G
| I | IN THE FEDERAL COURT OF AUSTRALIA ) |
1
| I | NEW SOUTH WALES DISTRICT REGISTRY ) | NO. VG316 of 1990 |
| BETWEEN: | INSURANCE AND SUPERANNUATION
COMElISSIONER |
Applicant
| AND: | OCCIDENTAL LIFE INSURANCE CO
OF AUSTRALIA LIMITED |
Respondent
| IN THE FEDERAL COURT OF AUSTRALIA | ) |
| 1 |
| NEW SOUTH WALES DISTRICT REGISTRY ) | No. VG317 of 1990 |
1
| BETWEEN | INSURANCE AND SUPERANNUATION
COfiIMISSIONER |
Applicant
REGAL LIFE INSURANCE LIMITED
| JUDGE MAKING ORDER : | LOCKHART J. |
| WHERE ORDER MADE: | SYDNEY |
| DATE ORDER MADE: | 9 OCTOBER 1991 |
MINUTE OF ORDER
I
| i | 1. | The Court gives instructions pursuant to S. 60(7) of the |
| I |
| I |
| I | Life Insurance Act in each matter that the remuneration, charges, |
| I |
| legal costs and other expenses of Mr Grellman in respect of his |
| l |
| l | appointment as a representative of policyholders of Occidental |
| ! |
| I | Life Insurance CO of Australia Limited and Regal Life Insurance |
Limited and in respect of the claims made by him in that capacity in action number 2496 of 1990 in the Supreme Court of Victoria or in any appeal or other proceedings in connection with that action shall constitute an expense within the meaning of order 2 made by Sheppard J. on 16 November 1990.
2. The Court makes the usual order for costs of the judicial
manager.
3. The Court orders that the two motions oi Battery Group Limited be dismissed and that Battery Group Limited pay the costs of the judicial manager of those two motions.
4. The Court makes no order as to the costs of the
Commissioner.
| NOTE: | Settlement and entry of orders is dealt with in Order |
| 36 of the Federal Court Rules. | |
I
| ' | v | - |
| ' 9' |
| l | b | | . | IN THE FEDERAL COURT OF AUSTRALIA | ) | |
1
| ! | NEW SOUTH WALES DISTRICT REGISTRY ) | No. VG316 of 1990 |
| BETWEEN : | INSURANCE AND SUPERANNUATION
COMMISSIONER |
Applicant
| AND: | OCCIDENTAL LIFE INSURANCE CO
OF AUSTRALIA LIMITED |
Respondent
| IN THE FEDERAL COURT OF AUSTRALIA | ) |
| 1 |
| NEW SOUTH WALES DISTRICT REGISTRY ) | NO. VG317 of 1990 |
1
| BETWEEN | : | INSURANCE AND SUPERANNUATION
COMMISSIONER |
Applicant
| AND: | REGAL LIFE INSURANCE LIMITED |
Respondent
9 October 1991
REASONS FOR JUDGMENT
There are four motions before the Court, two in the matter of Occidental Life Insurance CO of Australia Limited ("Occidental") and two in the matter of Regal Life Insurance Limited ("Regal"). The applicant in two of the motions is Richard John Grellman who is the judicial manager of Occidental and Regal. The applicant in the other two motions is Battery Group Limited ("Battery Group"). The four motions raise the same questions. They were all heard together by consent. The Insurance and Superannuation Commissioner ("the Commissioner")
also appeared on the hearing of the motions and supported the
orders sought by Mr Grellman.
fib Grellman seeks an instruction pursuant to S. 60(7) of the
L i f e I n s u r a n c e A c t 1945 ("the Act") that his remuneration, charges, legal costs and other expenses in respect of his appointment as a representative of policy holders of Occidental and Regal and in respect of claims made by him in that capacity in action number 2496 of 1990 in the Supreme Court of Victoria or in any appeal or other proceedings in connection with that action ("the Victorian action") shall constitute an expense properly recoverable by him in the judicial management of each company.
Mr Grellman also sought in his two notices of motion
instructions pursuant to S. 60(7) of the Act that he shall
continue to prosecute such of the claims in the Victorian action
| but on the hearing of the motions he did not press for such | as are pleaded against certain defendants under S. 38 of the Act; |
instructions at thls stage. Hence, that matter has been
deferred. |
| Battery Group seeks orders that Mr Grellman's remuneration, charges, legal costs and other expenses in respect of his appointment as a representative of the policy holders mentioned earlier and in respect of claims made by him in that capacity in the Victorian action shall not be included within his proper remuneration, charges and expenses as judicial manager. |
| The relevant facts are extensive and complex. I have considered all of them, but it is sufficient if I briefly summarise the principal facts. Prior to 28 September 1990 Battery Group was the holding company of a number of companies, one of which in turn was the holding company of Occidental and Regal. Occidental and Regal commenced the Victorian action against various defendants; it is studded with claims and cross claims and the pleadings have been amended from time to time. The defendants include Bank of Melbourne Limited, Battery Group and various persons who were directors of Occidental and Regal as at 28 September 1990. Occidental and Regal seek to recover some $58m removed from Occidental's statutory funds on or about 28 September 1990 and some $gm removed from Regal's statutory funds at the same time, when Battery Group purported to sell its shares in the ultimate holding company of Occldental and Regal to a company, Heath Holdings Pty Limited. It is not necessary |
| actlon. One such claim is important for present purposes and it | to recite all the claims that have been made in the Victorian | |
| is to be found as pleaded in paragraphs 48 to 55 of the reamended statement of claim. Those paragraphs allege that by reason of the provisions of S. 38(8) of the Act, certain defendants, being directors of Occidental and Regal on 28 September 1990, are liable to repay to the plaintiffs approximately $65m for breach of trust. |
| Occidental and Regal sought orders from the Supreme Court of Victoria that they be appointed in the Victorian action, pursuant to rule 16.01 of the rules of the Supreme Court of Victoria, to represent all persons who on 28 September 1990 were the owners of policies issued by Occidental and Regal and who claim to have had an interest in specified statutory funds. On 6 August 1991 O'Bryan J. of the Supreme Court of Victoria made an order appointing Mr Grellman to represent each and every owner of a life insurance policy issued by Occidental and Regal and extant on 28 September 1990 who is or may be interested in or affected by the Victorian action. |
| On 3 September 1991, pursuant to S. 15(2) of the Supreme C o u r t Act 1986 (Vic), O'Bryan J. reserved a number of questions |
| for the consideration of and to be argued before the Full Court of the Supreme Court of Victoria. The Full Court is expected to hear that matter together with an appeal from O'Bryan J.'s |
| decision of 6 August 1991 later this month. The questions which |
| Court raise issues as to whether the assets of a statutory fund | arlse in the Victorian action and which will come before the Full | |
| of a life insurance company are the subject of a trust under S. 38 of the Act; as to the identity of the trustee of the trust if there is such a trust; and as to who has standing to maintain an action under S. 38(8) of the Act. |
Section 37 of the Act requires a life insurance company to
establish and maintain statutory funds in respect of the life |
| i n s u r a n c e b u s i n e s s c a r r i e d o n b y it. S e c t l o n 38 i s i m p o r t a n t for |
| p r e s e n t | purposes | and | it | p r o v i d e s | a s | f o l l o w s : | |
| "38 ( 1 ) A l l | amounts r e c e i v e d by a | company i n |
| r e s p e c t | o f | a n y | c l a s s | o f | l i f e | i n s u r a n c e |
| b u s i n e s s , | a f t e r | the | e s t a b l i s h m e n t | by | the |
| company o f a | s t a t u t o r y fund | i n r e s p e c t | o f |
| t h a t c l a s s o f l i f e i n s u r a n c e b u s i n e s s , | s h a l l |
| be | c a r r i e d | to , | and | become | a s s e t s o f , t h a t |
f u n d .
| ( 2 ) | S u b j e c t | t o th is A c t , | the | a s s e t s o f | a |
| s t a t u t o r y fund | s h a l l | not , | so | l o n g a s | the |
company c a r r i e s on the c l a s s or c l a s s e s o f l i f e i n s u r a n c e b u s i n e s s i n r e s p e c t o f wh ich the fund was e s t a b l i s h e d , be a v a i l a b l e t o
| m e e t | a n y | l i a b i l i t i e s | or | e x p e n s e s | o f | the |
company other t h a n -
| ( a ) | l i a b i l i t i e s or e x p e n s e s r e f e r a b l e |
t o t h a t c l a s s or those c l a s s e s o f
| l i f e i n s u r a n c e b u s i n e s s ; | and | |
| ( b ) | l i a b i l i t i e s charged o n those a s s e t s o r a n y o f t h e m i m m e d i a t e l y p r i o r t o the commencenient o f th is A c t , |
| and | s h a l l | not | o t h e r w i s e | be | d i r e c t l y or |
| i n d i r e c t l y | a p p l i e d | f o r | a n y p u r p o s e | other |
| t h a n | the | p u r p o s e s | o f | t h a t | c l a s s | or | those |
c l a s s e s o f l i f e i n s u r a n c e b u s i n e s s .
| ( 3 ) | A | company s h a l l not m o r t g a g e or | c h a r g e |
| a n y o f | the | a s s e t s | o f | a n y s t a t u t o r y fund |
| o t h e r w i s e | t h a n | t o s e c u r e | a | b a n k | o v e r d r a f t . |
| ( 4 ) | S u b j e c t | t o | s u b - s e c t i o n | ( 5 ) , | a |
| t r a n s a c t i o n | s h a l l | not | be | i n v a l i d a t e d | by |
| r e a s o n only t h a t i t h a s been | e n t e r e d i n t o i n |
| c o n t r a v e n t i o n | o f | s u b - s e c t i o n | ( 3 , | b u t |
| n o t h i n g i n this s u b - s e c t i o n | s h a l l | a f f e c t the |
| l i a b i l i t y o f | a n y p e r s o n | t o a | p e n a l t y | i n |
| r e s p e c t | o f a n y s u c h | c o n t r a v e n t i o n . |
| ( 5 ) | T h e | C o u r t may, | on | the | a p p l i c a t i o n | o f |
| the | Commiss ioner , | make | a n | o r d e r | t h a t | a |
| t r a n s a c t i o n e n t e r e d i n | t o i n c o n t r a v e n t i o n o f |
| s u b - s e c t i o n | ( 3 ) s h a l l | be | i n v a l i d a t e d , | b u t |
| the C o u r t s h a l l | not | make | a n y s u c h | o r d e r i f |
| t h e C o u r t | i s s a t i s f i e d | t h a t | the | e f f e c t o f |
| the | o r d e r | ( i f made) | would | be | t o p r e j u d i c e |
| the r i g h t s o f a n y p e r s o n | i n r e s p e c t | o f , | or |
| a r i s i n g o u t | o f , | the | t r a n s a c t i o n | wh ich | h a v e |
| been | a c q u i r e d | i n | good | f a i t h | and | w i t h o u t |
| knowledge | o f | the | c o n t r a v e n t i o n . |
| The a s s e t s o f e a c h s t a t u t o r y fund | s h a l l |
(6)
be k e p t d i s t i n c t and s e p a r a t e from a l l other
a s s e t s o f the company.
| The income a r i s i n g from | the i n v e s t m e n t |
(7)
| o f the a s s e t s o f a n y s t a t u t o r y fund | s h a l l be |
| c a r r i e d | t o t h a t | f und . |
( 8 ) E v e r y d i r e c t o r o f a company s h a l l be u n d e r the same l i a b i l i t y , i n the event o f a c o n t r a v e n t i o n o f the p r o v i s i o n s o f th is
| section i n r e s p e c t o f a n y s t a t u t o r y f u n d , | a s |
| i f he had been | a | t r u s t e e u n d e r a | t r u s t f o r |
| the e x e c u t i o n o f t h o s e p r o v i s i o n s | i n r e s p e c t |
o f t h a t f und , and a s i f the a p p r o p r i a t e p o l i c y owners had been b e n e f i c i a r i e s o f s u c h a t r u s t , u n l e s s the d i r e c t o r p r o v e s t h a t the
| c o n t r a v e n t i o n o c c u r r e d | w i t h o u t h i s knowledge |
| and | t h a t | he | u s e d | a l l | d u e | d i l i g e n c e | t o |
| p r e v e n t | the | c o n t r a v e n t i o n . " |
It is sub-section (8) of S. 38 with which the present proceeding is most directly concerned and is at the heart of the controversy in the motions before the Court.
| Counsel for Battery Group argued that the order of O'Bryan policy holders was not authorised by rule 16.01 of the rules of | J. appointing M r Grellman in a representative capacity for the |
| the Victorian Supreme Court because there was no "property subject to a trust" within the meaning of rule 16.01(b). Rule 16.01 provides that it applies to a proceeding relating, inter alia, to property subject to a trust, and in those circumstances authorises the appointment of a person to represent interested classes. Counsel for Battery Group argued that sub-section ( 8 ) of S. 38 did not constitute a trust of anything and that all it |
did was to impose an obligation on the part of defaulting directors of a life insurance company to give compensation to policy holders. He argued that the appointment of Mr Grellman by O'Bryan J. as a representative party on behalf of policy holders of Occidental and Regal was an appointment of Mr Grellrnan personally and not as judicial manager, that any benefit that may flow from the Victorian action will go, so far as the claim which is based on S. 3 8 of the Act is concerned, to the policy holders and not to the companies; so that the costs, charges and expenses of and relating to so much of the Victorian action as is based on S. 3 8 has nothing to do with the preservation of the assets of the company; and therefore the motions by M r Grellman before the Court must fail.
Counsel for Mr Grellman argued that the relevant effect of
s . 38 is to render the directors of a life insurance company
liable to policy holders in any case in which statutory funds are lost as a result of the application of those funds directly or
or classes of life insurance to which the funds relate, and he indirectly for any purpose other than the purposes of the class
relied upon sub-sections ( 2 ) , ( 3 ) and ( 8 ) of S. 3 8 . Counsel
argued that in any such case the liability of each director is declared to be the same as if he were a trustee under a trust for the execution of the statutory provisions and as if the appropriate policy holders had been beneficiaries of such a trust. Counsel submittedthat to avoid that liability a director must prove that any contravention of the provisions of the section alleged to have been the cause of the loss of the
statutory funds occurred without his knowledge and that he used all due diligence to prevent the contravention. Counsel relied on sub-section (8). It was submitted that there is no reason in principle why a life insurance company, after its affairs have been placed under judicial management, should not be appointed as a representative plaintiff for policy holders to prosecute a S. 38 claim against directors. The prosecution of such claims was said to be reasonably incidental to the regime of judicial management because the objects of such management include the promotion of the general interests of policy holders: S. 62(1) of the Act. Therefore, counsel argued, there was no reason in principle why 14x Grellman should not be appointed as representative plaintiff to prosecute those claims in the interests of policy holders and therefore no reason why his costs and expenses incurred in doing so should not be charged against the funds of the insurance company as being reasonably incidental to the course of judicial management. What M r Grellman is doing
was said to be relying on s . 38 in circumstances similar to those
| in which a liquidator prosecutes claims on behalf of the company |
under S. 232 of the Corporations Law. Occidental and Regal would themselves be appropriate representative plaintiffs to prosecute claims under S. 38 against the directors; a fortiori the judicial manager is an appropriate representative plaintiff as his primary role is to protect the interests of policy holders.
It seems plain that when the matters which are before the Victorian Supreme Court are argued before the Full Court later this month these questions or certain of them will be agitated and decided by that Court. Various arguments as to the meaning and effect of sub-section (8) of S. 38 are open. On one view of the sub-section it does create a trust with the defaulting directors as trustees and the policy holders as beneficiaries. Another view, which is espoused by Battery Group and is mentioned above, is that all the sub-section does is to create a liability in defaulting directors to compensate the policy holders for their default. Other views as to the construction and effect of the sub-section are open. But one thing seems to me to be clear, namely, that the intention of sub-section (8) of the Act is plainly to enable the restoration of statutory funds that have been depleted by contraventions of the provisions of S. 38 by defaulting directors. Even if it be correct (and I say nothing on this question as I have no final view on it) that fruits of any victory under S. 38 (8) proceedings pass to the policy holders
| me that those fruits must be returned to the statutory funds as | rather than Occidental and Regal themselves, it seems plain to |
| the evident intent of the sub-section is to restore to the funds that which was wrongly removed from them due to defaulting directors. Doubtless the policy holders then have entitlements |
| under the Act, and under their contracts with the life insurance companies, in relation to the statutory funds. But it cannot be correct that the proceedings based on sub-section ( 8 ) could result in moneys being paid to the policy holders to be retained by them wlthout any obligation on their part to restore those moneys to the funds themselves. |
| However, even if it were correct that the policy holders could retain the fruits of their victory so that the statutory funds would not be replenished it would follow that the claims of policy holders against or in relation to the funds would correspondingly be reduced to the extent of the benefit which they received from the proceedings. Hence costs, charges and expenses incurred in the conduct of the proceedings by or on behalf of the policy holders would, it seems to me, necessarily benefit the statutory funds, the guardian of which at the present time is Mr Grellman, the judicial manager. |
| Plainly Mr Grellman was appointed a representative party by O'Bryan J. because he was the judicial manager. Whether that order was properly made or whether it is Occidental and Regal who ought to have been appointed as representative parties (as |
| companies and as pleaded by them in the reamended statement of | requested initially in the Victorian proceedings by those | |
| claim) is a matter on whlch I shall make no comment because I do not have to do so and it is therefore undesirable that I do so when that question is presently before another court. |
However one views the matter it seems to me that at the end
of the day successful pursuit of the claims made in paragraphs
48 to 55 of the reamended statement of claim in the Victorian |
I..
action will result in orders enabling the statutory funds to be replenished or at worst dlminish the entitlements of policy holders to thelr claims against those funds, however one views the true nature of the proceedings under sub-section (8) of S.
38. For example, if the true nature of the claims under sub-
section (8) is that they are actions akin to misfeasance proceedings against directors for the benefit of the policy holders; to the extent that they are entitled to recover moneys from those defaulting directors they cannot both recover those moneys and claim them also from the statutory funds. That would be an impermissible double payment.