The discretion to confirm the scheme
32 A review of some of the decided cases (including cases decided under similar provisions of the Life Insurance Act 1995 (Cth)) suggests that, in general terms, the Court has treated the critical factor governing the exercise of its discretion as being whether "policyholders" will be materially detrimentally affected by the implementation of the scheme: Re Insurance Australia Ltd at [76]; In the matter of GIO Personal Investment Services Ltd and AMP Life Ltd [2000] FCA 1871 at [27].
33 The expression "affected policyholder" is defined and used in s 17C of the Act. That section is concerned with steps to be taken before the application for confirmation is made. In Re Insurance Australia Ltd, I held at [19]-[24] that an "affected policyholder" within the meaning of s 17C is a holder of a policy being transferred under the scheme. Accordingly, in the present case it is the policyholders of Westport who are "affected policyholders" for the purposes of s 17C of the Act. I also held, however, that this does not mean that the effect that the scheme will have on other policyholders is irrelevant to the exercise of the Court's discretion: Re Insurance Australia Ltd at [25]. SRIAU has no existing policyholders (see [22] above), but SRCAU does (see [20]-[21] above).
34 The Court's discretion to confirm a scheme for the transfer of an insurance business is conferred by s 17F. In In the matter of Reward Insurance Ltd [2004] FCA 151, Heerey J observed (at [3]) that the discretion was a general one and that the Act did not specify any criteria that were to be considered. His Honour described as "a prime consideration" the nature of the actual and potential claims to which the transferor insurer is subject and the financial viability of the transferee insurer (ibid). In Re MDU Australian Insurance Co Pty Ltd [2008] FCA 490, Emmett J identified (at [7]) "[t]he critical consideration" as being whether the affected policyholders would be detrimentally affected. His Honour also said (at [9]) that the interests of the existing policyholders of the transferee insurer must be considered. Earlier, in Mercantile & General Reinsurance Company of Australia Ltd [2004] FCA 1773, his Honour had raised (at [23]) the question of the desirability of legislative amendment to make consideration of the interests of the latter mandatory (but see [44] below).
35 The position must now be considered in the light of s 17F(1A) of the Act. Subsection (1A) was inserted into s 17F by the Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Act 2008 (Cth)(No 105, 2008), s 3 Schedule 3, Item 7. Subsection (1A) provides:
In deciding whether to confirm a scheme (with or without modifications), the Federal Court must have regard to:
(a) the interests of the policyholders of a body corporate affected by the scheme; and
(b) if a report relevant to all or part of the scheme has been filed with the Court under section 62ZI - that report; and
(c) any other matter the Court considers relevant.
Paragraph (b) has no application in the present case.
36 The present application for confirmation has raised an important question, namely, whether para (a) of the new subs (1A) of s 17F encompasses the interests of the holders of policies issued otherwise than as part of the business of an Australian branch. In other words, must the Court have regard to the interests of the holders of policies issued in any of its branches anywhere in the world by a foreign general insurer that is affected by the scheme?
37 The argument in favour of a positive answer to this question depends on what may be described as a "literal" construction of para (a) of s 17F(1A).
38 In the present case, the bodies corporate that are affected by the Insurance Scheme are Westport (incorporated in Missouri) and SRI (incorporated in Luxemburg), and the bodies corporate that are affected by the Reinsurance Scheme are Westport (incorporated in Missouri) and SRC (incorporated in Switzerland). All three bodies corporate have written insurance business overseas. It could be argued that the interests of the holders of policies issued as part of the business of an overseas branch of any of these insurers are indirectly "affected" by the Schemes even though the Schemes directly affect only the interests of the holders of policies issued by the Australian branches.
39 It should be acknowledged at the outset that the literal construction referred to is at odds with the Act's concern with Australian branches; would give rise to inconvenience; and was almost certainly not intended.
40 On the question of inconvenience, the Court was informed, and in any event takes judicial notice of the fact, that global insurers are likely to have many branches located in several and possibly many countries, and thousands and possibly tens or even hundreds of thousands of policyholders. For example, the Court was informed that "Swiss Re operates in over 35 different countries", while "the Australian branch of Swiss Re Insurance Company Ltd represents only approximately 2.5% of Swiss Re Insurance Ltd's global premium income and claims liabilities".
41 If subsection (1A) requires the Courtto have regard to the interests of policyholders world wide, it may be necessary on applications for confirmation of a scheme to have actuarial evidence relating to the interests of the policyholders of overseas branches and of the legislative or regulatory requirements (or both) applicable in each overseas jurisdiction in which the body corporate operates.
42 It is difficult to accept that this is what the Parliament intended. I would so construe para (a) of the new subsection (1A) of s 17F in this way only if constrained to do so.
43 Neither my own researches nor those of Westport's legal representatives or of APRA (which exercised its right to be heard under s 17E(3) of the Act) have revealed any statement in the Explanatory Memorandum or the Parliamentary Debates associated with the Bill for Act No 105 of 2008 that throws any light on the intended scope of para (a).
44 An intention that might suggest itself is that of making mandatory a consideration that this Court was already at liberty to take into account and has taken into account, namely, the interests of non-transferred (remaining) Australian branch policyholders of the transferor insurer, and existing (continuing) Australian branch policyholders of the transferee insurer, neither of which categories would fall within s 17C's concept of "affected policyholder": see Re Insurance Australia Ltd, above at [25], [70], [75], [76]; Mercantile & General Reinsurance Company of Australia Ltd, above, at [23]; PMI Indemnity Ltd [2005] FCA 1842 at [25] ff; Re Calliden Group Ltd [2007] FCA 2019 at [90]-[91]. Importantly, in no case has the Court had regard to the interests of policyholders of an overseas branch or discussed the desirability of their being considered. In Mercantile & General Reinsurance Company of Australia Ltd, above, for example, Emmett J referred to the effect of a scheme on the Australian branch policyholders of the transferee foreign general insurer, and not the policyholders of its overseas branches. His Honour also said (at [3]) that the non-Australian assets and liabilities of the transferee foreign general insurer could be ignored. Justice Emmett's comment relating to the desirability of legislative amendment to which I referred at [34] above is to be understood against the background of the fact that his Honour took into account the interests of only the Australian branch policyholders of the transferee foreign general insurer.
45 It seems a fair summary to say that in all applications for confirmation involving foreign general insurers, the parties and the Court have treated the interests of policyholders of branches other than Australian branches as a consideration irrelevant to the exercise of the discretion under s 17F of the Act. The literal construction of para (a) of s 17F(1A) would therefore mark a fundamental change.
46 Section 17A, the first section within Div 3A of Pt III of the Act, provides that a reference in that division to "a body corporate affected by a scheme" is a reference to a body corporate that is a party or proposed party to an agreement or deed by which the transfer or amalgamation provided for in the scheme is, or is to be, carried out. The present Schemes identify the parties as the respective Australian branches, but it seems clear that it is the three legal entities that are the parties to the two Schemes.
47 In my opinion it is not possible to construe the expression "the policyholders of a body corporate affected by the scheme" in s 17F(1A)(a) as simply the plural number of "affected policyholder" in s 17C, subs (1) of which defines that expression as "the holder of a policy affected by a scheme". Parliament would have used the expression "affected policyholders" if that had been its intention. Similarly, it is not possible, in my view, to read para (a) as referring to [policyholders of a body corporate] [affected by the scheme] and so to make the definition in s 17A irrelevant. Rather, the paragraph refers to [policyholders of] [a body corporate affected by the scheme], and s 17A's definition of the latter expression is applicable. In the present respect my views are consistent with the submissions of APRA and not with those of Westport.
48 Parliament may be taken:
· to have legislated with knowledge of the course of decision referred to above to the effect that "affected policyholder" in s 17C means "holder of a policy to be transferred under the scheme";
· to have been content not to interfere with that construction of s 17C's notification requirement;
· to have legislated with knowledge of the course of judicial practice referred to above according to which the interests of Australian branch policyholders were, but the interests of non-Australian branch policyholders were not, treated as relevant to the exercise of the discretion to confirm a scheme; and
· to have intended the expression "policyholders of a body corporate affected by the scheme" to bear a wider meaning than "affected policyholders".
49 The question is "how much wider". The choice is between the holders of policies issued anywhere in the world by bodies corporate affected by the scheme on the one hand, and the holders of policies issued in their Australian branches by bodies corporate affected by the scheme on the other hand. As appears below, I think that, in effect, the latter is the correct construction because it is only the interests of such policyholders to which the Court is required to have regard.
50 I referred to at [11]-[12] above to the Act's and APRA's concern as being with the Australian branch businesses, assets and liabilities of foreign general insurers. Parliament should also be understood to have introduced subs (1A) into s 17F with knowledge of that background. A concern with the interests of policyholders world wide would represent a radical new point of departure which Parliament should be understood to have intended only if its intention to that effect is clear.
51 In my opinion, two provisions, in particular, show that para (a) is concerned with the interests of the holders of policies that give rise to a liability of a foreign general insurer in Australia.
52 The first of these provisions is found in subs (4) of s 17B of the Act. Subsection (4) with subs (1) of that section, is as follows:
(1) No part of the insurance business of a general insurer may be:
(a) transferred to another general insurer; or
(b) amalgamated with the business of another general insurer;
except under a scheme confirmed by the Federal Court.
…
(4) Subsection (1) does not require that a transfer or amalgamation of insurance business be made under a scheme approved by the Federal Court if:
(a) immediately before the transfer or amalgamation, the insurance business is carried on outside Australia; and
(b) the transfer or amalgamation will result in the insurance business being carried on outside Australia.
53 Subsection (1) of s 17B is the first and principal substantive provision of Div 3A. The remaining provisions of Div 3A are dependent on it. And subs (1) is subject to subs (4)'s exclusion or carving out.
54 Subsections (1) and (4) of s 17B contemplate a division of the insurance business of a general insurer into "parts" - a part carried on in Australia and a part carried on outside Australia. The requirement of confirmation does not apply to the latter. The whole of Div 3A, including the recently introduced subs(1A) of s 17F, is to be read subject to that exclusion.
55 APRA submits that s 17F is not to be read subject to s 17B and that once a transfer or amalgamation is found to fall within s 17B(1) and therefore to require confirmation by the Court, s 17F applies without any limitation or reading down.
56 While I appreciate the force of this submission, I do not accept it. It seems to me that the effect of s 17B is not spent once a transfer or amalgamation scheme is found to require confirmation. Rather, the section's division of an insurance business into the part carried on in Australia and the part carried on overseas exposes an intention as to "the interests of the policyholders" which respectively the Court must and must not treat as relevant for the purposes of s 17F(1A)(a). Division 3A leaves to overseas legal systems and regulators the interests of the holders of policies issued in the carrying on of that part of an insurance business that is carried on outside Australia.
57 It is a mistake, in my view, to read para (a) of s 17F(1A) as indicating that the interests of all policyholders of a body corporate that is a party to a scheme are necessarily to be treated as potentially affected by the scheme. The paragraph leaves open the possibility that it may be able to be said a priori and by reference to the other provisions of the Act that for the purposes of the paragraph there is a class of policyholders whose interests are not affected by the scheme. In my opinion, the Act's provisions to which I have referred above and will refer below, require that that view be taken of the interests of policyholders of non-Australian branches.
58 The second provision to which I referred is found in s 116(3) of the Act which is as follows:
(3) In the winding up of a general insurer, the insurer's assets in Australia must not be applied in the discharge of its liabilities other than its liabilities in Australia unless it has no liabilities in Australia.
Section 116A of the Act elaborates on the meaning of the expressions "asset in Australia" and "liability in Australia" for the purposes of s 116 (as well as for the purposes of ss 28, 62M, 62ZZC and 62ZZE as mentioned at [11] above).
59 This provision also gives context to para (a) of s 17F(1A). The interests of the holders of policies issued in the course of that part of the business of a foreign general insurer, such as Westport, SRI and SRC, that is carried on outside Australia are based on liabilities of the foreign general insurer arising under contracts of insurance made outside Australia. Those liabilities are therefore not liabilities "in Australia" and s 116(3), like s 17B(4), makes the interests of policyholders based on those liabilities an irrelevant consideration for the purposes of s 17F(1A)(a).
60 Notwithstanding the conclusion that I have reached, I respectfully suggest that legislative amendment is desirable to put the intended meaning of para (a) of s 17F(1A) beyond doubt.