The Application of Commonwealth Life Ltd & Anor [2003] FCA 637

Federal Court of Australia|2003-06-23|Before: Sackville J

REASONS FOR JUDGMENT 1 Commonwealth Life Ltd ("CLL") and Colonial Mutual Life Assurance Society Ltd ("CMLA") have applied for an order pursuant to ss 193 and 194 of the Life Insurance Act 1995 (Cth) ("the Act") confirming a scheme for the transfer of the life insurance business of CLL to CMLA. Both CLL and CMLA are registered as life insurance companies under the Act. The Commonwealth Bank of Australia ("CBA") is the ultimate holding company of CLL and CMLA. 2 The Colonial Group, including CMLA, was acquired by the Commonwealth Banking Group in June 2000 and since that date has gradually been incorporated into the latter Group. The objective of the scheme is said to be to integrate and consolidate the life insurance business of CLL and CMLA, with no material change to policyholder benefits and entitlements. 3 It is intended that, subject to Court approval, the scheme will take effect on 1 July 2003. The effect of the scheme is that the life insurance business of CLL will be transferred to CMLA. CMLA will assume all the rights and benefits and all the obligations and liabilities of CLL in respect of CLL's life insurance business. 4 An independent actuarial report on the scheme, prepared by Mr C Aaron of Tillinghast-Towers Perrin, summarises the scheme in these terms: "… the life insurance business of CLL is to be transferred to CMLA effective 1 July 2003. The basis of the transfer is that there will be no changes to the contractual entitlements of policy owners of either company. Further, the quantum of assets in the statutory funds of CMLA immediately following the transfer will be equal to the sum of the amounts in the statutory funds of the two companies immediately prior to the transfer (excluding amounts to cover current tax provisions in CLL in respect of the period up to the transfer date). All costs associated with the proposed transfer, including any stamp duty costs and the costs associated with any tax payments being brought forward, will be met by CMLA from shareholder funds. Management of CMLA and CLL view the transfer as an important component of the process of rationalising and integrating the CBA Group's life insurance businesses. We note that management of CMLA and CLL consider that this process will lead to operating efficiencies." 5 Section 193(1) of the Act provides that any of the companies affected by a scheme may apply to the Court for confirmation of the scheme. By s 189 of the Act a reference to "a company affected by a scheme" is to "a company that is a party or proposed party to an agreement or deed by which the transfer or amalgamation provided for by the scheme is, or is to be, carried out". 6 The Court's powers are set out in s 194 of the Act, as follows: "The Court may:

(a) confirm a scheme without modification; or (b) confirm the scheme subject to such modifications as it thinks appropriate; or (c) refuse to confirm the scheme." 7 The object of the legislation requiring the Court to confirm a scheme is to ensure that the interests of policy holders are adequately protected if a life insurance business is transferred. So much appears from s 3 of the Act which relevantly provides as follows: "Objects of Act (1) The principal object of this Act is to protect the interests of the owners and prospective owners of life insurance policies in a manner consistent with the continued development of a viable, competitive and innovative life insurance industry. (2) The principal means adopted for the achievement of [this object] are the following: …….. (f) providing for the supervision of transfers and amalgamations of life insurance business by the Court."

See In the matter of Colonial Portfolio Services Ltd [1999] FCA 1779, at [25], per Mathews J. 8 Section 193(3) of the Act provides that the Australian Prudential Regulation Authority ("APRA") is entitled to be heard on an application. The Act requires that any actuarial report on which the scheme is based be given to APRA: s 191(2)(a). APRA has a discretion to arrange for an independent actuary to make a written report on the scheme: s 192(1). 9 In a judgment delivered on 20 May 2003, I made orders pursuant to s 191(5) of the Act dispensing with certain procedural requirements in connection with the present application: The Application of Commonwealth Life Ltd [2003] FCA 501. I am satisfied that the formal requirements for the making of the application, insofar as they have not been dispensed with, have been satisfied. 10 The effect of the scheme has been considered by the appointed actuary of CLL and CMLA, Mr P Beck. It has also been considered by

· the Head Actuary, CommInsure, Mr P Nuttall, who has addressed the effect of the scheme upon the policyholders of CLL;

· the General Manager Finance, CommInsure, Mr T Cook, who has addressed the effect of the scheme upon the policyholders of CMLA; and · the independent actuary, Mr Aaron. 11 Mr Beck's conclusion is expressed as follows: "I have considered the opinions of the two actuaries that have reviewed the basis for the proposed transfer and considered the impact on the policyholders of each company. I have separately reviewed the proposed transfer and reached my own conclusion that the proposal is equitable to policyholders of each company and that policyholder benefit expectations should be maintained. Following the transfer adequate security of policyholder benefits should be maintained. … As a result of my investigations I have concluded that: · There should be no adverse change to the benefits or future expectations of the policyholders of either company

· Equity should be maintained between the existing policyholders of CMLA and those being transferred from CLL

· Adequate security of policyholder benefits should be maintained

· The transfer is in the interests of policyholders of both companies

· The transfer is in the interests of shareholders. Accordingly I support the proposed transfer."

Mr Beck has also provided an affidavit which establishes that there has been no material change of circumstances between the date he prepared the report and a date shortly before the hearing. 12 The other actuarial reports support Mr Beck's conclusions. 13 Both a draft and a final version of Mr Beck's actuarial report have been provided to APRA. While APRA has not itself arranged for an independent report, one has in fact been prepared. APRA has indicated that it has no objection to the court confirming the scheme. This is a material factor for the Court to take into account in exercising its powers under s 194 of the Act: The Application of Royal & Sun Alliance Life Assurance Ltd (2000) 104 FCR 37, at 40-42 [24]-[28], per Katz J. 14 Copies of the scheme, Mr Beck's actuarial report and the independent actuarial report have been available for public inspection. A significant number of telephone inquiries have been made to a call centre to which policy holders of CLL and CMLA could make inquiries concerning the scheme. Notice of intention to make the application has been given as required by the Life Insurance Regulations 1995 (Cth). In addition, an advertisement notifying interested persons of the hearing has been published in national newspapers. No one has sought to oppose confirmation of the scheme. 15 Dr Flick, who appears for the applicants, submits that an order confirming the scheme should be made on these grounds: (i) the objective of the proposed scheme is to integrate and consolidate the life insurance business of CLL within CMLA and does so in a manner which does not change the benefits or future expectations of the policyholders of either company; (ii) the transfer is in the interests of policyholders of both CLL and CMLA and is in the interests of shareholders; (iii) there has been compliance with all legislative requirements; and (iv) APRA has independently considered the scheme and has no objection to the present application being made to the Court for confirmation. 16 I accept this submission. 17 I note that the shareholders of CMLA have agreed to the pay the costs of the application. 18 Accordingly I propose to make the following orders: 1. Pursuant to s 194(a) of the Life Insurance Act 1995 (Cth) ("the Act"), the Scheme under Part 9 of the Act for the Transfer of the Life Insurance Business of Commonwealth Life Limited ("CLL") to the Colonial Mutual Life Assurance Society Limited ("CMLA") ("Scheme"), annexed to the Order and marked "A", be and is hereby confirmed without modification. 2. The costs of the applicants, including reserved costs, be paid by CMLA. 3. The costs of the Australian Prudential Regulation Authority ("APRA") of and incidental to these proceedings be paid by CMLA to APRA or its solicitor. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sackville.

Associate: Dated: 24 June 2003 Counsel for the Applicants: Dr G Flick SC

Solicitor for APRA: Australian Government Solicitor

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