that is within the knowledge of the directors of the body and has not previously been disclosed to the creditors or members of the body.

16 Essentially what is required is a statement of "all the main facts as will enable shareholders to exercise their judgment on the proposed scheme": Re Dorman Long & Co Ltd [1934] Ch 635 at 665-6 per Maugham J [emphasis added]. In that context, courts have been alive to the fact that schemes of arrangement frequently are but an alternative means to effectuate a takeover - here of Insurance by a new holding company, NIGL, following extinction of the rights of members of Insurance. (NIGL's shares are allocated as between members of Association, of Insurance and Association itself in accordance with the Share Allocation Rules.) That entails no lesser level of disclosure than in a conventional takeover. Thus in Re Archaean Gold NL (1997) 23 ACSR 143 at 147 I said: "It is also well settled that it is not for the court to substitute its commercial judgment for that of properly informed shareholders or creditors - hence the necessary emphasis on full disclosure. This balance - between paternalism on the one hand and non-interference with shareholders' commercial judgment - needs to be struck in a context where schemes of arrangement, often accompanied by selective reductions of capital, have increasingly been allowed to intrude upon the traditional statutory regime for conventional takeovers. Furthermore, the envelope has been increasingly stretched in terms of both process and content, most recently with the use of a standing proxy. ….. Thus courts approving schemes of arrangement have to be vigilant to ensure proper safeguards and disclosure operate, where appropriate adopting analogous safeguards to those applicable to conventional takeovers, though necessarily adapted to the particular situation."

17 Regulation 8301 of the Corporations Regulation also requires a statement as to each director's recommendation; alternatively a director must give the reasons for not wishing to make any recommendation. That in fact is what Mr Talbot did (Information Memorandum p20), though he appeared represented by Counsel at the hearing before me to oppose the proposal. 18 All disclosure must be without material omission or misstatement, and in a way that is neither misleading or deceptive; see s995 of the Corporations Law, s12DA of the ASIC Act 1989 (Cth) and s42 of the Fair Trading Act 1987 (NSW). 19 Such provisions proscribe misleading or deceptive conduct "in connection with any dealing in securities" (s995 of the Corporations Law) or "in trade or commerce" (s42 of the Fair Trading Act). Here there is a "dealing in securities" effected by the scheme of arrangement and the associated steps of the overall proposal, whereby members extinguish their membership of Insurance and receive in compensation shares in Insurance's new holding company ("NIGL"). In any event such dealing, with its intended sequel of listing and trading of those shares, is clearly enough conduct "in trade or commerce". Compare the reasoning of Austin J in Cleary v Australia Co-operative Foods Ltd and Ors (Nos. 2 and 3) (1999) 32 ACSR 701 at 732-3. That case is also a reminder of the importance of supplementing the material given to members under a scheme, if subsequent events or circumstances lead to that material being misleading or deceptive if not so supplemented. This is provided the court is satisfied supplementation is sufficient in the circumstances rather than for the process to start again. The remedies for contravention are similar in scope; see s12DA of the ASIC Act and s67 of the Fair Trading Act.

Arrangement or Compromise 20 Second of the threshold requirements is that the court must be satisfied that the scheme can be properly be described as an "arrangement" or "compromise" so as to come within the ambit of s411. One of the objectors, Mr Parker, contended that these schemes were not of that character. But the word "arrangement" is to be given a wide meaning: Re ACM Gold Limited Re Mt Leyshon Mines Limited (1992) 7 ACSR 231. Thus, the word has been given a liberal meaning. Generally speaking, unless the arrangement is ultra vires the company or seeks to deal with a matter for which a special procedure is laid down by the Corporations Law or to evade a restriction imposed by the Corporations Law, almost any arrangement otherwise legal which touches or concerns the rights and obligations of the company or its members or creditors, and which is properly proposed, may come under s411; compare Re International Harvester Co of Australia Pty Ltd [1953] VLR 669 at 672 per Lowe ACJ. Each of the present schemes with its associated elements is self-evidently an arrangement which touches and concerns the rights and obligations of both Association and Insurance and those of its members. As explained below, these proposals are not ultra vires either company, nor do they evade any restriction imposed by the Corporations Law. While a court will not convene a meeting to put needless procedures in train (Re Theatre Freeholds (1996) 14 ACLC 1,150) clearly enough to achieve the goals of this arrangement, such schemes are necessary to bind everyone, including dissentients as otherwise these proposals could not proceed.

Part 5.1 body 21 Third of the threshold requirements, the company proposing the scheme must be a Pt 5.1 body. I will not deal further with this question here since it is clear that Association and Insurance, being both public companies limited by guarantee, are Pt 5.1 bodies.

Scheme properly proposed 22 Fourthly, s411 gives jurisdiction to order scheme meetings only where the schemes are properly proposed. It was once the case that a court had to determine that the scheme was intra vires the company. In Re Guardian Assurance Co. [1917] 1 Ch 431 at 441, Younger J said of an earlier equivalent of s411 that: "Its purpose is strictly limited: it does not confer powers; its only effect at any time is to supply, by recourse to the procedure thereby prescribed, the absence of that individual agreement by every member of the class to be bound by the scheme which would otherwise be necessary to give it validity. The section accordingly has no application to an arrangement which is ultra vires the company, nor to an arrangement of a kind which can only be effected in a prescribed way, e.g. a reduction of capital, or a reconstruction…"

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.

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."

The process thereafter leading to Scheme approval or rejection - fairness. 27 While at the meeting convening stage the court must on the information then before it be satisfied as to compliance with these threshold statutory and regulatory requirements, the court does not determine the business or commercial efficacy of the proposed arrangement. The terms of s411(6) make clear that questions going to whether the scheme of arrangement is "just" or "fair" are to be considered by the court after the scheme has been approved by the members of the scheme company and then only in the limited sense I have earlier described. In Re ACM Gold (supra), O'Loughlin J remarked that: "It is not incumbent upon the court, at this [convening] stage, to consider the business or commercial efficacy of the proposed arrangements. That primarily will be the province of those to whom the arrangements are directed. However, when a scheme of arrangement is returned to the court for the court's approval pursuant to s411(6) the court will then have a twofold duty as explained by Maugham J in Re Dorman Long & Co Ltd [1934] Ch 635 at 655-6. First, the court will have to satisfy itself that the requisite resolutions were passed by the statutory majorities in number and value; but then the court will have the greater duty of satisfying itself that the arrangement is one that warrants the approval of the court."

28 Thus, at the stage of ordering a meeting to approve the scheme, the court does not ordinarily go very far into the question of whether "the arrangement is one that warrants the approval of the court". That question is to be answered when the scheme returns to the court for final approval pursuant to s411(6). I say "ordinarily" because it is conceivable - this is not such a case - that a scheme on its face is so blatantly unfair that it should be stopped in its tracks before even the meeting stage. 29 Nor indeed does the court either at the convening or approval stage have to be satisfied that no better scheme could have been devised. As Hoffman J (as he then was) said in Re London Life Association Ltd; Re Australian Mutual Provident Society (UK Chancery Division, 21 February 1989, unreported) (in the analogous situation of the statutory approval required for the transfer of an insurance business): "A board might have a choice of several possible schemes, none of which, taken as a whole, could be regarded as unfair. Some policyholders might prefer one such scheme and some might think they would be better off with another. But the choice is in my judgment a matter for the board. Of course one could imagine an extreme case in which the choice made by the board was so irrational that a court could only conclude that it had been actuated by some improper motive and had therefore abused its fiduciary powers ( Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, 835). In such a case a member would be entitled to restrain the board from proceeding. But that would be an exercise of the court's ordinary jurisdiction to restrain breaches of fiduciary duty; not an exercise of the statutory jurisdiction under section 49 of the Insurance Act 1982."

And then, I would add, after that board consideration approval of the arrangement becomes a choice for the members voting upon it, with the Court exercising its supervisory role. 30 A convening order under s411(6) will only be made where the members were properly informed as to the nature of the scheme before the scheme meeting. It is incumbent on the court, as I have said, to ensure that a scheme meeting is not ordered unless the members are so informed. In Re Scottish and Australian Chartered Bank [1893] 3 Ch 385, Lindley LJ said, in respect of the power of the court to refuse to approve a scheme already approved at a member's meeting: "If creditors are acting on sufficient information and with time to consider what they are about, and are acting honestly they are, I apprehend, much better judges of what is to their commercial advantage than the court can be…"

31 This principle is reflected in the judgment of Harman J in Re MB Group Plc [1989] BCLC 672 at 676: "If the persons with whom the scheme is made have been accurately and adequately informed by the explanatory statement and any additional circulars, and the requisite majority has approved the scheme, the court will not be concerned with their commercial reasons for approval"

32 The cases reflect slightly different emphasis as between individual judges as to the degree the court should pursue its supervisory role at the convening stage. Some have interpreted the duty of the court at the convening stage as being only, or at least principally, that the court should ensure that sufficient information is given to the members. The merits or prospects of the scheme, from this point of view, are not a subject with which the court should then be concerned. In Re the Bank of Adelaide (1979) 22 SASR 481, Wells J said in respect of the court's responsibility at the s411(1) stage: "Our sole concern is one of jurisdiction. Given that the scheme is one that is fit for consideration by the proposed meeting, our only function is to say whether the members should be given the opportunity of considering and either approving or rejecting. Nothing in our judgments should be construed as going in any way to the merits of the scheme; those merits are exclusively the concern of the members": at 494-5

33 This approach speaks of the 'supervisory' role of the court in schemes of arrangement in a relatively passive sense; see the discussion in Re Archaean Gold (supra) at 146. Nonetheless even that limited supervisory role as posited by Wells J requires the scheme be one "fit for consideration by the proposed meeting" [emphasis added] and thus by implication for the court to be so satisfied. 34 This has led to an approach by some courts to look to the merits of the scheme even at the convening stage to determine whether it is likely that the court will approve the arrangement when it comes back for approval pursuant to s411(6). In FT Eastment & sons Pty Ltd. v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69, Street CJ with whom Hutley and Samuels JJA agreed) said (at 72): "The approach taken upon a summons is that the court will not ordinarily summon a meeting unless a scheme is of such a nature and cast in such terms that, if it achieves the statutory majority at the creditors' meeting the court would be likely to approve it on the hearing of a petition which is unopposed"

35 This approach requires the court to consider a further aspect, that is, whether it would be likely to make an order approving the scheme if uncontested under s411(6) and were the scheme approved by the members at the meeting. 36 Street CJ's approach was approved by Murray J in Re Stockbridge Limited (supra) where (after quoting Street CJ as above) he said: "In my opinion, the law in relation to the exercise of discretion is indeed clear. The court is not to set itself up to second guess members of the business community and to interfere unduly in what such persons may regard as a scheme reflecting sound commercial judgment. On the other hand, the court has a duty not to approve a scheme which would not be in accord with sound commercial practice upon a reasonable view of the matter. And so it is the case that a sensible practice has in my opinion developed in relation to s411, that the process of seeking approval of the scheme of which the section speaks, will not be put in motion by the court unless it concludes that ultimately, at least upon the basis of the material of which the court is then aware, it would be likely to approve the scheme, subject only to a further argument and new matters being brought forward when the court's approval is sought in the final stage of the process.": at 647

37 Murray J also states that he was in agreement with the conclusions of O'Loughlin J in Re ACM Gold at 237 that: "… the granting of leave to convene meetings does not mean that the court is to be regarded as having given a commercial or juridical imprimatur to the scheme… Each arrangement appears to be one that is fit for the consideration of the intended meetings; they appear to be commercial propositions which, subject to the obtaining of the statutory majorities, would gain the court's approval on an uncontested motion."

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.]

The role of objectors 42 At the commencement of the application of Association and Insurance, I heard submissions from Mr Camilleri representing Mr Talbot and Mr Parker representing himself. It was submitted by Mr Camilleri that it was appropriate for the court to make orders or directions that Association and Insurance contribute monies towards the legal costs of the objectors or, instead, provide an indemnity to the objectors by which the applicants would in effect guarantee to pay the objectors' costs on an indemnity basis and not seek any order for costs against the objectors, whatever may happen. I declined that application for reasons elaborated below. 43 Objectors have been afforded considerable opportunity in cases of this type to present to the court submissions and to persuade the court to refuse orders under s411(1). For example, in Quatro v Argo Investments and Ors (1999) 32 ACSR 480 (a case involving a reduction of capital), Hansen J said: "… it is apparent from the cases that objectors, even if not parties, have been able to act in a manner akin to being a party and as such have taken steps such as requesting the production of documents, calling evidence - even expert evidence, and cross-examining witnesses. In other words, objectors have participated in a forensic process on confirmation applications without, in the above cases, being a party or being required to pay costs".

44 The cases referred to by Hansen J include: Re Castlereagh Securities Limited [1973] 1 NSWLR 624; Re Ampol (1989) 14 ACLR 772; Re Arrowfield Group Limited (1995) 17 ACSR 649 and Re Matine Limited (1998) 28 ACSR 268. 45 Whether the costs of objectors on their objection should be met by the applicant scheme company has been the subject of a number of cases, but all of them were in relation to cost applications made at the conclusion of the convening hearings. The principles which emerge from the cases show why that must be so. I will attempt to distil their effect in these terms.

(i) The ordinary rule is that the scheme companies pay the objector's costs and do not suffer cost orders against them.

(ii) However, this is subject to the objections not being frivolous or without substance but rather such as to be properly and justifiably advanced, even if unsuccessfully. I would add that even sensible objections should be capable of being advanced with reasonable economy of time, consistent with the summary nature of a s411(1) application.

(iii) These principles reflect the fact that the scheme procedure unavoidably must provide an independent court forum on two separate occasions - for convening and then to approve the scheme. The court will often be assisted by having a contradictor at either stage. It must not be forgotten that the end point of most schemes, if adjudged sufficiently fair and achieving the statutory majorities, is compulsory acquisition of the member's property and the court is no rubber stamp in that process.

(iv) Where there is a clear indication that objectors are using the tactics of technical and artificial objection so as to stall a scheme of arrangement for their own purposes, the courts will not hesitate to make costs orders against objectors to the extent warranted; those cost orders may even be indemnity cost orders in appropriate cases.

(v) Since assessment of the objections cannot be made in advance, cost orders should not be made in advance either. 46 In Quatro Limited v Argo Investments Limited (supra) Hansen J dealt with the question of costs sought after objections to a reduction of capital. Hansen J in that case restated the general principle that the court's discretion on costs should be exercised having regard to all the circumstances of the case (at 481). His Honour said: "… the presence and submissions of an objector on a company's application for confirmation of a capital reduction can be of material assistance to the court. Thus for a long time now, as the authorities to which I was referred show, courts have been prepared to allow objectors their costs. See Carruth v Imperial Chemical Industries Limited [1937] AC 707 at 771.(at 481)

47 Hansen J goes on to summarise a number of cases in which the Court had ordered that the scheme company pay the costs of objectors. In all of those cases, the award of costs was made at the close of the substantive proceedings. 48 While this Court was made aware of an agreement in advance between the applicants and Mr Talbot to provide an amount to cover that objector's costs, it is not for the court to order that such an agreement be made nor is it concerned to inquire about the terms of such an agreement or its adequacy.

Summary of each scheme proposal and interrelationship of schemes 49 What follows by way of descriptive summary is taken from the summary prepared by the parties, with some modification.

1.1 "The NRMA" is the name commonly given to two distinct companies, NRMA Limited ("Association") and NRMA Insurance Limited ("Insurance"). Each is a public company limited by guarantee. The two are linked through provisions of their constitutions (including primarily the right of the Association board to determine the composition of the Insurance board and Association's right to any surplus assets on a winding-up of Insurance). The companies have a significant number of common members. This structure dates back to the 1920s.

1.2 The boards have developed for members' consideration a proposal under which: (a) Insurance will be demutualised under Part 2B.7 of the Corporations Law , thereby converting it from a public company limited by guarantee to a public company limited by shares; (b) all members of Association who are not already Insurance members ("Association Only Members") will become members of Insurance; (c) all members of Insurance, including those in (b) and Association itself, will in accordance with a prescribed share allocation formula become shareholders of a newly formed company, NRMA Insurance Group Limited ("NIGL"), which in turn will become the sole shareholder of Insurance; (d) although the memberships of members of Insurance will be extinguished under Part 2B.7 and replaced by shareholdings in NIGL, members of Association will not relinquish Association membership and Association will retain its status as a public company limited by guarantee; (e) Association will, however, give up all its current rights as a member of Insurance (including those described in 1.1); and (f) Association, Insurance and NIGL, and certain of their respective subsidiaries, will enter into a series of business relationship agreements designed to preserve and to put on a formal footing the close relationship between the NRMA companies in certain key areas such as the common use of the NRMA brands, the provision of distribution, technology and administrative functions and common access to membership and customer lists. It is intended that, if the Proposal is implemented through member approval, the approval of the Court and granting by ASIC of Insurance's application under Part 2B.7, NIGL will apply to list on Australian Stock Exchange Limited.

1.3 Due to the NRMA group structure, implementation of the Proposal involves five schemes of arrangement, changes to the constitutions of both Association and Insurance, approval of certain of the business relationship agreements by the members of Insurance and the conversion of Insurance to a public company limited by shares. Meetings of the respective members and certain classes of members of Association and Insurance are proposed to take place on 19 April 2000. The scheme resolutions require merely a majority in number of the members present and voting as being companies limited by guarantee, they have no share capital (s411(4)(a)(ii)). But the remaining resolutions to be passed, and upon which the Schemes are conditional, require a majority passed by 75% of the votes cast on the resolution. Those meetings will consider resolutions relating to each of these implementation matters, with the exception that the resolution for the conversion of Insurance to a public company limited by shares (leading to demutualisation) is proposed to be considered at a meeting to be held after all the schemes of arrangement have become binding assuming approval of them by the members and the Court. The passing of that resolution (and the ASIC steps which follow under s164(4) of the Corporations Law rendering NIGL sole shareholder of Insurance) are conditions subsequent to the schemes. Their non-fulfilment by 31 December 2000 leads automatically to termination of the relevant schemes.

1.4 Of the five schemes of arrangement (each of which must be approved by a majority in number of the members entitled to vote who do vote in person or by proxy, as well as being approved by the Court), three involve members of Association and two involve members of Insurance.

1.5 In the case of Association, the first scheme is between Association and its members generally. Its central purpose is to cause Association and its members as a whole to be committed to the benefits and detriments that will arise from the implementation of the overall Proposal. There is an express requirement that Association take all necessary action to implement the Proposal, including the abrogation of the rights described in 1.1 by the Association board. The second Association scheme is between Association and the Association Only Members. By this scheme, those members would become committed to the particular benefits and detriments affecting them and, in particular, become entitled and bound to become members of Insurance and, thereafter, members of NIGL in accordance with the Proposal. Through becoming Insurance members, Association Only Members would ultimately become NIGL shareholders instead upon Insurance's conversion to a public company limited by shares. The third Association scheme is between Association and those Association members who are already Insurance members ("Dual Members"). Under it, Dual Members would commit themselves to the benefits and detriments affecting them including, in particular, Association Only Members becoming Insurance members so that they may participate in the demutualisation of Insurance.

1.6 The other two schemes of arrangement involve Insurance and certain classes of its members. Because of the existence of the rights referred to in 1.1, Association alone is regarded as a class of member within Insurance and a scheme is therefore proposed between Insurance and Association alone, as a member. Under this scheme, Association would become committed to the benefits and detriments flowing to it under the overall Proposal, including those arising from the breaking of the existing constitutional links between the two companies and the issue of NIGL shares to Association. The other Insurance scheme is between Insurance and all Insurance members other than Association. This scheme creates a commitment of those members to the benefits and detriments of the overall Proposal as it affects them.

1.7 A special feature of the second Association scheme and both Insurance schemes is the creation of an agency under which each company itself becomes invested with certain specific authorities to act on behalf of each relevant member in connection with particular implementation steps. Taking the second Association scheme as an example, Association becomes the agent of each Association Only Member to do things such as receive notice of the subsequent meeting of Insurance members to pass the Part 2B.7 resolution leading to conversion to a company limited by shares and appoint a proxy to attend and vote for the member in favour of that resolution. This streamlining means that there will be no need for the vast bulk of members to meet after 19 April 2000 for the purposes of considering the Part 2B.7 resolution or the resolution to repeal Insurance's constitution. Special provision will be made, however, to ensure that the subsequent meeting of Insurance members is advertised in the daily press and that any Insurance member may override the agency either by attending the meeting in person and voting or notifying the agent that the agency to vote is not to be exercised on that member's behalf at the meeting.

1.8 The constitutions of Association and Insurance will be amended in a number of ways to facilitate the Proposal. These include imposing on the directors of both companies a qualified duty to do everything necessary to implement the Proposal, removing the constitutional links between the companies, enabling Association Only Members to become members of Insurance and removing Association's special rights in Insurance referred to in 1.1. The changes to the constitutions must be passed in each case by special resolution.

1.9 Under certain of the proposed business relationship agreements, financial benefits may be given by Insurance (a "public company") and one of its subsidiaries to Association which, despite the breaking of existing constitutional links through implementation of the Proposal, will continue for six months to be a "related party" of Insurance for the purposes of Part 2E of the Corporations Law . It will therefore be necessary for the members of Insurance to approve, by resolution (with no vote being cast by Association) the making of those agreements.

1.10 Assuming all of the above steps occur, the subsequent general meeting of Insurance to pass the Part 2B.7 resolution will be convened and the agencies to appoint proxies and to exercise members' voting rights within Insurance will be exercised. The demutualisation resolution must be passed by special resolution and, as the agencies created through the schemes will enable the casting of the votes of all members (except where a member acts to countermand the agent's authority), the resolution will only fail if a very significant number of members exercise their express countermanding rights and vote against it. The conversion of Insurance to a public company limited by shares will proceed under Part 2B.7 by way of application lodged with ASIC on the basis of the special resolution; see s164 of the Corporations Law . Upon conversion (at which point Insurance becomes a wholly owned subsidiary of NIGL), the existing constitution of Insurance will be repealed by means of a second special resolution passed at the same meeting as the conversion resolution.

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;

(c) all of the shares in Insurance issued under the Insurance Change of Status will be issued to NIGL;

(d) each Insurance Member (including Association and an Association Only Member who becomes an Insurance Member): (i) will receive an allocation of shares in NIGL in accordance with the Share Allocation Rules; and (ii) through the Insurance Change of Status, will cease to be a member of Insurance so that the liability of the Insurance Member as a guarantor on the winding up of Insurance is extinguished; (e) by virtue of the Insurance Demutualisation Resolutions and its ceasing to be an Insurance Member, Association will cease to enjoy Association's Control Rights in Insurance; (f) commercial and other relationships among Insurance, Association and NIGL become regulated by the Business Relationship Agreements; and (g) ownership of certain trade marks related to insurance and financial services activities will be assigned by Association to NIGL, Association will grant to NIGL licences to use and sub-licence the NRMA trade marks which Association and Insurance are to use concurrently after the Insurance Change of Status and use of all such trade marks will become regulated by certain of the Business Relationship Agreements, all as more particularly described in the Information Memorandum."

58 The ultimate approval of the arrangements by the members and the Court will accordingly embrace consideration by the Court of the fairness of all of the associated resolutions to be proposed at the Special General Meetings of Association and Insurance, as well as those proposed at the Scheme Meetings. 59 The significance of that result is this. Because fairness of the proposal overall is considered by the court, including the compulsory acquisition of membership rights in Insurance, to be effected by the further but associated steps under s164 of the Corporations Law, the denial of that expropriation in Gambotto v WCP Ltd (1995) 182 CLR 432 is not applicable here. This is because such an acquisition is covered by the High Court's contemplated exception for court approved arrangements the subject of a statutory scheme of arrangement thereby appraised broadly for fairness; Gambotto (supra) at 446.

Conclusion 60 The arrangements collectively embrace a series of steps including demutualisation. These together constitute a proposal. Court approval of these arrangements therefore necessarily includes appraisal of the fairness of the proposal overall.

The use of conditions subsequent in the proposal 61 I expressed initial concern, at the fact that these schemes were to be approved by the court when further steps in each proposal had still to occur, being each of the events set out as conditions subsequent. That is not the conventional scheme route. Most though not all schemes qualify for approval only after all conditions are satisfied (other than the formality of lodgment of the court order). Here the schemes could still terminate after court approval, if a condition subsequent were not fulfilled by 31 December 2000 though on the basis that the status quo is then to be restored, save for unimportant exceptions. 62 However, an analysis of how these conditions subsequent operate has allayed that concern. With minor exceptions which do not matter, if any of the conditions - whether precedent or subsequent - do not occur - then the status quo is fully restored without adverse consequence. In Appendix A, I have elaborated the analysis which supports that conclusion. 63 Furthermore, as explained below, the demutualisation is necessarily deferred till after the scheme approval date to enable the schemes to cause Association members first to become members of Insurance before demutualisation so as to qualify for the new shares in NIGL to be issued. This is in order that there be no tax disadvantage for capital gains tax purposes under Division 9AA of the Tax Act and to ensure the efficacy of the s164 demutualisation resolutions, by including Association members in their passing.

Conclusion 64 The Schemes, though approved by the court, may still be terminated and the status quo effectively restored, if any of the conditions subsequent are not fulfilled by 31 December 2000, in particular demutualisation. In the present circumstances, that is not objectionable, as it preserves certain capital gains tax advantages for members.

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."

A further factor I would add is the closeness in timing of the later demutualisation meeting to the earlier scheme meetings on 19 April 2000.

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."

72 Thus while the proxy can be set aside by the member turning up and voting, apathy will usually dictate otherwise. However, here the scheme proxy has some other saving graces. First, the scheme itself is not passed by the scheme proxy nor the initial special resolutions. Second, if the demutualisation special resolution is held reasonably soon thereafter, and follows very strong support for the scheme - say around 80% or more - the earlier resolutions are likely to be a valid surrogate for the demutualisation special resolutions especially as they form part of the same composite proposal. Thirdly, the Deemed Proxies represent considerable cost saving, though that of itself could not be decisive. Finally, the order of events that lead to the demutualisation resolution being put after the scheme meetings and scheme approval is intended to preserve a capital gains tax advantage for members, with the scheme proxy then obviating the confusion and complexity of inflicting members with yet another meeting to attend.

Conclusion 73 I am satisfied that there is no "in principle" objection to the scheme proxy. There are here the kind of exceptional circumstances where use of such a scheme proxy may be justified for the later demutualisation resolutions. A final view will be reached at the scheme approval stage. The Court, like ASIC, will reserve its position till the relevant circumstances are known including particularly voting results on the scheme resolution.

Membership Classes 74 As has already been noted, three schemes are proposed for Association:

(a) a scheme between Association and all its members;

(b) a scheme between Association and the Association Only Members;

(c) a scheme between Association and those of its members who are also members of Insurance ("Dual Members"). 75 Two schemes are proposed for insurance:

(a) a scheme between Insurance and all of its members except Association; and

(b) a scheme between Insurance and Association (as a separate class of member of Insurance). 76 The long standing test for identifying a class of members is that of Bowen LJ in Sovereign Life Assurance Company v Dodd [1892] 2 QB 573, at 583. Bowen LJ said that: "The word "class" is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the Court to order a meeting of a class of creditors to be called. It seems plain that we must give such a meaning to the term "class" as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest..."

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. ..."

81 Also, in Re Bond Corporation Holdings Ltd at 317, Owen J said that: "... In determining classes of creditors, the court must balance the danger of a compromise being forced on dissenting creditors by a majority, against the danger of a minority of creditors having the power to veto the scheme."

82 Further, in Re Crusader Ltd (1995) 17 ACSR 336, at 345, Thomas J said that: "...Where a sufficient clash of interest is apparent, separate meetings may be necessary. Conversely courts do not create classes unnecessarily because this causes unnecessary inconvenience, artificiality, and increases the possibility of veto by a limited group" (citing Nordic Bank v International Harvester )

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."

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:

(a) Royal Automobile Club of Australia (RACA members and certain NRMA employees who are not Association members);

(b) former Association members who continue to hold an eligible insurance policy which has not expired; and

(c) those Insurance members who have an Association membership in joint names (that is, joint members of Association are one member, but if an eligible policy is held with Insurance, each is a member of Insurance). 89 NRMA submitted, and I accept, that, by contrast with the position of Association Only Members (who are to be treated as a separate class because they have to consider whether to agree to become members of Insurance), the interests of Insurance Only Members are not so dissimilar to the Dual Members that they cannot meet together to consider their common interests.

Conclusion 90 I am satisfied on the information presently before me that the classes of members have been appropriately drawn up for each scheme, though the voting result at the relevant meetings will need to be closely scrutinised having regard to the potentially divergent interests. In that regard it would be desirable for there to be detailed record keeping such that the voting result can be correlated to the principal categories of member differentiated by the number of shares obtained under the share allocation formula.

Possible Equitable Constraints 91 There is one possible objection, of the kind that, if made out, would represent a potential legal impediment even to convening the scheme meetings. It is essentially that this restructuring, with its intended end point of demutualisation of insurance and its subsequent listing, is constrained or precluded by what may be described as the "general intention and common understanding" of the Insurance members at the time when they became members. This, it is then suggested, was a common intention and understanding to operate only as a mutual, or only under the existing constitutional relationships between Association and Insurance; indeed so to operate forever, with no prospect of change even if most of the then members wanted it. For reasons which are elaborated below, I do not accept that proposition. 92 In Fraser v NRMA Holdings Limited (1995) 55 FCR 452 at 481, the Full Court of the Federal Court referred in obiter dicta to: "the power of equity to restrain conduct, otherwise authorised, where to engage in such conduct would be entirely outside what can fairly be regarded as having been within the general intention and common understanding of the members when they become members. Observations in Re Tivoli Freeholds Limited [1972] VR 445 at 468, Re Wondoflex Textiles Pty Ltd [1951] VLR 458 at 468 and HA Stephenson & Son Limited (in liq) v Gilanders, Arbuthnot & Co (1931) 45 CLR 476 at 487 show that conduct of this nature will empower a Court to wind up a company on just and equitable grounds and there is no reason in principle why equity should not intervene at an earlier point to restrain that conduct."

93 As the Full Federal Court went on to note (at 481-482): "Without the consent of the Association the wealth of Insurance therefore remained "locked" away from the members of Insurance. … The situation was as if two keys were needed to unlock the wealth - one key being held by the members of each of the Association and Insurance. In this practical sense the rights of the members of each company were similar: the members of each had the power to consent or to block the proposal, and unless both agreed, neither group could turn to their direct financial benefit the wealth of the organisation. It is perhaps theoretically possible that the members of Association in general meeting could alter cl. 5 of the Memorandum of the Association [see now rule C of Association's constitution which is to the same effect] so as to permit them to obtain some direct financial benefit from the wealth of the Association. … However the prospect of such an alteration happening otherwise than as part of a major reorganisation of the structure of the whole organisation … does not appear on the evidence before the Court as a realistic or open one."

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."

The proposal thus lists this and its other associated elements, all of which, being inextricably connected, are appraised by the Court as a collective whole, in considering the respective arrangements for approval or rejection. 100 The cases referred to by the Full Federal Court in the extract from Fraser first quoted above, have no application to a scheme of arrangement taking effect under s411 of the Corporations Law:

(a) Re Tivoli Freeholds Ltd was a winding up case on the just and equitable ground. Tivoli Freeholds Ltd was a small company with very few shareholders. The main objects of the company were to carry on an entertainment business with associated activities and to acquire land on which theatres were erected together with adjoining premises. From 1969 almost none of the company's moneys were used for the real objects of the company - the theatres it owned were sold and the surplus funds lent to its effective majority shareholder for the purposes of acquiring shares in public companies. Moreover, 93% of the company's minority shareholders wanted to dissociate themselves from the company's new activities.

(b) Re Wondoflex Textiles Pty Ltd [1951] VLR 458 was also a winding up case on the just and equitable ground. It concerned a small company with only two shareholders, one owning 70% of the shares and the other 30%. The majority shareholder used his power to remove the other as a director, and also to reduce his salary and status, with the object of forcing the other party to sell his shares in the company at an undervalue.

(c) H A Stephenson & Son Ltd (in liq) v Gillanders, Arbuthnot & Co (1931) 45 CLR 476 was an ultra vires case (before that doctrine was abolished in company law). The passage in the decision referred to by the Full Federal Court in Fraser contains comments made by Dixon J about when it may be just and equitable for a company to be wound up, and that in determining this the general intention and common understanding of members "may be important".

Accordingly the NRMA correctly submitted that the passage from Fraser first quoted has no application to the present case.

Conclusion 101 There is no constraint based on some common understanding of members, incapable of alteration, as would prevent a properly approved scheme of arrangement embracing the steps to demutualise.

Is there a trust of Insurance's assets? 102 A question arises whether Insurance is constitutionally unable to demutualise because it may be said that a trust is created of the residual assets of Insurance following its winding up, in accordance with clause C of its constitution. 103 Clause C of the constitution of Insurance currently provides as follows: "If upon the winding up or dissolution of the Company the same shall be applied or given or transferred to the National Roads and Motorists' Association (N.R.M.A) or in the event of the National Roads and Motorists' Association (N.R.M.A) for any reason having ceased to exist then to such other Association or Associations having objects similar to the National Roads and Motorists' Association (N.R.M.A) or such other Company having objects similar to those of this Company as shall be determined by the members of this Company at or before the time of winding up or dissolution and in default thereof by any Judge of the Supreme Court in New South Wales in its Equitable Jurisdiction."

104 As part of the Proposal, it is proposed that the constitution of Insurance will be altered, including by substituting a new clause C in the following terms: "If upon the winding up or dissolution of the Company (otherwise than for the purposes of reconstruction) there shall remain any surplus assets after payment of all the Company's liabilities and the expenses of winding up, or dissolution, the same shall not be paid to or distributed among the members of the Company but shall be given or transferred: (a) unless paragraph (b) applies, to some other institution or institutions having objects similar to the objects of this Company, such institution or institutions to be determined by the members of this Company at or before the time of dissolution, and in default thereof by any Judge of the Supreme Court of New South Wales in its Equitable Jurisdiction or such other Judge or Court as may have or acquired jurisdiction in the matter, and if and in so far as effect cannot be given to the aforesaid provision then to some charitable object; or (b) if either of the events referred to in rule 3(a)(iv) (D) and (E) occurs, to NRMA Limited ACN 008 010 506 ("the N.R.M.A.") or, in the event of the N.R.M.A. for any reason having ceased to exist then to such other association or associations having objects similar to the N.R.M.A. or such other company having objects similar to those of this Company as shall be determined by the members of this Company at or before the time of winding up or dissolution and in default thereof by any Judge of the Supreme Court of New South Wales in its Equitable Jurisdiction." (Information Memorandum page 154).

105 The purpose of this proposed alteration is to ensure that Insurance remains a 'mutual insurance company' within the meaning of s121AB(1)(b) of the Income Tax Assessment Act 1936 so as to qualify for the tax relief available upon the demutualisation of such a company pursuant to Division 9AA of Part III of that Act. 106 Further, if under the Proposal Insurance demutualises pursuant to Part 2B.7 of the Corporations Law and the constitution of Insurance is repealed so that the replaceable rules apply, any reference to the destination of any surplus upon a winding up of Insurance will be eliminated so that the regime ordinarily applicable in the winding up of a company limited by shares will apply (see ss485(2) and 501 of the Corporations Law). 107 NRMA made the following submissions on these questions, which I am satisfied should be accepted.

(a) There is nothing to suggest that the subscribers to the memorandum of association of Insurance intended to create a trust of Insurance's surplus assets and there is no presumption of any such intention, even in the case of a company which has solely charitable purposes. The subscribers elected to use a corporate, rather than a trust vehicle to conduct the business of Insurance.

(b) Whilst at the time of formation of Insurance the provisions of a company's memorandum governing the destination of surplus assets were unalterable, this was a consequence of company law, rather than an indication of an intention to create a trust.

(c) Changes to company law made since the incorporation of Insurance allow the alteration of any provisions of a company's constitution (s136 Corporations Law ) subject only to the constraints identified in Gambotto . Consequently, clause C of the constitution dealing with the destination of surplus assets may now be altered. There is no principle of the law of trusts which prevents an alteration to the constitution of a company pursuant to the Corporations Law . This consequence flows from changes to company law which the original subscribers to the memorandum of Insurance chose to govern the affairs of Insurance.

(d) It has always been open to the members of Insurance, had they so wished, to entrench a provision like clause C of Insurance's constitution. The members of Insurance could have passed a special resolution to amend Insurance's constitution by inserting a requirement that a "super majority" of members be achieved before those clauses could be altered (pursuant to s136(3) of the Corporations Law ). This was not done, nor even attempted. This indicates that Insurance's members do not intend (and in the past have not intended) that clause C of the constitution be unalterable.

Conclusion 108 There is no basis for treating the constitution of Insurance creating a trust of the residual assets of Insurance in favour of Association following its winding up. Nor is there any basis for preventing a subsequent change to that disposition of Insurance's residual assets on winding up as is now proposed.

Qualified Duty upon Directors 109 The proposed alterations to the constitution of Insurance include the imposition of a duty on the directors to cause to be done everything which it is necessary for the company and the directors to do to implement the Proposal (by the insertion of a new rule 38A sub-rules (1) and (2)). It is subject to the qualification in sub-rule 38A(4) that nothing in those sub-rules requires any director to act in a way which would be in breach of any duty owed by that director or which would be unlawful. A similar duty subject to a similar qualification is proposed to be inserted in the constitution of Association by the insertion of a new rule 52A. Those rules are set out in the notices at pages 148 and 152 of the Information Memorandum. 110 During the hearing of the application, a question arose concerning the qualification. It is a director's duty to implement and honour binding obligations entered into by the company: Thorby v. Goldberg (1964) 112 CLR 597, 605-606, 612, 618; ANZ Executors & Trustee Company Ltd v. Qintex Australia Ltd (1990) 2 ACSR 676, 688-689; Ford's Principles of Corporation Law, 9th edition, page 304. There may, of course, be exceptional cases where a director would be entitled, or indeed bound, to cause the company to breach its obligations. Without the qualification, there would be an issue as to whether the proposed resolutions would be effective to preclude the directors from an independent exercise of their discretion or to relieve them from their statutory and common law duties in relation to their decision whether or not to act on the directions of the general meetings. With that qualification, that issue goes away.

Conclusion 111 The qualification to act lawfully upon the proposed obligation on directors to implement the demutualisation resolution removes any legal difficulty on that score.

Cut-off of Membership 112 At the time when the boards of Association and Insurance resolved to develop the Proposal, resolutions were passed by each board to establish a membership cut-off as at midnight on 25 February 1999 "in order to protect the underlying interests of current members of the company while the reconstruction proposal is developed." The full terms of the resolutions are set out in paras 29 to 31 of the affidavit of Eric Dodd sworn 21 January 2000. 113 Rule 4 of Association's rules has for many years, and well before these current proposals, provided: "4. The Board of Directors may refuse to admit any person as a member and shall not be bound to give any reason for so refusing."

114 In addition rule 3A, added as from 28 October 1998, provides that: "3A. Subject to the Law, the Board of Directors may close the register for a period not exceeding the period of 45 days prior to the date of a meeting of members or the close of the voting period."

115 Primarily pursuant to that rule of its constitution, Association has therefore the express power to pass such a resolution. Rule 3A can be called in aid, but it is merely facilitative; the power to close off membership resides in rule 4. All rule 3A does is to permit the closing of the register for a brief period (up to 45 days), such as here, to enable counting of votes. Such temporary closure may be used for a variety of purposes, not just as part of the mechanisms of a scheme. Mr Talbot complained that because the notice of meeting (MFI5) introducing the new rule 3A sent earlier must have been sent by directors having demutualisation in mind, that notice by not revealing this as the purpose of the new rule 3A was misleading or deceptive. But that contention is without foundation, either factual or legal. Clearly, rule 3A was simply introduced to enable temporary closing of the register, which as I say may be for a multiplicity of purposes. It was rule 4 that is primarily relied upon and that has been part of Associations constitution for some years. 116 That power to cut off membership is analogous to a power to refuse registration of a transfer of shares and its exercise is governed by the same consideration. "A discretion about registration may be limited to certain grounds specified in the constitution or it may be unlimited. Even if the constitution imposes no limits, there are limits arising from the discretion being regarded in case law as a fiduciary discretion which must not be exercised fraudulently, capriciously or for a collateral purpose: Manning River Co-op Dairy Co Ltd v Shoesmith (1915) 19 CLR 714; 21 ALR 206". (Ford Principles of Corporation Law 21,370)

Here the exercise of discretion to close off membership pending consideration of the scheme is readily justified on the basis that otherwise, new members could flock to join solely or predominantly for the perceived scheme benefits, once their possibility was sufficiently known. That in turn would dilute those benefits for members of longer standing and could be seen as unfair. 117 Whilst the constitution of Insurance does not contain an equivalent express power, the position has been that, since the date of the cut-off resolutions (25 February 1999), the proposal forms for new policies issued by Insurance have contained a term that applicants, if not already members of Insurance, agree that they will not become members or become entitled to participate in the share allocation under the Proposal by taking out the policy. The effect is that such persons do not satisfy the requirements of membership because they have not agreed to become a member under rules 3(a)(iii) and 3(b) of Insurance's constitution. The same result may in some cases have been achieved by reason of the cut-off resolution of Association and the operation of rules 3(a)(iii) and 3(b)(i) of Insurance's constitution. 118 I am satisfied that, as NRMA contends, such arrangements were within the board's general management power contained in rule 38 of Insurance's constitution. The institution of a cut-off date for membership during a period of corporate restructuring is both customary and necessary in the interests of members. It was, furthermore, modified quite reasonably, by setting up a Disputes and Review Panel to deal with anomalous or hard cases; see 8.20 of the Information Memorandum. In the present case no question relating to improper exercise of powers by directors arises.

Conclusion 119 There is no legal impediment to closing off membership of Association and Insurance for the purpose of limiting the schemes' perceived benefits to members prior to the cut-off date.

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.

Conclusion 123 Ordinarily, a draft information memorandum, when subject to material change, should not be released to the press until the meeting convening orders are made.

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."

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.

134 Mr Parker also submitted that NIGL "will not be listed on the ASX or any other reputable stock exchange anywhere in the world". This submission is without foundation and indeed contrary to present indications.

Conclusion 135 There is no basis for the contention that Insurance or NIGL may not lawfully pay dividends out of unrealised gains by reason of them being unrealised, nor preventing such unrealised gains being combined with realised gains and any earned profits for the purpose of the profit calculation in the accounts. Indeed Insurance is obliged at law by accounting standard AASB 1023 to include unrealised gains under its profits, being a company carrying on general insurance activities. It follows that the proposal to list could not be said to be a "fraudulent scheme" by reason of NIGL's supposed inability to obtain listing due to its supposed inability lawfully to pay dividends. Neither of those suppositions are made out.

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)

141 That view is affirmed in Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 501. Since the Guardian Assurance case, courts have consistently rejected attempts to impose restrictions on the meaning of the word "arrangement" which are not found in the statute: Re National Bank Ltd [1966] 1 All ER 1006 at 1012; Re Calgary and Edmonton Land Co Ltd [1975] 1 All ER 1046 at 1054; Re Savoy Hotel Ltd [1981] 3 All ER 646 at 652. 142 Accordingly, if the subject matter of the arrangement is something upon which a company is able to agree with an individual member or creditor, it may permissibly be the subject of an arrangement under s411. However, there must be "some sort of contract or approximation to a contract as between the company and its members or creditors or any class of them" In Re A & C Constructions Pty Ltd [1970] SASR 565 at 570; Isles v The Daily Mail Newspaper Limited (1912) 14 CLR 193 at 204-6; Re NFU Development Trust Ltd [1973] 1 All ER 135, at 140 or else what Hayne J more recently described as an element of "give and take": Re Sonodyne International Ltd (1994) 15 ACSR 494 at 497. 143 Schemes of arrangement are not restricted to circumstances where there exists "difficulties which may be beyond the will or ability of the members or creditors themselves to overcome" (cf. for example, Re Advance Bank Australia Ltd (No.2); Re Credit Reference Association of Australia Limited.

Conclusion 144 Recourse to a scheme of arrangement under s411 is not a privilege, but simply a statutory facility to bind members, once its requirements are satisfied. Those requirements are capable of being satisfied by the present proposals if duly passed and approved, as they constitute an arrangement between members and the relevant scheme company.

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.

What is a Mutual? 148 There was discussion at the hearing about the nature and characteristics of a so-called "mutual company". Both Association and Insurance describe themselves as mutual companies in the Information Memorandum and it is common ground between the NRMA and the various objectors who appeared at the hearing that that is an apt description of them. Where the NRMA and the objectors part company is in their respective views about what the law requires of the directors of such a company and of the company itself, insofar as those requirements may differ from those imposed upon companies which are not mutuals. 149 The Corporations Law does not anywhere refer to a mutual company. It makes no provision for the creation of such a company: s112 Corporations Law. Nor does it contain a definition of what a "mutual" is, or articulate any principles for the management of the affairs of a mutual company. 150 Both Association and Insurance are companies limited by guarantee. In s9 of the Corporations Law a "company limited by guarantee" is defined as: "a company formed on the principle of having the liability of its members limited to the respective amounts that the members undertake to contribute to the property of the company if it is wound up."

151 The New Shorter Oxford English Dictionary includes in its definition of "mutual": "a building society, insurance company, etc, owned by its members and dividing some or all of its profits between them." 152 In Faulconbridge v National Employers Mutual General Insurance Association [1952] 1 Lloyd's List Law Reports 17, Upjohn J attempted to identify certain characteristics of a mutual insurance association. He considered the two essential conditions were to be:

(a) every holder of a policy must be a partner in the concern with a voice in the administration of the association, whether or not the association is carried on through the medium of an incorporated company (at 27); and

(b) any surplus must ultimately come back to the contributors "in meal or in malt" on a winding up or otherwise (at 35). 153 Whether or not the first of these requirements is compatible in practice with widely spread membership and indirect rights via Association, it is apparent that neither Association nor Insurance exhibit the second set of characteristics of a "mutual". That is indeed if those characteristics be essential to be a mutual, as may be doubted. In particular:

(a) Rule C of Association's constitution provides that, in the event that Association is wound up or dissolved and there remains any surplus, that surplus cannot be paid to or distributed among the members of the Association but must be given or transferred to some other institution or institutions having objects similar to Association's objects or, in default, as directed by this Court.

(b) The profits of Association are not divisible amongst Association's members in any circumstances.

(c) Rule A(1) of Insurance's constitution (in combination with rule 3(b)) has the effect that Insurance's object is to provide insurance for both members and non-members; and

(d) Insurance's constitution makes no provision for the distribution of profits to members and provides that any surplus assets on a winding up shall be paid to Association (rule C). 154 It can be seen therefore that, at least in these respects, neither Association nor Insurance exhibit characteristics which are usually found in a mutual organisation, these being indicia to be appraised for their cumulative effect. Nonetheless I shall proceed on the basis that they are mutuals.

Are mutuals required to act in accordance with different legal principles? 155 There has been no clear articulation to the Court by any objector of any separate or special legal obligations of a mutual company or owed by its directors to members. An exhaustive review of the cases in Australia and the United Kingdom, reveal no authority for the suggestion that mutual companies and their directors have an obligation to provide mutual benefits to members whether in the form of "mutual pricing", rebates or in some other form. Nor is there any authority for the suggestion that mutuals should be run, in effect, as non-profit organisations. Absent any prohibition in its constitution, there is no legal bar to a company limited by guarantee earning and distributing profits (Re NFU Development Trust Limited [1972] 1 WLR 1548; Federal Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR 447. In the present case, while the constitution of Insurance makes no provision for the distribution of profits (save by way of surplus assets on winding up to Association) it certainly places no prohibition on earning them. 156 The Australian Stock Exchange Guidance Note on "Co-operatives and mutual business entities" refers to co-operatives and mutuals as functioning in accordance with "co-operative principles" or "mutual principles". But no example is given of "mutual principles". 157 Data from the insurance industry overseas, in particular the United States, France and Germany, indicates however that mutual insurance companies are profitable, and compete on an equal footing with stock companies. There is no evidence that mutual insurers, in general, adopt different premium pricing policies to shareholder owned insurers (see Swiss Re, sigma report no. 4 of 1999 - "Are mutual insurers an endangered species?") A copy of this report is available on the internet at:

http://www.swissre.com/e/publications/publications/sigma/sigma499.html . 158 Even in respect of what Upjohn J considered to be a mutual insurance company in Faulconbridge (as all policyholders were members and were ultimately entitled to the surplus of the company), the Court (at 37) did not accept: "the implication in the broad submission that in reality the Association is really a trading company intent on building up large profits with an eye to future business, and, therefore, as it was said, not a truly mutual concern. The respondents themselves admit that the Association is an expanding commercial concern, but that does not, in my judgment, prevent the application of the principle of mutuality. A mutual concern, it is now established, trades with its members (see Commissioners of Inland Revenue v Cornish Mutual Assurance Company Ltd (1926) 12 TC 841). If members, instead of receiving back part of their surplus contributions by way of bonus, prefer to leave them with the Association to attract more members to come in, or to provide additional reserves to cover additional classes of insurance, I do not see how that alters the character of the surplus, nor why the principle of mutuality is thereby affected. It can scarcely be doubted that the New York Life Insurance Company carried on a commercial expanding business ." [emphasis added]

159 It is also well recognised that a mutual insurance company can, in addition to its mutual business, carry on non-mutual business, that is, provide insurance to non-members: see, for example, Municipal Mutual Insurance Ltd v Hills (Inspector of Taxes) [1932] All E.R. Rep. 979. The ability of Insurance to provide insurance to non-members is expressly recognised in Insurance's constitution. The submission that Insurance has an obligation to engage in mutual pricing or provide rebates or other mutual benefits ignores the fact that not all policyholders are members of Insurance. Of the approximately five million polices of Insurance presently in force, about 1.8 million of those policies are held by non-member policyholders (see page 28 of the Information Memorandum). I consider that it is intrinsically unlikely that Insurance is obligated by any supposed principle of mutuality to engage in conduct which would result in the provision of benefits to non-members of Insurance by engaging in "mutual pricing" or providing premium rebates.

Directors' Duties 160 No authority has been cited for the assertion that the directors of Insurance owe any duty to its members requiring them to price policies on a concessional basis or give premium rebates. No cases have been found either within Australia or overseas, which suggest that the duties imposed on a mutual company are any different to directors of non-mutual companies. Indeed, if rebates were paid to, or a "mutual pricing" policy adopted for, all policyholders, that would inevitably benefit non-members at the expense of members. This creates the possibility of conflict between the directors' duty to members. It is true that directors can choose to take other interests into account but only when they are compatible. (I leave aside any duty to creditors, which arises only when the company's position is financially precarious or insolvent.) I have already concluded that there is nothing in Insurance's constitution or by reference to equitable principles which lead to any different result. Finally, the Information Memorandum (p26-7 in particular) deals with other implications of premium rebates 161 Thus there is no provision of Insurance's constitution (including its objects) which contains reference to premium pricing practices or imposes any duty on the directors of insurance in relation to the provision of "mutual benefits". Rule 38 of Insurance's constitution simply provides that: "The business of the company shall be managed by the directors, who may exercise all such powers of the Company as are not by the Act or by these rules required to be exercised by the Company in general meeting, subject nevertheless to the provisions of the Act and of these rules and to any regulations not being inconsistent with the aforesaid provisions as may from to time be prescribed by the Company in general meeting..."

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.

Members' Rights - the position of Insurance 165 The members of Insurance do not as I have said currently have the right to receive dividends from profits made by Insurance. On the winding up of Insurance, any surplus assets are required to be applied or transferred to Association (see clause 5 of the Memorandum of Association of Insurance). 166 The issue of the distribution of profits to the members of Insurance arose in the litigation concerning the 1994 demutualisation proposal. In Fraser v NRMA Holdings Ltd & Ors (supra), at 481 the Full Federal Court referred to a submission "that it was within the power of members of Insurance by special resolution in general meeting to amend the objects and articles of Insurance to provide for the payment of the trading profits of Insurance to the members of that company by the declaration of dividends."

167 The Court said of that submission (at 481): "such a submission ignores the power of equity to restrain conduct, otherwise authorised, where to engage in such conduct would be entirely outside what can fairly be regarded as having been within the general intention and common understanding of the members when they become members."

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.

The Australian Position 175 Part 2B.7 of the Corporations Law contains a statutory procedure for converting a company limited by guarantee (the form taken by so called "mutual" companies) to a company limited by shares. Section 411 of the Corporations Law empowers the court to, first convene a meeting in respect of, and then approve, an arrangement between members of a company (including a company limited solely by guarantee). 176 There is authority in Australia for a company limited by a guarantee demutualising pursuant to Part 2B.7 and a scheme of arrangement under s411: In the matter of Credit Reference Association of Australia Ltd and the Corporations Law. In that case, I concluded: "The present scheme is thus in effect a demutualisation of CRAA in which customers are no longer required to be members and members are no longer required to be customers. By proceeding by scheme of arrangement, it has been accepted that issues of fairness are satisfactorily dealt with within the ambit of the framework of protection provided by Part 5.1 of the Corporations Law . It thus does not give rise to the issues dealt with by the High Court in Gambotto v WCP Ltd (1995) 182 CLR 432 at 446 in relation to expropriatory articles of association." (at page 494)

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)."

182 There are also precedents for demutualisation of mutual insurance companies in Europe and America. See for example report by Clifford Chance on demutualisation of mutual insurance companies in Europe, winter 1999. Of the European jurisdictions dealt with, only in France does it appear that demutualisation cannot take place. The comparative American and South African position is dealt with in Appendix C, but is consistent with that described above. 183 The Swiss Re Sigma No. 4/1999 "Are Mutual Insurers an Endangered Species" also refers to the worldwide trend to demutualisation: "Over the past two years many of the largest mutual insurers in the world had either restructured themselves as stock companies or indicated their intent to do so. Swiss Life, the largest life insurer in Switzerland and Norwich Union, the fifth largest insurer in the United Kingdom, both demutualised in June 1997. AMP, the largest Australian life insurer, followed suit in January 1998. In late 1997 and early 1998, the four largest Canadian life companies, whose assets account for half their domestic market, announced their intent to convert from mutual to stock ownership. The two largest US life companies announced in 1998 that they, too, would convert to stock ownership. The two largest South African conglomerates demutualised in October 1998 and July 1999. Scottish Widows, the second largest pension provider in Scotland, announced in June 1999 its intent to demutualise and become part of the Lloyd's TSB Group."

As I have earlier said, such statements should not be treated as somehow implying an inevitability to demutualisation in the present case, or on the present terms. That is for members to decide.

Conclusion 184 Neither "mutuality principles", nor the constitution of Insurance nor the fact of there being accumulated profits derived from failure to pay rebates or carry out "mutuality pricing", constitute any legal impediment to approval of these Schemes with the associated demutualisation. Nor has it been in a number of other countries and cases. But the prevalence of examples of demutualisation does not make it an inevitability in the present case; some mutuals continue to operate successfully whilst in other cases members have elected to change that status. It is primarily a matter for members, properly informed, to decide for themselves.

"Paying up" of shares in Insurance and NIGL 185 A further issue, is whether the NIGL shares would be fully paid when issued by NIGL to members of Insurance in return for extinction of their membership rights. The starting point is the procedure to be followed leading up to and including issue of NIGL shares. It should be appreciated that the end point of those steps is that NIGL replaces the members and becomes the sole shareholder of Insurance, now a company limited by shares. 186 The steps are as follows:

(a) The application lodged by Insurance under s163(1) following passing of the s162(1)(a) special resolution (being, in light of s163(4), an application on Form 206) will state, in response to s163(3)(a), that NIGL is the only person included in the list of persons to whom shares in Insurance will be issued.

(b) The number of shares to be issued to NIGL will be included in the application (see s163(3)(b)). The questions posed by ss163(3)(c) and (ca) will be answered by saying that there is, in each case, no such amount (ie. no amount will be paid by NIGL for the shares and no amount will be unpaid on the shares).

(c) Section 163(3)(d) will apply in this case. Its requirement will be satisfied by lodging with the application a copy of the Implementation Deed since the shares will be issued "under" that deed, given that the issue will be referable to the provisions of the deed.

(d) No value will be introduced into Insurance through the steps just described. Accordingly, there will be no occasion to create within Insurance a share capital account or to transfer any amount to any such share capital account. 187 On 1 July 1998 by s254A(1)(a) of the Corporations Law, the concept of par value was abolished and the rule against issue of shares at a discount became redundant. The 1 July 1998 changes deprived of all meaning the statement of Lord Green MR in Osborne v Steel Barrel Co Ltd [1942] 1 All ER 634 that "when fully-paid shares are properly issued for a consideration other than cash, the consideration moving from the company must be at the least equal in value to the par value of the shares..." (at 638).

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.

Conclusion 194 The NIGL shares upon issue under the terms of the relevant resolutions will be "fully paid shares" with NIGL left as the sole shareholder of Insurance. No illegality attends that step, following the legal abolition of par value.

SUMMing up 195 I now set out the conclusions earlier reached, in order to give members an overall picture.

(a) The relevant meetings of members may be convened under s411(1) of the Corporations Law and the Information Memorandum is approved. This is on the basis that the threshold requirements for this purpose remain satisfied including proper disclosure. The boards of Association and Insurance and senior management must let the documents speak for themselves and avoid undue partisanship or oversimplification. Phone queries should be handled with strict neutrality. Individual directors too have a particular responsibility to avoid saying anything which could mislead or deceive, though subject to that they are not precluded from participating in public debate. These strictures apply equally to any paid or inspired publicity.

(b) Cost orders should not be made in favour of objectors at the outset because they depend upon a consideration of the nature of the objection, and other relevant considerations.

(c) The arrangements collectively embrace a series of steps including demutualisation. These together constitute a proposal. Court approval of these arrangements therefore necessarily includes appraisal of the fairness of the proposal overall.

(d) The Schemes, though approved by the court, may still be terminated and the status quo effectively restored, if any of the conditions subsequent are not fulfilled by 31 December 2000, in particular demutualisation. In the present circumstances, that is not objectionable, as it preserves certain capital gains tax advantages for members.

(e) I am satisfied that there is no "in principle" objection to the scheme proxy. There are here the kind of exceptional circumstances where use of such a scheme proxy may be justified for the later demutualisation resolutions. A final view will be reached at the scheme approval stage. The Court, like ASIC, will reserve its position till the relevant circumstances are known including particularly voting results on the scheme resolution.

(f) I am satisfied on the information presently before me that the classes of members have been appropriately drawn up for each scheme, though the voting result at the relevant meetings will need to be closely scrutinised having regard to the potentially divergent interests. In that regard it would be desirable for there to be detailed record keeping such that the voting result can be correlated to the principal categories of member differentiated by the number of shares obtained under the share allocation formula.

(g) There is no constraint based on some common understanding of members, incapable of alteration, as would prevent a properly approved scheme of arrangement embracing the steps to demutualise.

(h) There is no basis for treating the constitution of Insurance as creating a trust of the residual assets of Insurance in favour of Association following its winding up. Nor is there any basis for preventing a subsequent change to that disposition of Insurance's residual assets on winding up as is now proposed.

(i) The qualification to act lawfully upon the proposed obligation on directors to implement the demutualisation resolution removes any legal difficulty on that score.

(j) There is no legal impediment to closing off membership of Association and Insurance for the purpose of limiting the schemes' perceived benefits to members prior to the cut-off date.

(k) Ordinarily, a draft information memorandum, when subject to material change, should not be released to the press until the meeting convening orders are made.

(l) There is no basis for the contention that Insurance or NIGL may not lawfully pay dividends out of unrealised gains by reason of them being unrealised, nor preventing such unrealised gains being combined with realised gains and any earned profits for the purpose of the profit calculation in the accounts. Indeed Insurance is obliged at law by accounting standard AASB 1023 to include unrealised gains under its profits, being a company carrying on general insurance activities. It follows that the proposal to list could not be said to a "fraudulent scheme" by reason of NIGL's supposed inability to obtain listing due to its supposed inability lawfully to pay dividends. Neither of those suppositions are made out.

(m) Recourse to a scheme of arrangement under s411 is not a privilege, but simply a statutory facility to bind members, once its requirements are satisfied. Those requirements are capable of being satisfied by the present proposals if duly passed and approved, as they constitute an arrangement between members and the relevant scheme company.

(n) Neither "mutuality principles", nor the constitution of Insurance nor the fact of there being accumulated profits derived from failure to pay rebates or carry out "mutuality pricing", constitute any legal impediment to approval of these Schemes with the associated demutualisation. Nor has it been in a number of other countries. But the prevalence of examples of demutualisation does not make it an inevitability in the present case; some mutuals continue to operate successfully whilst in other cases members have elected to change that status. It is primarily a matter for members, properly informed, to decide for themselves.

(o) The NIGL shares upon issue under the terms of the relevant resolutions will be "fully paid shares" with NIGL left as the sole shareholder of Insurance. No illegality attends that step, following the legal abolition of par value.

OVERALL CONCLUSION 196 On the material before me, none of the matters so far raised are legal impediments to Court approval of the scheme. Nonetheless, the Court's discretion to give or withhold approval remains unfettered for the approval stage under s411(6) of the Corporations Law. That approval may be given or withheld, or given on conditions. It will take account of what has since transpired, as well as any matters properly raised at the approval hearing. As regards the scheme proxy, the earlier provisional conclusion as to its use will need to be reviewed following the scheme meetings and in light of the voting at those meetings on the scheme and on the associated resolutions to be passed contemporaneously. The Court will need to be informed about the then status and timing of the demutualisation resolutions to follow. Also the applicants have a responsibility to place before the Court any other matter relevant to the exercise of the Court's discretion, whether as to matters noted in this judgment or otherwise.

appendix a - The Effect of the Conditions Subsequent

Each of the schemes provides that it will become effective on the "Effective Date", but only if the Effective Date occurs before 31 December 2000 (which is defined as the "End Date"). Under the Association schemes, the Effective Date is defined to be the later of the date of lodgement with ASIC of the orders approving the Association schemes and the first date on which all specified conditions precedent are satisfied. Similarly, under the Insurance schemes, the Effective Date is the later of the date of lodgement with ASIC of the orders approving the Insurance schemes and the first date on which all the specified conditions precedent to the Insurance schemes are satisfied.

The Association schemes and the Insurance schemes also contain a number of conditions described as "Conditions Subsequent". Under the Association schemes, those conditions are: (a) approval of the Insurance schemes by the Court; (b) the giving of consent by Association, as required by Insurance's constitution, to the abrogation and repeal of Association's current rights as a member of Insurance, including its right to determine the composition of the Insurance board and its right to any surplus on a winding up of Insurance; (c) passing the "Insurance Demutualisation Resolutions", whereby Insurance changes its type to a public company limited by shares and repeals its existing constitution; and (d) alteration by ASIC of the details of Insurance's registration to reflect its new type as a public company limited by shares.

The latter three conditions are the conditions subsequent under the Insurance schemes.

Under each of the schemes, if any of the conditions subsequent is not satisfied by 31 December 2000, the scheme terminates and it is provided that all entitlements and obligations arising under the scheme are extinguished, so that each member or class of member (as the case may be) is in the same position with respect to the subject matter of the scheme in which it would have been had the scheme not become effective: see Association document Part IV para 2.3, Part V para 3.3 and Part VI para 2.3; Insurance document Part IV para 3.3 and Part V para 3.3. An exception is that, if the Association Only Members become Insurance members by virtue of The Second Association Scheme becoming effective, (such membership ceasing automatically if the Second Association Scheme terminates), then the Association Only Members will continue to have a liability to contribute $1.00 each to the assets of Insurance if Insurance is wound up during the period of one year after their membership ceases: see clause 3.3 of Part V of the Association scheme document.

There are provisions in each of the schemes which ensure that none of the conditions precedent or conditions subsequent may be waived or otherwise dispensed with by any of the parties to the scheme.

Restoration of the status quo if the conditions subsequent are not satisfied

An important consideration in assessing the use of conditions subsequent in these schemes is that, with two exceptions, every change effected by the schemes at the Effective Date will be rendered nugatory if any of the conditions subsequent is not satisfied by 31 December 2000. Neither of the exceptions, which are considered below, is of any real significance or causes any material prejudice to members.

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.

The above analysis identifies the two exceptions to the outcome that changes effected by the schemes at the later Effective Date will be rendered nugatory if any of the conditions subsequent fails to occur. The first exception is the agencies created by the Second Association Scheme and both Insurance schemes. These agencies must of necessity be created so as to be absolute and effective before the totality of the conditions has been satisfied. This follows as a corollary of the role that the agencies play in events which constitute satisfaction of certain of the conditions.

In particular, all agencies created by the schemes must be effective and capable of operating before the subsequent general meeting of Insurance at which the Insurance Demutualisation Resolutions are to be considered. The agencies are employed to introduce the Association Only Members into Insurance, to effect proxy appointments for the subsequent general meeting of Insurance and, in due course, to agree to become a shareholder in NIGL in consequence of Insurance's becoming a wholly owned subsidiary of NIGL. To achieve their purposes, the agencies must be unconditional. The authority of the agent to perform the relevant act for the member must be unequivocally shown to the party concerned: s250B(1) of the Corporations Law .

The fact that the agencies may continue until 31 December 2000 notwithstanding the prior failure to satisfy a condition subsequent is of no real significance and does not work to the detriment of any members of either company. The restricted scope and terms of the agencies would not allow them to be used for any other purpose than for the implementation of the Proposal. If the Proposal is not proceeding due to the failure to satisfy a condition subsequent, then the agencies will not do any work. There is no occasion on which those agencies could be employed in extraneous transactions during the period up to 31 December 2000.

The second exception is the remote one year liability of Association Only Members to contribute $1.00 if Insurance is wound up. This has no real significance in the context of these schemes and is not a material consideration.

The purpose of the conditions subsequent: Division 9AA of the Income Tax Assessment Act

Division 9AA of the Income Tax Assessment Act was inserted in 1995 and applies to mutual insurance companies. In essence, if "demutualisation" is carried out in accordance with any of the seven methods specified in Division 9AA, then there are certain beneficial capital gains tax consequences. One important CGT consequence for members is that, in the case of a general insurance company, the acquisition cost of the shares issued (in this case, by NIGL) is based on the lesser of the net tangible asset value of the company and the value of the company based on the total first trading day price of all shares in the company.

The present case involves, in terms of Division 9AA, "demutualisation method 3", specified in s121AH. It is a requirement of this demutualisation method that the mutual insurance company issue shares to a holding company (in this case, NIGL) which in turn issues shares to each member of the "policy holder/member group". Division 9AA applies relevantly only if this criterion is satisfied.

The definition of "policy holder/member group" is found in s121AE(4) of Division 9AA. In general terms, the definition is limited to persons who are members of the mutual insurance company immediately before the demutualisation and persons who cease to be members before the demutualisation. In other words, in this case it will be limited to current and former members of Insurance.

The persons who are to receive shares in NIGL are not only the pre-existing members of Insurance, but also those pre-existing members of Association who are not also members of Insurance (i.e., the Association Only Members). It is therefore necessary that the latter group become members of Insurance immediately before the demutualisation of Insurance if Division 9AA of the Income Tax Assessment Act is to apply.

The expression "demutualisation" is not defined in Division 9AA. The term "demutualises" is defined in s121AE(1): "A mutual insurance company demutualises if it ceases to be a mutual insurance company: (a) in any case - other than by ceasing to be an insurance company; or (b) if it is a life insurance company - because the whole of its life insurance business is transferred to another company under a scheme confirmed by the Federal Court of Australia"

In s121AB(1) of Division 9AA, "mutual insurance company" is defined to mean an insurance company: (a) "whose profits are divisible only among its policy holders; or (b) that satisfies all of the following conditions: (i) it is limited by guarantee; (ii) it did not divide its profits among its members during the ten years ending on 9 May 1995; (iii) on a winding up, its profits are not divisible among its members". Insurance's constitution makes no provision for the distribution of profits to members and presently provides that all surplus assets on a winding up shall be paid to Association. Accordingly, the event which, in the present case, will mark "demutualisation" of Insurance is its change of type under Part 2B.7 of the Corporations Law .

Division 9AA does not specify whether the phrase "immediately before the demutualisation" in s121AE(4) should be construed narrowly so as to focus on the class of members existing at the moment just before the change of type of Insurance takes effect by ASIC changing the register, or whether it should be construed widely so as to include the beginning of the process by which the members' assent to the demutualisation is given. Although it is not free from doubt, there are some indications in Division 9AA that the latter interpretation might be correct. For example, the valuation date of Insurance for the purpose of ascribing a cost base to the shares in NIGL is set in s121AN by reference to the "demutualisation resolution day". This term is relevantly defined in s121AD(3) to mean the day on which the resolution to proceed with the demutualisation is passed.

For the avoidance of doubt, and in view of the importance to members of securing the benefits of Division 9AA, the NRMA Group has adopted the latter interpretation in its discussions with the Commissioner of Taxation in relation to the tax treatment to be afforded to members of the two companies if the demutualisation of Insurance proceeds. Accordingly, the NRMA Group's discussions with the Commissioner have proceeded on the basis that the Association only members must become members of Insurance before the commencement of the process by which Insurance is demutualised.

Because the Proposal involved the Association Only Members becoming members of Insurance prior to both the Court's approval of the Insurance schemes and the passing of the resolution to change Insurance's company type, it was, according to the NRMA, demonstrated to the satisfaction of the Commissioner following months of discussions that no tax consequences accrued to Association Only Members as a result of their becoming members of Insurance. The Commissioner was satisfied that no market value should be attributed to the temporary membership of Insurance acquired by the Association Only Members because of the proposed order of the schemes. The Commissioner has provided his opinion that the requirements of Division 9AA will be satisfied if the Proposal is implemented in its present form.

It is for this reason that the arrangements adopt the use of conditions subsequent and involve the following sequence of events: (a) admit Association Only Members as members of Insurance; (b) convene Insurance general meeting to consider change of type special resolution; (c) pass change of type special resolution, including repealing Insurance's constitution; (d) registration by ASIC of Insurance's change of type, whereupon NIGL becomes the holder of all of the shares in Insurance and shares in NIGL are issued to the former members of Insurance.

The use of conditions subsequent in the NRMA's schemes of arrangement is permissible

The arrangements are structured so that, after they are effective, subsequent events specified in the schemes may then intervene to produce the result that the schemes are terminated. In the context of the NRMA schemes, the use of the conditions subsequent in this fashion is permissible.

A scheme of arrangement, once approved by the Court, is no more or less than a set of stipulations given binding effect by the statute as a result of the combination of the acts of the members and the Court in terms of the statutory provisions requiring their respective approvals: Kempe v Ambassador Insurance Co [1998] 1 WLR 271 at 276.

One example of a scheme of arrangement which contained conditions subsequent, the non-satisfaction of which would cause the scheme to terminate was Re Advance Bank Australia Limited (No 2) (1997) 22 ACSR 513 (Santow J). In that case, a merger between Advance Bank and St George Bank was proposed to be achieved through a scheme of arrangement, followed by an associated selective reduction of capital under former s195 of the Corporations Law . In that case, which also involved the creation of an agency to appoint proxies, the proxy took effect on and from the "Scheme Effective Date" and was the only provision of the scheme to so do. The remaining provisions of the scheme, dealing with payments to each Advance ordinary shareholder in relation to the selective reduction of capital, occurred only on the later "Merger Implementation Date" and then only if the conditions for the occurrence of that date were satisfied. The Merger Implementation Date presupposed that the Scheme Effective Date had already occurred. If the Merger Implementation Date had not occurred by the "End Date", the scheme would lapse and be of no further force and effect. The definition of Merger Implementation Date required that the selective reduction of capital and the relevant amendments to the articles of association of Advance Bank had occurred and taken effect prior to that date. In other words, the structure of the Advance Bank scheme was relevantly identical to that in the present case, with the conditions subsequent being implemented through the definition of the "Merger Implementation Date" rather than being separately identified as such, as is the case in the Proposal.

Similarly, the scheme of arrangement involving AGL Sydney Limited, reported as Re AGL Sydney Ltd (1994) 13 ACSR 597 (Young J), became effective but also provided for various steps to be taken subject to further conditions being satisfied. The effect of the scheme provisions was to provide various conditions subsequent which might not be satisfied, for instance, the adoption of certain financial accounts and the consent of the Commissioner of Taxation to the dissolution of the companies transferring their assets and liabilities to AGL Sydney Limited. There is no suggestion in the judgment of Young J that his Honour considered there was any conceptual difficulty with the use of such conditions subsequent.

It is not uncommon for a scheme to carry within itself the means of its own termination. In Re SDR Apparel Pty Ltd and the Companies Act (1977) 3 ACLR 162, Needham J said (at 163): "The Court, so far as I am aware, and so far as the solicitor for the scheme trustee is aware, has no power to terminate a scheme of arrangement. The power to terminate this scheme resides in the terms of the scheme itself and the persons having the power to do that are the creditors in a meeting convened by the scheme trustee". Needham J did not suggest that this was in any way objectionable.

An analogous approach is found in Re Neman Pastoral Co (No 2) Pty Ltd (1981) 5 ACLR 510, where, by its terms, a scheme was to expire on the stated date unless the meeting of creditors had set some later date. Again, Needham J did not suggest that this was open to objection.

The use of conditions subsequent to bring about termination of a scheme of arrangement needs to be distinguished from a scheme containing machinery which could lead to variation of its terms. Courts will generally not approve schemes which carry within themselves machinery for variation of their own terms: see, for example, Re R M Eastmond Pty Ltd and the Companies Act (1972) 4 ACLR 801; Re Telford Inns Pty Ltd (1985) 3 ACLC 660; Re Leamon Consolidated (Vic) Pty Ltd (1985) 10 ACLR 263. The reason for that is stated in Leamon (at 265): "In my opinion, a scheme … ought not to be approved unless the creditors and the court can see very clearly at the time the scheme is proposed what it is that they are being asked to accept, and, in the case of the court, what it is that it is being asked to approve".

Clarity and certainty are thus the touchstones. Provided that clarity and certainty are present on the face of the scheme and no new decision making process intrudes after court approval, it does not matter that different results may emerge in different (but clearly identified) eventualities. A key question is whether the scheme is, according to its own terms, self-executing in the sense that certain results follow in certain defined events.

The use of conditions subsequent in a scheme of arrangement also needs to be distinguished from a conditional reduction of capital under the former reduction of capital regime. There was authority for the proposition that an order confirming a reduction could not be made when the reduction was subject to some contingency: see, for example, Re Advance Bank Australia Ltd (1996) 22 ACSR 476 and the authorities there cited. However, there is also authority for the proposition that the same problem does not arise where the reconstruction is carried out by scheme of arrangement: Re AGL Sydney Ltd at 599.

A reason for the distinction is that, unlike a capital reduction, a scheme does not have an absolute effect: capital is either reduced in the way and to the extent specified in the resolutions for the court's approval, or it is not. Section 411, on the other hand, gives binding effect to a set of provisions which then operate according to their own terms, including any terms which dictate future steps and provide for termination in clearly defined events before the whole of the contemplated results has been achieved. Section 411(6) expressly contemplates the prospect of conditional schemes of arrangement by permitting the Court to approve an arrangement subject to conditions.

The nature and scope of the termination provisions and the events triggering them are circumscribed only by the requirements of clarity, certainty and fairness. These requirements are essential to the principle that members invited to vote in relation to the scheme (and the court invited to approve it) must be fully aware how members' positions will be affected in defined eventualities. A scheme of this kind is not objectionable just because some of the consequences it has produced remain after its termination - provided, of course, that this possibility has been made clear and is not of such a nature as to call in question the scheme's fairness.

In this case the relevant requirements are satisfied. The fairness of the conditions subsequent is emphasised by the fact that the status quo is substantially restored if the conditions subsequent are not fulfilled and by the fact that no prejudice to members is demonstrated as a result of those conditions being imposed. Indeed, those conditions are only imposed to ensure that members obtain the beneficial tax treatment allowed by Division 9AA of the Income Tax Assessment Act .

In the Second Association Scheme it is proposed that the Association Only Members will appoint an agent (ie. Association). In the First Insurance Scheme it is proposed that the Insurance Members will appoint an agent (ie. Insurance). In the Second Insurance Scheme, it is proposed that Association will appoint an agent (ie. Insurance). In each case, the agent is appointed to do a number of things, including: (a) in the case of the Second Association Scheme, to introduce the Association Only Members into Insurance, (b) to nominate one address for notice of a meeting, and (c) to appoint a proxy to attend and vote on the relevant member's behalf at the meeting of all Insurance members which is proposed to be called for the purposes of the demutualisation of Insurance under Part 2B.7 of the Corporations Law and the repeal of Insurance's constitution (this resulting in the application to it of the replaceable rules in accordance with Chapter 2B.4 of the Corporations Law ).

It was submitted on behalf of the NRMA that such an agency/proxy mechanism in respect of the Second Association Scheme and the First Insurance Scheme was appropriate and not unfair or otherwise unlawful in the circumstances of the present case for a number of reasons. First, it avoids the need for separate notices of meeting to be sent out to all of the individual members of Insurance for the purpose of considering the Insurance demutualisation resolution and the resolution repealing Insurance's constitution. In the case of the NRMA this is a very large and expensive task because the notices would otherwise need to be sent to some 1.8 million members of Insurance and the individual proxies sent back. Secondly, it was submitted that no injustice or unfairness could result from the agency/proxy mechanism because the practical effect of the Proposal reflected in the schemes is to require at least a 75% majority of the members of Association and Insurance to approve the schemes. This is because, despite the fact that only a 50% voting majority is required by s411(4) of the Corporations Law (due to the fact that neither Association nor Insurance has a share capital: s411(4)(a)(ii)(A)), nevertheless the proposed amendments to their respective constitutions which are integral parts of the Proposal and the schemes require 75% majority votes of the members of each company. Thirdly, the demutualisation of Insurance and the associated repeal of Insurance's constitution is very likely to be supported by the same proportion of members as have supported the schemes. Fourthly, the mechanism contains appropriate protection to members by enabling them to revoke the proxy in writing and appoint another proxy, or to attend in person and vote at the meeting.

The law relating to company meetings (including the law relating to the appointment of proxies for company meetings) has changed since the decision in Re Advance Bank Australia Ltd (No.2) . These matters are now regulated by the provisions of Part 2G.2 of the Corporations Law which took effect on 1 July 1998. The effect of these provisions, so far as relevant to the present case, is as follows.

Each relevant meeting (whether a scheme meeting or a general meeting) will be a "meeting of the company's members" within Division 6 of Part 2G.2 of the Corporations Law . As a result, proxy appointment and related matters are governed by the provisions in that Division, to the exclusion of the companies' constitutions, except to the extent that the latter may operate in ways allowed by the combined operation of Parts 2B.4 and 2G.2 of the Corporations Law .

For present purposes, the key provisions in Part 2G.2 Division 6 are ss250A(1) and 250B(1) which identify the circumstances in which a proxy appointment is "valid" and "effective" respectively. A proxy is "valid" if s250A(1) is satisfied. It is "effective" if s250B(1) is satisfied. Where a statutory right to appoint a proxy is created, a company's constitution cannot qualify or detract from the statutory right, except, of course, as the statute itself contemplates: In Re Dorman, Long & Co Ltd [1934] Ch 635; Re Australian Consolidated Press Ltd (1994) 14 ACLR 639. Examples of permitted qualifications by a company's constitution include ss249Y(2), 249Y(3), 250A(2) and 250B(5) of the Corporations Law . To the extent that a constitutional provision otherwise purports to qualify Part 2G.2, it is ineffective: cfs. 135(2) Corporations Law .

Section 249X of the Corporations Law creates a right for a member of a company to attend and vote by proxy. This rule is mandatory for all public companies (like Association and Insurance) and therefore cannot be affected by their constitutions.

The only provision of the Corporations Law dealing explicitly with the execution of a proxy appointment is s250A(1) which declares an appointment to be "valid" if, inter alia, "it is signed by the member". There is no requirement that the signing be done "personally" (cf. Motel Marine Pty Ltd v IAC (Finance) Pty Ltd (1964) 110 CLR 9) or "under his own hand" (cf. Bray v Commissioner of Taxation (1968) 117 CLR 349). Accordingly, the prima facie rule stated by Hope JA in McRae v Coulton (1986) 7 NSWLR 644 at 663 applies and the long established common law principle qui facit per alium facit per se operates to allow signing by an agent.

Part 2G.2 Division 6 in fact recognises the prima facie rule: see the reference in s250B(1)(b) to an appointment "signed by the appointor's attorney". Butterworths Australian Legal Dictionary gives as the primary meaning of "attorney": "a person appointed by another to represent or act in place of that person". Black's Law Dictionary is to the same effect: "in the most general sense this term denotes an agent or substitute…". In other words, "attorney" is a synonym for "agent".

The combined effect of ss250A(1) and 250B(1)(b) of the Corporations Law is thus clear recognition that a proxy appointment may be signed for the appointor by an agent invested by some legally effective means with the necessary authority. Re Advance Bank Australia Ltd (No.2) at 535-538, confirms the capacity of s411 of the Corporations Law to create such an authority within and by virtue of a scheme of arrangement.

For a proxy appointment signed by an agent so invested with the requisite authority to be "effective", it is necessary for the company to receive before the ss250B(1) and (5) deadline not only the appointment document but also the "documents" that are "the authority under which the appointment was signed or a certified copy of the authority": s250B(1)(b).

The relevant authority will arise by operation of s411: In Re Garner's Motors Ltd [1937] Ch 594. But it is the order of the court approving the scheme which, upon lodgment under s411(10), activates the section and is the means whereby the binding force of the scheme (and thereby the agency) as between the company and its members arises: Sun Alliance Insurance Ltd v Inland Revenue Commissioners [1972] Ch 133.

Section 250B(1)(b) will accordingly be satisfied when Insurance has received: (a) a copy of the office copy of each relevant order lodged with ASIC under s411(10) (ie. the order approving the scheme which is itself the source of the agency and such other s411 orders as are involved in conditions precedent or subsequent contained in that scheme), being a copy given and certified by ASIC under s1274(2)(c); and (b) a copy of each notice of resolution lodged with ASIC in respect of resolutions involved in scheme conditions, being again a copy given and certified by ASIC under s1274(2)(c).

It follows that the proxy so obtained will be legally effective.

APPENDIX C - UNITED STATES AND SOUTH AFRICAN EXPERIENCE WITH DEMUTUALISATION

The characteristics of mutual insurance companies, including their ability to make profits, the distribution of those profits, and the rights of members is determined variously by applicable statutes including state insurance acts and federal taxation acts, the constitution of the company and the terms of the insurance policies.

(a) The American text book, "Couch on Insurance Law" 2nd ed, 1959, provides the following description of mutual companies, as they are understood in the United States: "The formation of companies on the mutual plan appears to have begun in England in 1686, and in the United States in 1752. The history of fraternal societies with benefit features seems to have started in the United States at a period beginning within the last half of the nineteenth century with the earliest benefit assurance case, of date 1871, and the next decision of date 1875, so that while the idea of mutual protection as a principle of insurance is of very ancient origin, yet it has not approximated to true insurance until within a comparatively short time. Mutual insurance, as its name implies, exists where several persons have joined together for their united protection, each member contributing to a fund for the payment of the losses and expenses, the benefit or indemnity to accrue to any individual member, depending upon the existence of other persons holding similar contracts, the relationship between the members being a dual one, in that each member is in a sense both an insured and an insurer. Mutual insurance companies are those in which the members mutually contribute to the payment of losses and expenses, and in which the indemnity or benefit to accrue is conditioned upon persons holding similar contracts; that is, a mutual company is one in which the members constitute both insurer and insured. Mutual insurance is that form of insurance whereby each of the insureds becomes one of the insurers, thereby becoming interested in the profits and liable for the losses. In consequence, the policyholders are, so far as rights and remedies are concerned, stockholders, the same as stockholders in a stock corporation." (at pp 166-167)

Couch further says that: "Today it is questionable whether there is any significant distinction between mutual companies and stock companies beyond the element of the ownership of the stock." (at p 168)

(b) The characterisation of an insurance company as a mutual is often an issue for federal taxation purposes, as a different tax regime applied from that relevant to stock companies. See National Chiropractic Insurance Co v United States , 494 F2d 332, 333 (1974), Court of Appeals, Eight Circuit: "The characteristics of a mutual insurance company for tax purposes are ... (1) common equitable ownership of the assets by members, (2) the right of policyholders to be members and the exclusion of others and to choose management, (3) the sole business purpose of supplying insurance at cost, and (4) the right of members to the return of premiums which are in excess of the amount needed to cover losses and expenses." (per Stephenson CJ)

(a) On the question of whether a mutual company is entitled to carry on its operations with a view to making a profit, United States authority suggests that there is no prohibition on profit-making occurring.

(b) In Mygatt v New York Protection Insurance Company , 21 NY 52-66, it was said that: "There is nothing to prevent a mutual company from carrying on its operations with a view to profits and dividends."

Mygatt was referred to by the Supreme Court of Wisconsin in Huber v Martin 105 NW 1031 (1906, Wisc), at 1037: "No reason is perceived why such an insurance company may not make rates with a view to the probable accumulation of a surplus and the distribution of so much therefore, from time to time, as may appear from experience not to be needed."

4. Whether the members have an interest in the property of a mutual company

(a) There is United States authority for the proposition that, whilst the title to the property of the mutual insurance corporation is in the company, the equitable interests in that property are vested in the members in the same manner as in the case of a stock corporation ( Huber v Martin 105 NW 1031 (1906, Wisc)). It should be noted that Huber involved a situation where all policyholders were members of the mutual company.

(b) However, in Greeff v Equitable Life Assurance Society 54 NE 712 (N.Y 1899) (referred to in Birne v Public Service Mutual Casualty Company 77 NYS 2d 446), the court said that: "It is manifest that by the terms of the plaintiff's policy the only right he acquired was to share in an equitable distribution of the accumulated surplus. Until the distribution was made by the officers or managers of the defendant, the plaintiff had no such title to any part of the surplus as would enable him to maintain an action at law for its recovery . We think the principles which control the disposition of the surplus earnings of a stock corporation are applicable here. In those cases it has often been held that until dividends have been declared a stockholder has no right of action at law to recover any part of the fund applicable to that purpose, and that when directors have exercised their discretion in regard thereto the courts will not interfere unless there is bad faith, or wilful neglect, or abuse of such discretion." (at 715) (our emphasis added)

(c) See also Pierce Insurance Co. v Maloney 269 P2d 57 (Cal. App., 1954) where the court said: "'The interest of policyholders in a mutual company are twofold, since they are both insurer and insured; in respect to the former they are entitled to share in the losses and profits of the business on the basis of a partnership, except so far as the charter or policy contract provides otherwise. In such dual capacity, their rights are fixed partly by the policy contract, partly by the by-laws of the company, and partly by the relevant statutes.' 18 Appleman Insurance Law and Practice, p 97, sec. 10046. An examination of the policy issued by the original company discloses that the insurer agreed to pay its face upon contingencies mentioned: for instance, death, if the policy was then in full force and effect. As a condition to its remaining in force, the policy required the policyholder to pay the stipulated premiums and in addition any assessment levied by the company to balance receipts with necessary expenditures. There is no provision in the policy giving the policyholder any right to share in the assets: reserves, profits or surplus. Neither is there any provision requiring the company to make assessments against its policyholders. It follows, that assets of the type just mentioned were then necessarily owned by the company as an entity, before its transformation." (at 62) [emphasis added]

(d) Pierce v Maloney concerned a situation where a mutual company was transforming into a stock company. It was held that where the policies of a mutual life and benefit association before its transformation into a capital stock company made no provision for giving the policyholders any right to share in the assets, either reserves, profits or surplus, such assets were necessarily owned by the mutual company as an entity, and upon completeness of transformation, the former policyholders not being entitled to preferential or separate treatment were not entitled to share in the profits of the company, that right being reserved to the stockholders who assumed the burdens and liabilities (at 63).

5. Whether mutual companies are required to return a surplus to members

(a) There are some suggestions in United States case law that members of mutual companies are entitled to a return of surplus monies earned by the mutual company. For instance, in Fidelity & Casualty Co. v Metropolitan Life Insurance Company 42 Misc 2d 616, 248 NYS 2d 559 (NY Sup. Ct. 1963) the court stated that: "Since a mutual company is operated wholly for the benefit of its policy holders, it functions to provide insurance at cost rather than to amass profits in the ordinary business sense. While the initial premium paid by the policy holder usually represents a somewhat inflated estimate of the cost of the policy, at the end of the year when such cost is actually ascertained, the company is required to return to its policy holders the excess premium, that is the amount in excess of the company's actual cost. Such return is accomplished by means of a distribution of the "divisible surplus" in accordance with the mandate of [New York Insurance Law]." (at 566)

(b) However, the generally accepted position in the United States appears to be that the question of the distribution of a surplus, and how much should be distributed, is a decision for the directors of the mutual company, with a possible limitation in the case of an unreasonably large surplus.

(c) "It is likewise no answer to say, it is no part of the business of a purely mutual insurance company to distribute its profits among the members, unless that is provided for by the contract or the organic act. Unless prohibited from doing so such a corporation, in the event of its accumulating a needless surplus may distribute the same to its members, Mygatt v New York Protection Insurance Company , 21 NY 52-65, and may make such distribution at such times and to such extent as the governing authority may determine . Equitable Life Assurance Society of the United States v Host (Wis) 102 NW 579. Indeed no reason is perceived why such an insurance company may not make rates with a view to the probable accumulation of a surplus and the distribution of so much thereof, from time to time, as may appear from experience not to be needed. Moreover, it may be that such distribution would be due to members and enforceable in case of the surplus being unreasonably large, as there is reason to believe it was in this case." ( Huber v Martin , at 1037) [emphasis added]

(d) Huber v. Martin also discussed the position of persons who cease to be members of the mutual insurer. At 1039-1040: "Every policy-holder knows, or ought to know, that he will remain a member so long as he remains a policy-holder and no longer.. He knows, or ought to know, that it is entirely optional with him whether to preserve his interest in the company and thereby protect his contingent rights, or to allow them to lapse by ceasing to be a member. He also knows, or ought to know, that in case of his interest so lapsing it will inure to the benefit of those associated with him who choose to retain their membership and those who come after him, the doors of the company swinging freely to let in new members and to let old ones out according to choice, those at any moment to time being then and then only the owners of the company to all intents and purposes the same as members of any other corporation."

(e) "........ Since the contract gives the company the right to determine the amount of divisible earnings and their apportionment among the policy holders, courts will not interfere unless there is bad faith, wilful neglect, or abuse of discretion." ( Black v Pacific Mutual Life Insurance Co 31F Supp. 805 at 808 (D.C Ark, 1940)

In this case, the policy provided that policies should participate in future surplus earnings and "the proportion of the divisible surplus accruing on this policy shall be determined by the company" (at 806).

(f) "Mason St. 1927 s3389 which went into effect January 1, 1908, provides in substance that every life insurance company doing business in this state in which the policyholders are entitled to share in the profits or surplus shall make an annual apportionment and accounting of divisible surplus to each policyholder beginning not later than the end of the third policy year, and each such policyholder shall be entitled to be credited with or paid such portion of the entire divisible surplus as has been contributed thereto by his policy. This section establishes the contribution method as a basis for the apportionment of dividends. Properly construed, we regard it as vesting in the directors of an insurance company a reasonable discretion as to how much of the earnings and profits shall be allocated divisible surplus." ( Lommen v Modern Life Insurance Co , 4 NW 2d 639 at 643 (Min, 1942) [emphasis added]

This action related to a claim by policyholders for a return of funds. The relevant policies provided "This Policy shall participate from the date of issue in all profits accruing to policies of this class...the Company shall annually ascertain the divisible profits which have accrued under this Policy..." (at 641)

(g) "The essence of mutuality is the capability of furnishing insurance at cost. Thompson v White River Burial Association (CA 8, 1950), 178 F. 2d 954, 957. It is enough, however, that the power exists. When there is a surplus of premium receipts over the cost of insurance the management has discretion whether to retain the surplus or pay dividends." (National Chiropractic Insurance Co v United States 365F. Supp. 971 at 973, affirmed in 494 F. 2d 332 (S.D Iowa 1973) [emphasis added].

Note, as mentioned above, this case related to characterisation for income tax purposes (26 U.S.C.A (I.R.C. 1954 s s821,831)).

(h) See also the comments of Schmuck J in Lipsman v Reich 16 N.Y.S 2d 892 (S.C, 1939), at 896: "It cannot be said that the matter of paying a dividend is solely within the unreviewable discretion of the directors. While the stability and solvency of the mutual company is the prime consideration, the principle of mutuality would be a mere sham, if the directors could, under all circumstances, reserve within the treasury all the accumulation of excess charges...In case of mutual life insurance companies, as has been said, the payment of the so-called dividend is made mandatory and not left to the discretion of the directors. In the case of casualty companies, the situation before noted is less fixed and both the discretion of the directors and the examination and approval of the Superintendent of Insurance are necessary for the safety of the company."

These comments would result from the particular New York legislation involved (Insurance Law s 323) and the terms of the policy itself which provided "The Assured shall be entitled to an equitable participation in the funds of the Company in excess of the amounts required to pay expenses.."

(a) Couch states (at page 175): "Statutes frequently authorize mutual companies to change to joint stock companies, upon giving notice and properly protecting the interests of existing members. The procedures prescribed by such statutes must be followed. A statute authorizing a change from the mutual to the stock plan may, however, be of no effect because it is unconstitutional. The statute must not impact the obligations of contracts between the mutual company or the association and its members, or deprive them of their property without due process of law."

(b) Huber v Martin was an action relating to the allocation of surplus profits on the reorganisation of a mutual insurer to a stock company pursuant to state legislation. It was held that because the Act did not properly take account of the property interests of policyholders prior to reorganisation, it was unconstitutional (at 1042) as a deprivation of property without due process of law.

(c) Pierce Insurance Co v Maloney similarly involved the transformation of a mutual life insurance company into a capital stock company as authorised by statute (Insurance Code, sections 10950-10953.2).

(d) Richard Clemens, of Sidley & Austin has written on the various forms of state legislation available in the United States under which mutual insurers may demutualise "A New Look at Demutualization of Mutual Insurers" (www.insurance-finance.com/doc2.html) and discussed some of the major demutualisations currently under way. Of interest, he notes that the Illinois statute contains a provision which prohibits any one person from holding more than 5% of the stock of the converted company for 5 years after conversion, without consent of the Illinois Director of Insurance.

(e) Moody's Investor's Service produced a report in May 1998 ("March of the Mutuals- A Rapidly Evolving World") commenting, inter alia, on increased demutualisation activity in the United States. This report notes: "While infrequently occurring before the 1990s, current demutualizations in the U.S. generally benefit from clear legislative authority, regulatory guidance and precedents on which to base plans."

( http://www.moodys.com/insuranc.nsf/index/57FE3073874E66EA8525675F005F4E53?OpenDocument ).

1. Background South Africa has seen two high profile demutualisations in recent years. In both the Sanlam and Old Mutual cases, the High Court of South Africa in Capetown confirmed the demutualisation schemes. Demutualisation occurred under the Insurance Act, No. 27 of 1943 (as amended). Procedurally, in South Africa, the court's confirmation is sought after the members of the company have voted on the conversion from a company without share capital to a public company with share capital. According to the submissions in the Sanlam matter, prior to the amendment of the Insurance Act in 1998, it was not possible for a domestic mutual insurer to convert to a public company with a share capital.

2. Sanlam This company was incorporated under the South African National Life Assurance Company Incorporation (Private) Act , No. 3 of 1954. The conversion was approved by the Cape High Court in October 1998 following a vote of members which was 99.5% in favour of the proposal. No judgment was delivered in this case. According to the 'Heads of Argument' filed on behalf of the Applicant company, a membership cut-off was applied to prevent abuse by persons applying for policies solely to get "free" shares, and to enable the company to provide eligible policyholders (holding some 4.4 million policies) with personalised information on their eligibility for shares. The cases referred to in this submission were: (a) Ex parte Liberty Life Association of Africa 1976 (1)SA 58 (W) (b) Re Hill Samuel Life Assurance Ltd [1998] 3 All ER 176 (Ch) (c) Re London Life Association Limited (21 February 1989, unreported)

3. Old Mutual Application was made to the High Court of South Africa under s25 of the Insurance Act . No objectors appeared in person, but two filed written objections with the court, and a formal judgment was handed down ( Re The South African Mutual Life Assurance Society , unreported, per Comrie J, Capetown High Court, 29 March 1999). There was no discussion of any general mutuality principle as a legal barrier to demutualisation. It was argued by one of the objectors that the company had not been adequately distributing surplus to policy holders. Comrie J dismissed this objection stating: "... the resultant increases in capital reserves have been disclosed in the Society's annual published financial statements. The increased capital has enabled more free shares to be allocated to policyholders so that, as shareholders, they will participate directly in the Society's present wellbeing and, if they retain their shares, in the future fortunes of the life of assurance companies."(at 19)

The court also stated that, despite an objection that insufficient disclosure of alternatives had been given, adequate information had been provided to policyholders, more detailed information was available to those who wanted it, and sufficient time (in this case at least 5 weeks) had been given to policyholders to make up their minds.

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