Sentry Life Assurance Ltd v Life Insurance Commissioner [1983] FCA 230

Federal Court of Australia|1983-07-01

2 4 Life Insurance ~- Life insurance company - Stautory funds - Surplus - Participating and non-participating policies - Contributions to fund of shareholders' funds - Distribution of surplus to shareholders - Surplus derived from participating policies - Meaning ~ Calculation - Real source of surplus - Proper bases of accounts.

Sentry Life Assurance Limited v. Life Insurance Commissioner No. G128 of 1982

IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) ) )

Orders 1 and 2 made by the Administrative Appeals Tribunal on 21 June, 1982 in proceedings N.81/60 and N.81/175 be set aside.

The decisions of the Life Insurance Commissioner that

the abstracts of the actuary lodged by the applicant with

the respondent for the 1979 and 1980 years are rejected, be

applicant referred to 1n order 2 of the Administrative Appeals

The said proceedings N.81/60 and N.81/175 be remitted to the Administrative Appeals Tribunal to be heard and decided again, with further evidence if necessary.

Publication or disclosure to the public of this judg- ment and publication or disclosure to the public of any part of the reasons for this judgment insofar as the reasons may tend to identify the applicant or disclose its financial or other circumstances 1s prohibited up to and including

twenty four hours' notice for any var1ation of order 7 hereof.

decision of the Administrative Appeals Tribunal brought

pursuant to s.44(1) of the Alministrative Appeals Tribunal

Act, 1975. The decision of the Tribunal was made in an

application to review a decision of the Life Insurance Commissioner ("the Commissioner") 1n an application made under s.138(8)

The review and this appeal involve the construction

and operation of s.50(3) of the Act. That provision inhibits,

to some degree, the powers of a life insurance company to deal with surplus funds in one of its statutory funds. It

is convenient to refer, at the outset, to the relevant pro- visions of the statute before going to the facts of the case. In doing this, we have adopted, substantially, the analysis

Section 37 of the Act provides that a company shall, at the date on which it commences to carry on life insurance business in Australia, establish and maintain a statutory fund in respect of the life insurance business carried on by it. Section 37(2) provides that a company may establish and maintain a separate statutory fund in respect of any class or classes of its life insurance business. A class of life in- surance. business is defined in s.4(3) and (4) of the Act. In the absence of a direction from the Commissioner, and there was none in this case, a class of life insurance business is life ansurance business (other than superannuation business) under ordinary policies, life insurance business (other than superannuation business) under industrial policies and super- annuation business. Section 37(2) further provides that, with the consent of the Commissioner, a company may establish and maintain a separate statutory fund in respect of a part

of any class or classes of its life insurance business.

In the present case, the applicant first established a single statutory fund in respect of both its ordinary and superannuation business but subsequently created one fund for

1ts ordinary business and another for its superannuation business.

-3- The funds covered both participating and non-participating policies. Wath the consent of the Commissioner, the company could have established separate statutory funds with respect

to its participating policies and other statutory funds with respect to its non-participating policies but it did not do so. Apparentiy, it is not the practice of insurance companies to do

The essential difference between a "participating" policy and a "non-participating" policy is that, with the former, an additional premium is charged and, in return for that additional premium, the policyholder is entitled to participate in the pro- fits of the life insurance business. Participation in profits takes the form of periodic additions to the sum insured under

the policy. Once granted, these additions are guaranteed.

Pursuant to s.38, the assets of each statutory fund are to be kept distinct and separate from all other assets of the company and the income arising from the investment of the assets of the fund are to be carried to that fund. All amounts received in respect of the business to which the statutory fund relates

are to be carried to and become, assets of the fund.

The Act restricts the class of creditors for which moneys, once carried to a statutory fund, are available.

"38 (2) Subject to this Act, the assets of a stat- utory fund shail not, so long as the com- pany carries on the class or classes of life insurance business in respect of which the fund was established, be available to meet any liabilities or expenses of the company other than -

that class or those classes of life insurance business; and

(b) liabilities charged on those assets or any of them immediately prior to the commencement of this Act, and shall not otherwise be directly or indirectly applied for any purpose other

than the purposes of that class or those classes of life insurance business."

Sections 40 and 40A provide for the transfer of the assets of an old fund to a new fund which has been established. Section 50(1) otherwise restricts the company in its dealings with the

assets of a statutory fund by providing as follows:

(a) pay, apply or allocate any part of the assets of a statutory fund -

(i) as dividends or otherwise as profits to shareholders; or

(b) transfer any part of the assets of a statutory fund to another statutory fund,

except in accordance with this section or sections 40 or 40A,. "

In the present case, neither s.40 nor s.40A apply. By

s.50(2) the company may deal with surplus funds as follows:

"Tf, as a result of the latest valuation in respect of a company which 1s either -

(a) a valuation made in pursuance of sub-section 48(1); or

(b) a valuation (not being a valuation in pur- suance of that sub-section) made in the course of an investigation into the

financial condition of the company, being a valuation -

(ii) in respect of which the provisions of sub-sections 48(2), (3) and (4) and section 49 have been complied with,

the valuation balance-sheet or valuation balance- sheets in respect of the life insurance business to which a statutory fund relates discloses or disclose that the balance of the revenue account or, if there is more than one revenue account

in respect of that business, the sum of the balances of the revenue accounts, is greater

than the amount of the net liabilities of the company in respect of that business, the company may, with the approval of an actuary and subject to sub-section (3) of this section, pay, allocate or transfer the surplus or a part of it in any manner consistent with the provisions of the instruments constituting the company and the articles of association or other rules of the company."

In the present case, it is common ground that a relevant surplus existed for the purposes of s.50(2): the question for decision is whether the proposed dealing offends s.50(3). Under that provision, restrictions are placed upon the powers of the

company to deal with the relevant surplus as follows:

"(3) The sum of the amount paid or allocated to or for the benefit of the shareholders of the company and the amount transferred to another statutory fund under sub-section (2) in respect of that part of the surplus which is derived from participating policies registered in Australia shall not exceed one-quarter of the amount paid or allocated to or for the benefit of the owners of those policies."

By s.50(4), where there were included as a liability of a company, in the latest valuation made in respect of the

company (being a valuation referred to in paragraph (2) (a) or

(b), bonuses which were attached to policies at the date of

commencement of the Act or became attached to policies as a

result of an allocation of surplus made in pursuance of s.50,

the company may, without regard to the conditions and limit-

ations contained in ss.(2) and (3), pay or apply, in respect

of those bonuses, moneys forming part of the assets of the

statutory fund or part of a statutory fund which relates to

Section 69 deals with the position of a statutory fund

of a statutory fund of the company shall be ascertained separately from the value of any other liabilities or from the value of any other assets of the company, and no assets of the statutory fund shall be applied to the discharge of any liabilities other than those in res-

pect of that statutory fund except in so far as those assets exceed the liabilities of that statutory fund.

In the winding~up of a company, if, when the liabilities and assets of any statutory fund of the company have been ascertained, there 1s found to be a surplus of those assets over those liabilities, there shall be added to the liabilities of that statutory fund an amount equal to that proportion of the surplus so found as is equivalent to the proportion, if any, of the profits in the class or classes of life insurance business to which the statutory fund relates, allocated to shareholders and policy owners, which was allocated to policy owners during the ten years immediately preceding the commencement of the winding-up, and the assets of that statutory fund shall be deemed to exceed the liabilities of that statutory fund only in so far as those assets exceed those liabilities after that addition:

be inequitable that the amount specified should be added to the liabilities of any statutory fund, the amount to be added shall be such amount as the Court directs."

Thus, when funds have become part of a statutory fund, the extent to which payments thereout may be made to or for the benefit of shareholders is, prior to a winding~up and apart from transfer to another fund pursuant to s.40 or s.40A, limited to the circumstances provided for by s.50(2) and (3) and, in

the case of a winding-up, to the circumstances specified in s.69.

Section 41 provides that a company shall keep separate accounts of its receipts and payments in 'respect of each class of life insurance business. Section 44 provides, inter alia, for a revenue account in accordance with Form A in respect of each class of life insurance business and a balance sheet in

accordance with Form D. Those forms appear in the First Schedule.

Form A is a revenue account to be kept in respect of a class of life insurance business. With respect to that class of business, the revenue account is to set out the relevant particulars for the year. The credits include the balance of accounts at the beginning of the year, the premiums received

during the year, investment income, appreciation of assets and

"Pransfers from Reserves (to be specified)". The expenditure

side of the account provides for amounts paid under the policies, including bonuses paid in cash and outgoings including commissions, salaries, travelling expenses, contribution to staff superannuation fund or scheme, directors' fees, and the like. The expenditures specified include "Shareholders' Dividends", "Transfers to

Profit and Loss" and also "Transfers to Reserves (to be

Form D, the balance sheet, includes, amongst its items, the balances of revenue accounts and reserve accounts and re- quires that," (Where)a company maintains more than one statutory fund in respect of its life insurance business, the amounts of the items in the balance~sheet shall be shown in separate columns in respect of each statutory fund in lieu of combining those amounts in the columns headed 'Life Insurance Business'." (Note 1)

These proceedings arose out of an abstract of the report of the applicant's actuary prepared pursuant to s.48(1)(b). Section 48(1) provides that every company shall, at intervals of five years or such shorter intervals as it notifies to the Commissioner, cause an actuary to make an investigation of its financial condition and to furnish a written report of the results of the investigation and cause an abstract of the report of the actuary to be prepared in accordance with the provisions of the Second Schedule and a statement of its life insurance

business to be prepared in accordance with the provisions of

the Third Schedule. Section 48(3) provides that the company shall cause a separate abstract and a separate statement to

be prepared in respect of each class of life insurance business

The Second Schedule requires that there shall be annexed to every abstract a summary and valuation in accor- dance with Form I in the Schedule of the policies included in the class of business to which the abstract relates and a valuation balance sheet in accordance with Form J of the Schedule. Form I requires particulars for participating policies to be shown separately from those for non-partic-

VALUATION BALANCE-SHEET OF (class of life insurance business} OF (name of Company) AS AT (date)

At a glance

Court

Decision date

Source

Judgment (84 paragraphs)