Australian Prudential Regulation Authority v ACN 000 007 492 (Under Judicial Management) (Subject to Deed of Company Arrangement)
[2010] FCA 912
FEDERAL COURT OF AUSTRALIA
Australian Prudential Regulation Authority v ACN 000 007 492 (Under Judicial Management) (Subject to Deed of Company Arrangement) [2010] FCA 912
Citation: Australian Prudential Regulation Authority v ACN 000 007 492 (Under Judicial Management) (Subject to Deed of Company Arrangement) [2010] FCA 912 Parties: AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY v ACN 000 007 492 (UNDER JUDICIAL MANAGEMENT) (SUBJECT TO DEED OF COMPANY ARRANGEMENT) File number(s): NSD 574 of 2010 Judge: PERRAM J Date of judgment: 25 August 2010 Catchwords: INSURANCE – General insurer – Order for judicial management – Part VB of the Insurance Act 1973 (Cth) Legislation: Companies Act 1926 (SA) ss 195, 196, 197
Corporations Act 2001(Cth) Pts 5.2, 5.3A, 5.4B, 5.5
Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Act 2008 (Cth) Sch 3 [11]
Insurance Act 1943 (SA) ss 30, 31
Insurance Act 1973 (Cth) ss 3, 9, 10, 11, 12, 35, 38, 49E, 52, 54, 55, 60, 62K, 62L, 62M, 62P, 62Q, 62R, 62T, 62U, 62V, 62X, 62Y, 62Z, 62ZE, 62ZG, 62ZI, 62ZJ, 62ZN, 62ZQ, 62ZR, 62ZZC
Life Insurance Act 1945 (Cth) Pt III Div 8
Life Insurance Act 1995 (Cth) Pt 8Cases cited: Estate Loock v Graaff-Reinet Board of Executors [1935] CPD 117 cited
Insurance and Superannuation Commissioner v Occidental Life Insurance Co of Australia (1991) 28 FCR 437 cited
Insurance and Superannuation Commissioner v Occidental Life Insurance Co of Australia (No 2) (1991) 33 FCR 41 cited
Insurance and Superannuation Commissioner v Regal Life Insurance Ltd (1994) 49 FCR 468 cited
Insurance Commissioner v Associated Dominions Assurance Society Pty Ltd (1953) 89 CLR 78 cited
Porter v Australian Prudential Regulation Authority (2010) 265 ALR 322 cited
Silverman v Doornhoek Mines Ltd [1935] TPD 349 citedTexts cited: W A Joubert (ed), The Law of South Africa (1982) Vol IV Date of order: 18 June 2010 Date of hearing: 18 June 2010 Date of last submissions: 18 June 2010 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 45 Counsel for the Plaintiff: Mr J S Wheelhouse SC Solicitor for the Plaintiff: Australian Prudential Regulation Authority Solicitor for the Defendant: Blake Dawson
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 574 of 2010
BETWEEN: AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY
PlaintiffAND: ACN 000 007 492 (UNDER JUDICIAL MANAGEMENT) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
Defendant
JUDGE:
PERRAM J
DATE OF ORDER:
18 JUNE 2010
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The respondent be placed under Judicial Management pursuant to s 62L of the Insurance Act 1973 (Cth).
2.Murray Smith, a partner of McGrath Nicol, be appointed as Judicial Manager of the respondent pursuant to sub-section 62R(1) of the Insurance Act 1973(Cth).
3.Leave be granted pursuant to s 62P(1)(b) of the Insurance Act 1973(Cth) to Mr Elliot to continue proceedings NSD 186 of 2009 to the point of the conclusion of the Registrar’s calculation of the question of remuneration.
4.Prayer 3 of the application be stood over to 12 July 2010 for hearing at 10.15am.
5.These orders be entered forthwith.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 574 of 2010
BETWEEN: AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY
PlaintiffAND: ACN 000 007 492 (UNDER JUDICIAL MANAGEMENT) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
Defendant
JUDGE:
PERRAM J
DATE:
25 AUGUST 2010
PLACE:
SYDNEY
REASONS FOR JUDGMENT
I - Introduction
On Friday 18 June 2010 I made orders placing the respondent, which is a general insurance company, under judicial management pursuant to s 62L of the Insurance Act 1973 (Cth). That insurer was formerly known as Rural and General Insurance Ltd and, in these reasons, I will refer to it as “Rural”. At the same time that I placed Rural under judicial management I appointed Mr Murray Smith to be its judicial manager. These are my reasons for taking that course.
II - Regulation of General Insurers
The regulation of general insurers occurs under the provisions of the Insurance Act 1973 (Cth). Generally speaking a natural person may not carry on the business of a general insurer at all (s 9) and a corporation cannot carry on that business without holding a licence from the Australian Prudential Regulation Authority (“APRA”): ss 10(1)(b), 11 and 12(1). Part IIIA of the Act is concerned with prudential supervision. By s 32, APRA may determine prudential standards and, by s 35, a general insurer is required to comply with those standards. One of the functions conferred upon APRA by s 38 is the monitoring of prudential matters which, by s 3, include those relating to the ability of an insurer to keep itself in a sound financial position. In Part IV of the Act extensive provision is made for the appointment of auditors and actuaries to a general insurer and Division 3 of Part IV explicitly empowers APRA, should it think it necessary, to appoint an independent actuary to investigate the liabilities of a general insurer: s 49E(1). More severely, Part V of the Act, which is entitled “Investigations of General Insurers”, gives APRA considerable scope to investigate, inter alia, a general insurer which it believes is, or may be, unable to meet its liabilities: s 52(1)(aa)(i).
That ability is supported by a power to enter premises and to inspect, and if necessary to remove, books, a term which is very broadly defined: s 54. It may also appoint inspectors to carry out any such investigation. In the course of carrying out an investigation, notices may be issued, including to third parties, requiring production of documents or assistance with an investigation or requiring a person to attend and be examined: s 55(1). At the conclusion of the investigation a report must be prepared: s 60.
Part VB then regulates the external administration of general insurers. There are two aspects to it. The first concerns the relationship between regulation under the Act and external administration under the Corporations Act 2001 (Cth). Because all general insurers must be corporations they are subject to the provisions of the Corporations Act 2001 (Cth). Chapter 5 of that Act regulates the external administration of corporations providing various paths by which they may be placed into the hands of external administrators. Not all of these require the making of a court order as is shown by the appointment of administrators under Part 5.3A and the commencement of a member’s voluntary winding-up under Part 5.5.
However, to the extent that a Court order is required – for example, as it is in the case of a winding-up in insolvency under Part 5.4B or the court appointment of a receiver and manager under Part 5.2 – s 62ZQ of the Insurance Act 1973 (Cth) requires APRA to be notified of the application and s 62ZQ(2) gives APRA an entitlement to be heard on any such application. Likewise, APRA is entitled to be notified of, and to be heard on, any application made by a liquidator of a general insurer to a court: s 62ZR. There is thus exhibited a clear legislative intention to place the external management of general insurers on a special footing which includes notification to APRA.
The second aspect of Part VB concerns a sui generis form of external management known as judicial management. Part VB was inserted into the Act by cl 11 of Schedule 3 to the Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Act 2008 (Cth) which commenced on 18 October 2008. Upon the second reading of the Bill in the House of Representatives on 15 October 2008 the Treasurer indicated those provisions were intended to “bring APRA’s powers for general insurers in line with those currently existing for life insurers …”. It is necessary then to say something of the history of judicial management.
III - Judicial Management
At the time that Part VB was inserted into the Act in 2008 the Life Insurance Act 1995 (Cth) contained provision (in Part 8) for the judicial management of life insurance companies which had been present since that Act’s inception. Those provisions, in turn, were drawn from Division 8 of Part III of the Life Insurance Act 1945 (Cth). The Life Insurance Bill 1945 was introduced into the House of Representatives by the then Acting Prime Minister and Treasurer, Mr Chifley, who remarked upon the new provisions dealing with judicial management:
It is thought, however, that in the case of a life insurance company, it will frequently be possible to make arrangements which are more satisfactory to the policy-owners than a complete winding-up of the company, and the bill provides the machinery whereby each case can be closely examined and, subject to directions of the High Court, the procedure most favourable to the policy-holders can be adopted. The procedure adopted has been modelled upon an enactment of the South African legislature.
The reference to South African legislation is a reference to the Insurance Act 1943 (SA). Chapter II of that Act contained provision for the placing of the business of an insurer under judicial management. However, in South Africa judicial management was a form of external administration available for companies generally. It is described in these terms in Joubert’s The Law of South Africa Vol 4 para 594:
Judicial management is an extraordinary procedure, peculiar to South African and Zimbabwean company law, the purpose of which is to obviate a company being placed in liquidation where by proper management or by proper conservation of its resources it will be able to meet its obligations, remove any occasion for winding up, and become a successful concern.
Judicial management was first introduced into South African company law by Chapter IV of the Companies Act 1926 (SA) as an alternative to winding-up. Before such an order could be made the Court had to be satisfied that the company should be would-up. If so satisfied, however, s 195 then provided:
… notwithstanding any present inability of the company to meet its obligations or the existence of any other fact or circumstance alleged in the application, there is a reasonable probability that if the company be placed under judicial management as provided in this section it will be enabled to meet such obligations and to remove the occasion for liquidation or dissolution, and that it is otherwise just and equitable that the grant of an order of liquidation should be postponed, the Court may, instead of granting a liquidation order, grant an order (hereinafter called a judicial management order) in terms of this section, to be of force either for a period stated in the order or for an indefinite period.
The function performed by the process was described in Estate Loock v Graaff-Reinet Board of Executors [1935] CPD 117 at 129 in these terms:
A judicial manager is appointed because the court thinks that the company, if it has a sort of moratorium – that is what a judicial management amounts to – will pull through and will be able to go on. Section 195 provides that a judicial manager may be appointed if the court, upon consideration of the facts, is of opinion that notwithstanding any present inability of the company to meet its obligations there is a reasonable probability that the company will be able to meet its obligations and to remove the occasion for liquidation or dissolution.
That last mentioned purpose placed emphasis upon the probability of the company meeting its obligations. Consequently, the remedy was not available where there was little prospect of financial recovery: Silverman v Doornhoek Mines Ltd [1935] TPD 349 at 353. Consistent with that observation, if the judicial manager formed the opinion that the continuance of the judicial management would not enable the company to meet its obligations he was bound to apply to the Court to terminate the judicial management: s 197(h).
The judicial manager was obliged to produce reports on the position of the company (s 196(1)(b)) but – and this will be important later – those reports were not required to recommend to the Court any process of reconstruction nor was the Court called upon to act on such a report. Pausing there it may be observed that this model of judicial management bore similarities to the former notion under Australian company law of official management. The provisions dealing with official management – which had their final incarnation as Part 5.3 of the Corporations Law – were repealed in 1992 and replaced by the new procedure of voluntary administration under Part 5.3A. The similarity of official management with judicial management was the focus of both procedures on helping the company to meet its obligations. In Australia the experience of official management was that the requirement of a full return to creditors meant that the procedure was rarely attempted: see paragraph [47] Australian Law Reform Commission Report No 45, “General Insolvency Inquiry” (1988). The principal difference between judicial management and official management was the former’s status as a court administered process and the latter’s as a process instituted by a meeting of the company.
Prior to 1943, the general model of judicial management in South Africa housed in the Companies Act 1926 (SA) applied to insurers. In that year, however, there was passed the Insurance Act 1943 (SA) which produced a hybridised version of judicial management especially for insurers. Unlike the general judicial management provisions it was no longer necessary to establish, in the first instance, that a winding-up order was appropriate. Instead an application could be made by the registrar to the Court and this could be acceded to if the Court was of the opinion that “it was desirable for any reason”: s 30(1). A creditor who had gone unpaid could also apply: s 30(2).
The main differences with the general regime applying for judicial management of companies were twofold. First, the Court’s principal focus was shifted to the interests of policyholders rather than creditors generally or shareholders. In appointing a judicial manager the Court was bound to “act primarily in the interests of the owners of Union policies under which the insurer is liable”: s 30(3). Secondly, the Act contained provisions facilitating the restructuring of an insurer’s business. The judicial manager was tasked to produce a report to the Court “as soon as possible” outlining which of the number of particular courses should be adopted: s 31(9). The Act nominated five such courses. These were:
(a)the transfer of the insurer’s rights and obligations under some or all of its policies to some other person;
(b)the carrying on of the business or any part thereof, with the possibility of discounting the original sums insured;
(c)winding-up;
(d)dealing with separate classes of policies in different ways; and
(e)any other course deemed advisable.
The major development, however, was the choice then conferred upon the Court by s 31(10) as to which of those courses was to be taken. When the Court made the choice the order giving effect to it bound all parties. Further, these re-structuring orders could occur even if they were contrary to the insurer’s Memorandum and Articles of Association. What was created was a power of restructuring which went beyond the mere power of management contemplated under the Companies Act 1926 (SA).
For present purposes there are four aspect of the Insurance Act 1943 (SA) which should be emphasised. First, it was necessary to make plain that an insurer could not be judicially managed under the general scheme of judicial management in Part IV of the Companies Act 1926 (SA). By s 30(5) it was declared that an insurer might not be judicially managed other than under the Insurance Act 1943 (SA). This otherwise unimportant provision explains the presence in the Australian provisions of a section which is otherwise inexplicable. I return to this provision below. Secondly, the provisions of the Insurance Act 1943 (SA) were enacted against a backdrop of an existing and well-known regime of judicial management for companies. The provisions of Chapter II which dealt with judicial management of insurers had no particular need to explain what judicial management was or to provide the everyday machinery for its operations. Instead, Chapter II simply picked up and applied to judicial management under the Insurance Act 1943 (SA) the law surrounding judicial management generally. Section 31(6) was explicit:
The law relating to the judicial management of companies shall apply mutatis mutandis in connection with the judicial management of the business of a registered insurer under this Act, except in so far as those provisions are inconsistent with any provision of this Act or of an order of the court under paragraph (c) of sub-section (3) of section thirty, or with any direction issued by the court under this section.
Thirdly, that context provided a purpose of judicial management which remained a moratorium procedure to see if the insurer could not be put back on an even keel. Since Chapter II contained alternate provisions for winding-up an insurer it is not to be thought that the process thus contemplated was a substitute for winding-up; it was plainly an alternative. Whereas judicial management under the Companies Act 1926 (SA) was focussed on the likelihood of a full return to creditors, the effect of s 30(3) of the Insurance Act 1943 (SA) was to switch that emphasis to the subset of creditors or potential creditors constituted by policyholders.
It was these provisions which were then transplanted in 1945 into the first Life Insurance Act 1945 (Cth). A fully successful transposition might have required some explanation of what judicial management was because no such explanation appeared in the South African Insurance Act 1943 (SA). So too a simple copying of that Act’s provisions without the copying of the judicial management provisions in Chapter IV of the Companies Act 1926 (SA) was likely to generate difficulties since the Insurance Act 1943 (SA) depended upon that Act.
Be that as it may, it was solely the provisions of the Insurance Act 1943 (SA) which were then brought across into the Life Insurance Act 1945 (Cth). Mr Chifley, in the second reading speech, summarised the new Act’s terms this way:
If [the regulator’s] investigations show that there is anything seriously wrong with the management of a company, his remedy would be to apply to the High Court for the appointment of a judicial manager to the company. If appointed, the judicial manager will, subject to directions from the court, take over all the powers and functions of the management of the company. The judicial management is intended to be only a temporary phase to protect the interests of the policy-owners, and, as soon as practicable, the judicial manager will report to the court, indicating whether he considers the company should be wound up or its business transferred to another company, or whether any better arrangement can be made in the interests of policy owners.
It is by no means obvious that the requirement of South African law that there be a real likelihood of a full return to creditors (or policyholders) was intended to be brought into the Australian provisions. There were other departures from the South African model. Under s 59 Life Insurance Act 1945 (Cth) only the Insurance Commissioner could apply for judicial management so that, unlike the South African legislation, creditors were excluded from the procedure. The essential feature of the judicial manager’s report on the appropriate courses to be adopted was copied word for word from s 31(a) of the Insurance Act 1943 (SA) into s 62(1) including its injunction to act “with the greatest economy compatible with efficiency”. Provision too was made for the Court to give effect to the report thereby achieving the proposed re-arrangement: s 64(1). Curiously, s 59(4) provided that an insurer was not to be judicially managed other than under the Act (mirroring the terms of s 30(5) of the South African Act). This provision, however, made no sense in the absence of a regime of judicial management for companies in general. Absent were any provisions of equivalent effect to s 31(6) of the South African Act which applied the general law of judicial management in that country to judicial management under the Insurance Act 1943 (SA) and thereby better illuminated its operation. The Act therefore left quite undefined what judicial management was.
It was this somewhat uncertain structure that found its way into the Insurance Act 1945 (Cth). The critical aspects of that Act were four-fold. First, what was being sought was a procedure that would deliver a more satisfactory outcome to the policyholders than a traditional winding-up. Secondly, the procedure would be a temporary phase conducted under the auspices of the Court. Thirdly, the judicial manager’s function, unlike that of a receiver or liquidator, was to produce a report to the Court for it to act upon by means of restructuring. Fourthly, that report would include recommendations as to the future of the insurer whether by winding-up, carving-up or some other apposite solution.
So far as I can see courts in this country have considered judicial management on only three occasions. The first was in Insurance Commissioner v Associated Dominions Assurance Society Pty Ltd (1953) 89 CLR 78. In that case, the Insurance Commissioner applied to wind-up the insurer and it cross-applied for the appointment of a judicial manager. Fullager J appointed a liquidator and declined to appoint a judicial manager. Much of the judgment is devoted to the question of the validity of various portions of the Life Insurance Act 1945 (Cth) together with a detailed examination of the financial position of the insurer. Fullager J’s explanation of the power in s 59 was in these terms (89 CLR at 91):
If any one of those grounds is established, the making of either of the orders authorized by s 59 is still a matter of discretion. No rule should, or can, be laid down. The case must depend on all the circumstances. But, so far as grounds (a) and (b) in s 55 are concerned – and these are the most important for the purposes of the present case – it may be said that, generally speaking, if there appears to be no reasonable prospect of the position being remedied and the company’s business being placed in the near future on a sound basis, a winding-up order should be made. If it appears likely to be a case of mere temporary embarrassment, no order should be made. If the position is in doubt, and the Court thinks that, although a serious position is disclosed, further investigation and experiment would be desirable – perhaps that the company ought to be given a chance to see what it can do – then an order for judicial management of the company may well be thought appropriate.
(emphasis added)
This suggests a power not to be exercised in situations, at one extreme, of plain insolvency or, at the other, of mere temporary embarrassment. That view is consistent with the history of judicial management as a tool of reconstruction. So viewed, judicial management under the Life Insurance Act 1945 (Cth) was not be treated as a prelude to a winding-up but as a procedure to be utilised to assist an insurer which was struggling, but where the struggle was not futile. There was one further judicial management decision under the Life Insurance Act 1945 (Cth). On 7 November 1990 this Court placed Regal Life Insurance Co Ltd under judicial management (see 49 FCR 469). There is no report of any reasons for the making of those orders although aspects of that judicial management and the related judicial management of Occidental Life Insurance Co of Australia Ltd came before the Court on a number of occasions: cf. Insurance and Superannuation Commissioner v Occidental Life Insurance Co of Australia (1991) 28 FCR 437; Insurance and Superannuation Commissioner v Occidental Life Insurance Co of Australia (No 2) (1991) 33 FCR 41; Insurance and Superannuation Commissioner v Regal Life Insurance Ltd (1994) 49 FCR 468. The processes of this judicial management appears to have been extensive and, ultimately, directed towards reconstruction.
In 1995 the provisions of the new Life Insurance Act 1995 (Cth) came into effect and largely reproduced the former judicial management provisions of the Life Insurance Act 1945 (Cth). Although there were amendments in various ways none of those is presently material. The provisions of that Act appear not yet to have been used.
I turn to the present legislation in Part VB of the Insurance Act 1973 (Cth) shortly. As mentioned already, they commenced in October 2008 and are directly descended from the Insurance Act 1943 (SA). Apart from this case, they have been used only once in the case of Australian Family Assurance Ltd which was placed under judicial management on 3 July 2009.
IV - The present legislation
It is necessary then to turn to the present provisions of the Insurance Act 1973 (Cth). The application may be made only to the Federal Court and only by APRA or the insurer itself: s 62K. Applications by creditors and members are, therefore, excluded. The Court may place the general insurer under judicial management if satisfied that APRA has investigated the insurer under Part V and if “it is in the interests of policyholders” that the order may be made: s 62L. The anomalous stipulation that an insurer might be judicially managed only under the Act has been repeated in s 62Q. The absence of any other form of judicial management in Australia (apart from under the Life Insurance Act 1995 (Cth)) makes the point of this provision somewhat obscure. The legislative history recounted above suggests that the provision is an error. In Porter v Australian Prudential Regulation Authority (2010) 265 ALR 322 at 329 [30] the question was left open as to whether s 62Q might prevent the Court’s appointment of a manager even though such an office might not be accurately described as that of a judicial manager. The fact that the provision springs from a drafting error does not entitle the Court to disregard it. It is not presently necessary to express a concluded view as to what s 62Q should be taken to mean.
Given the broad nature of the discretion to make an order for judicial management it is neither appropriate nor useful to seek to circumscribe its limits. It suffices for the purposes of this case to observe that the power is likely to be enlivened whenever the Court is of the view that the position of policyholders is likely to be benefited by it. This encompasses Fullager J’s notion of judicial management being appropriate where, although the situation is serious, further investigations and experiment might be desirable to see what can be done. However, the Insurance Act 1973 (Cth) now confers upon the process of judicial management significantly greater powers of reconstruction than were present in the Life Insurance Act 1945 (Cth). I deal with those powers below at paragraph [30]. The important matter for present purposes is that the breadth of those powers inform the likely beneficial outcome of the judicial management.
Judicial management may also be ordered on other grounds including that the insurer has failed to comply with prudential standards or is likely to be unable to meet its policy or other liabilities as they fall due: s 62U. Once placed under judicial management the Court must appoint a judicial manager: s 62R. The discretion conferred on the Court is wide. Unlike the situation under South African Companies Act 1926 (SA) it is plain that it is not necessary for the Court to think that there is a reasonable likelihood that policyholders or creditors will be paid out in full.
There is no requirement that the judicial manager be an accountant or an official liquidator and, given some of the tasks with which a judicial manager may be confronted, the appointment of a member of the accounting profession is by no means inevitable. As under the Life Insurance Act 1943 (SA), one of the most important purposes of judicial management is the production of the judicial manager’s report. It is provided for by s 62ZI(1) which is in these terms:
(1)As soon as possible after starting to manage a general insurer, a judicial manager must file with the Federal Court a report that:
(a)recommends the course of action listed in subsection (2) that is, in his or her opinion, most advantageous to the general interest of the policyholders of the general insurer while promoting financial system stability in Australia; and
(b) sets out the reasons for that recommendation.
The courses of action are set out in s 62ZI(2):
(2) The following are the possible courses of action:
(a)to transfer the business of the general insurer to another general insurer under Division 3A of Part III (whether the policies issued by the general insurer continue for the original sums insured, with the addition of bonuses that attach to the policies, or for reduced amounts);
(aa)to transfer the business, or part of the business, of the company to another company under section 25 of the Financial Sector (Business Transfer and Group Restructure) Act 1999;
(b)to allow the general insurer to carry on its business after a period of judicial management (whether the policies issued by the general insurer continue for the original sums insured, with the addition of bonuses that attach to the policies, or for reduced amounts);
(c)to do one or more of the acts described in subsection 62Z(1) (which is about various measures to recapitalise the general insurer), if that subsection applies to the general insurer;
(d) to wind up the general insurer;
(e)to take such other course of action as the judicial manager considers desirable, which may, for example, be a course of action that includes either or both of the following:
(i)altering the constitution, rules or other arrangements for governance of the general insurer, if it is registered under the Corporations Act 2001, to enable or facilitate the performance of the judicial manager’s functions and duties, the exercise of the judicial manager’s powers or a course of action described in paragraph (a), (b), (c) or (d);
(ii)one or more of the courses of action described in paragraphs (a), (b), (c) and (d).
The making of a report by the judicial manager to the Court enlivens the Court’s powers in s 62ZJ which are in these terms:
(1)On an application for an order to give effect to a course or courses of action recommended in a report under section 62ZI:
(a)APRA and any other person interested is entitled to be heard; and
(b)the Federal Court may make an order giving effect to such course or courses of action as it considers in the circumstances to be most advantageous to the general interest of the policyholders of the general insurer concerned, while promoting financial system stability in Australia.
(2)The course or courses of action to which an order may give effect may be one or more of the following:
(a)one or more of the courses of action set out in subsection 62ZI(2);
(b)one or more other courses of action.
(3) An order under this section:
(a)is binding on all persons; and
(b)takes effect despite anything in any of the following:
(i)the Corporations Act 2001;
(ii)the constitution or other rules of the general insurer;
(iii)any contract or arrangement to which the general insurer is party;
(iv) any listing rules (as defined in section 761A of the Corporations Act 2001) of a financial market (as defined in that section) in whose official list the general insurer is included.
It will be seen that this a power couched in the broadest of terms. In effect, any proposal to re-arrange the affairs of the insurer can be achieved and any such outcome binds all persons. The provisions of Part VB Division 1 make plain that such measures may include substantial alterations to the company’s share register including by way of recapitalisation and even the cancellation of shares: s 62Z(1). Further, these steps may be taken regardless of the terms of any listing rule of a stock exchange, any provision of the Corporations Act 2001 (Cth) or rules thereunder or of any contract: s 62Z(4). Such arrangements are likewise not subject to the restrictions of Part IV or the Trade Practices Act 1974 (Cth): s 62ZN.
There may be more than one report and the re-structuring which results may take place in parts. So much had previously been held by Lockhart J in Occidental Life Insurance 28 FCR at 442-443. That ability is now express in s 62ZI(4). Granted then that one of the most important purposes of judicial management is the production of reports by the judicial manager and the making of related restructuring orders by the Federal Court, the management functions of the judicial manager and their interim nature become clearer. Section 62T vests all management functions formerly held by any other person in the general insurer in the judicial manager. But the judicial manager does not become thereby the insurer and service upon it is not achieved by service upon him: Porter v APRA 265 ALR at 329-331 [30]-[38]. The judicial manager is equipped with extensive management powers by s 62Y including any other power directed by the Federal Court. Section 62ZG requires the judicial manager to conduct the judicial management “efficiently and economically”. That injunction is reflected in the language of s 62ZI(1)(a) which requires the provision of the judicial manager’s report “as soon as possible after starting to manage” the general insurer. That, of course, is consistent with Mr Chifley’s original remarks that the process was to be temporary. Speed is important but it is not to be thought that all judicial managements will end quickly. As Lockhart J observed in Occidental Life Insurance 28 FCR at 442-443:
Judicial management, like other forms of administration of companies, notably winding up, receivership and official management, are mechanisms for administering the affairs of companies by agencies outside the control of the board of directors of the company and its shareholders. Judicial management of life insurance companies would vary considerably from case to case; some would be comparatively simple and take only a short time; whereas others, like those with which the court is concerned here, are very complex and may take a substantial length of time before they are completed. In some cases it may be clear that the business of the company should be transferred to another company; but in other cases it may be appropriate that at one time the business of the company should be dealt with in a particular way, or part of the business of the company wound up, and at some later time another part of the business be dealt with in a different way.
All other forms of external management are superseded upon the placing of a general insurer under judicial management. The office of any such external administrator is thereby terminated: s 62U. It is unclear what the status of a deed of company arrangement might be following the appointment of a judicial manager. There may be difficulties in the concept of a deed of company arrangement which is bereft of the possibility of having a deed administrator. Given the apparent intention of Part VB of the Insurance Act 1973 (Cth) to create a paramount mode of corporate restructuring it may be that that regime under Part 5.3A Corporations Act 2001 (Cth) simply becomes inapplicable on the appointment of a judicial manager. However, that question does not presently arise.
All proceedings against the general insurer or relating to its property are stayed unless the Federal Court otherwise grant leave: s 62P. Further, the appointment of a judicial manager does not operate as a ground for the denying of any obligation by a party to a contract: s 62V. The judicial management continues until the Court cancels it or until such time as the insurer is wound up: s 62ZE. At all times the judicial manager remains the creature of the Court and is controlled by it: s 62X.
V - The position of Rural
I turn then to the position of Rural. On 9 November 2009 Mr Brett Riley, a fellow of the Institute of Actuaries of Australia, was appointed by APRA as an inspector to investigate the activities and financial position of Rural. That appointment followed Rural’s failure to respond to a show cause notice issued to it by APRA on 16 October 2009 which required it to explain why an investigation into its affairs should not be held. On 19 May 2010 the inspector provided APRA with his report which is substantial. The inspector’s basic conclusions were:
(a)Rural was insolvent on base or pessimistic scenarios but marginally solvent on optimistic scenarios. It was “reasonable to conclude that in most plausible scenarios RGIL is insolvent”.
(b)The management of Rural was dysfunctional. Claims had not been paid for substantial periods of time and case estimation was inadequate. Reinsurance recoveries were not being appropriately pursued. Many other deficiencies besides were noted.
(c)The problems, in part, could be traced to the division of duties which had taken place between Rural’s former managing director and its present administrator.
(d) There was no plan administering the position of books of risk in run-off.
(e) Rural did not comply with most of APRA’s prudential standards.
The statutory pre-conditions to the exercise of the power to place a general insurer in judicial management are set out in s 62L:
(a)the Court’s satisfaction of the fact that APRA has conducted an investigation into the affairs of the general insurer; and
(b)the Court’s opinion that it is in the interest of policyholders that the order be made.
There is no question (a) has been satisfied. As to (b), the following should be noted. There is nothing, I think, to be said for the current situation. The affairs of the company are a shambles and its management is plainly dysfunctional. Some policyholders are not being paid and rudimentary aspects of an insurer’s business – such as, for example, the pursuit of reinsurers and elementary attendance to prudential standards – are not being observed. The more difficult question is whether the interests of policyholders are best served by a winding- up or by judicial management. The inspector’s report contains within it the view that on an optimistic scenario Rural is marginally solvent. Although I have some doubt about this conclusion, as presently advised, I think it would be in the interest of policyholders to establish the true position of Rural and to see if this hope has any real substance. For that reason the requirements of s 62L have been met.
The conclusion that the preconditions to the exercise of the power in s 62L have been met does not mean that the order should automatically be made. It is always to be kept in mind that the procedure is a reconstruction procedure. No doubt the fact that the Court has concluded that it is in the interest of policyholders that the insurer be placed under judicial management will often be a strong indicator of the desirability of pursuing that course. But policyholders are not the only persons interested in the process. In Associated Dominions Assurance Society 89 CLR at 91 Fullager J did not think that the primacy of policyholders under the Life Insurance Act 1945 (Cth) meant that “the interests of shareholders or others are always to be ignored”. Accepting that the risk to shareholders that a judicial management may leave them with little, it is relevant to observe that the same risk is likely to be present under a winding-up. Since, however, the only real choice in the present case is between a winding-up and a judicial management this factor is likely to be of lesser moment.
APRA submitted that the appointment of the judicial manager was also to be justified on the basis that once the order was made the Minister was authorised to give Rural’s policyholders access to a scheme under which they would receive full payment of their claims. This scheme is included in Part VC of the Act and was introduced in October 2008 at the same time as Part VB. Section 62ZZC provides (relevantly):
Declaration that Division 3 applies in relation to general insurer
(1)The Minister may declare that Division 3 applies in relation to a specified general insurer if:
(a)either:
(i)the general insurer is under judicial management under Division 1 of Part VB; or
(ii)an external administrator for the general insurer has been appointed under Chapter 5 of the Corporations Act 2001; and
(b)APRA has advised the Minister under this Division that APRA believes that:
(i)the general insurer is insolvent as defined in section 95A of the Corporations Act 2001 ; or
(ii)the general insurer is a foreign general insurer and is unable to pay, from its assets in Australia (other than any assets or amount excluded by the prudential standards for the purposes of paragraph 28(b)), all its debts that are liabilities in Australia other than pre-authorisation liabilities, as and when those debts become due and payable.
Declaration to specify amount for meeting entitlements
(2)The declaration must also specify the amount (if any) that is to be credited to the Financial Claims Scheme Special Account in connection with the application of Division 3 in relation to the declared general insurer. The amount must not be more than $20,000,000,000.
Declaration to specify amount for administration
(3)The declaration must also specify the amount (if any) that is to be credited to the APRA Special Account in connection with the administration of this Part in relation to the declared general insurer. The amount must not be more than $100,000,000.
Where the Minister makes the declaration, the policyholders may claim under the financial claims scheme. It is not necessary to set that scheme out in any detail. APRA submitted that it was in the interest of policyholders to place Rural under judicial management so that they might have access to that scheme.
I reject this argument for two reasons. First, I am not satisfied at this stage that Rural is, in fact, insolvent, so that it is difficult for me to be satisfied that APRA would advise the Minister appropriately under s 62ZZC(1)(b)(i). Secondly, even assuming that problem did not exist I know nothing of the circumstances in which the Minister might make such a declaration. There are, I should say, serious drafting issue with s 62ZZC. There is no guarantee that every insurer under judicial management will be insolvent. Indeed, it would be inappropriate to place a plainly insolvent insurer under judicial management because there would be no hope of it being successfully restructured. Thus, it is by no means obvious that judicial management will be an automatic gateway to access the scheme in Part VC. More serious, so it seems to me, is that in the case of a plainly insolvent insurer the Court is unlikely to appoint a judicial manager at all and the scheme of Part VC will never become applicable. Having read the explanatory memorandum it is clear that that is not what the drafter intended; it is however what the Act does.
The instant proceeding presents a prima facie case for judicial management. Against the making of the order and in favour of a winding-up are:
(a)a distinct, but not inevitable, possibility that Rural may be insolvent; and
(b) dysfunctional management.
In favour of the appointment of a judicial manager are:
(a) the fact that there is some possibility that Rural may turn out to be solvent;
(b) the need to ascertain its true position; and
(c)the likelihood that competent management may have a distinct and beneficial effect on the management of Rural.
In all the circumstances, to use Fullagar J’s words, Rural should “be given a chance to see what it can do”. It was for those reasons that I placed Rural under judicial management and appointed a judicial manager on 18 June 2010.
I certify that the preceding forty-five (45) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram. Associate:
Dated: 25 August 2010
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