Hedge, as Administrator of Goldfields Medical Fund Inc
[2002] FCA 1303
•23 OCTOBER 2002
FEDERAL COURT OF AUSTRALIA
Hedge, as Administrator of Goldfields Medical Fund Inc [2002] FCA 1303
PRACTICE AND PROCEDURE –national health legislation – application for approval of merger of registered health insurance funds – application by administrator of fund falling below capital adequacy standard – fund not insolvent – necessary directions – notice to contributors – no meeting required – whether notice to creditors necessary – creditors potentially “other persons interested” – notice by newspaper to creditors
SOCIAL SECURITY – national health legislation – prudential regulation – legislative scheme – replacement of judicial management regime – Public Health Insurance Administrative Council – appointment of administrator – fund not meeting capital adequacy standard – fund not insolvent – application for approval of merger – directions and notice requirements
COURTS – federal jurisdiction – proposed conferring of jurisdiction on court by deed – provision for review by court of administrator’s decisions under deed – ineffective – whether matters arising under the deed attract federal jurisdiction.National Heath Act 1953 (Cth) s 67(1), s 73BCC, s 82XB, s 82XZC(7), s 82 XZC(8), s 82XZE
Health Legislation Amendment Act (No 3) 1999
Corporations Act 2001 (Cth) s 447A(1)Minister for Health (Cth) v Trustees of the Ancient Order of Foresters Friendly Society in Queensland (1985) 10 FCR 27 cited
PETER HEDGE in his capacity as Administrator of the Goldfields Medical Fund Incorporated (Administrator Appointed)
W288 of 2002FRENCH J
23 OCTOBER 2002
PERTH
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
W288 OF 2002
BETWEEN:
PETER HEDGE in his capacity as Administrator of the Goldfields Medical Fund Incorporated (Administrator Appointed)
ApplicantJUDGE:
FRENCH J
DATE OF ORDER:
23 OCTOBER 2002
WHERE MADE:
PERTH
THE COURT ORDERS THAT:
1. The requirements of Order 55 Rules 4 and 5, to the extent that they apply, be waived.
2.The Applicant not be required to hold a meeting or meetings of contributors of Goldfields Medical Fund Incorporated (Administrator Appointed) (“GMF”).
3.The Applicant shall, by 30 October 2002, send to each contributor of GMF by normal pre-paid post:
(a)a notice substantially in the form of the draft notice annexed to the affidavit of Peter James Hedge sworn 3 October 2002 as annexure “PJH8”;
(b)a copy of the application; and
(c)a notice setting out the substance of paragraphs 4, 5 and 9 of this order.
4.If any contributor of GMF seeks to be heard on the application, the contributor must, by 20 November 2002:
(a)enter an appearance by filing a notice of appearance in accordance with Form 15 at the Western Australian District Registry, Commonwealth Law Courts Building, 1 Victoria Avenue, Perth in the State of Western Australia; and
(b)serve a copy of the notice of appearance at the Applicant’s address for service.
5.If any contributor of GMF enters an appearance in accordance with paragraph 4:
(a)the contributor must, by 4 December 2002, file and serve any affidavit setting out the matters in respect of which it wishes to be heard;
(b)the Applicant have leave to file and serve any affidavit in response within 7 days thereafter; and
(c)the matter be listed for further directions as soon as possible thereafter.
6.The Applicant shall, as soon as practicable after the date of this order, give notice of this application in the Australian Newspaper, the West Australian Newspaper and the Kalgoorlie Miner Newspaper, including:
(a)the date and time of the hearing of the application;
(b)the manner in which a copy of the Explanatory Statement relating to the proposed merger can be obtained;
(c)the requirement that any interested person wishing to be heard must file an appearance by no later than 20 November 2002; and
(d)the further requirement that any interested person who has entered an appearance file and serve on the administrator at an address for service specified in the advertisement, by 4 December 2002, any affidavit setting out matters in respect of which that person wishes to be heard.
7.The Applicant shall provide, within 48 hours of a request from any interested person, a copy of the Explanatory Statement relating to the proposed merger free of charge.
8.The Applicant have liberty to file and serve any affidavit in reply within 7 days after the filing of an affidavit by an interested person.
9.If no contributor of GMF or interested person enters an appearance in accordance with paragraph 4 or the advertisement referred to in paragraph 6 respectively:
(a)the application be listed for hearing before a Judge at 10.15am on 22 November 2002 with an estimated hearing time of half a day; and
(b)the Applicant have leave to file and serve any further or supplementary affidavits on the day of the hearing.
10.The costs of this directions hearing be the costs and expenses of the administration.
11.There be liberty to apply, including liberty to apply to vary the order set out in paragraph 6 above.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
W288 OF 2002
BETWEEN:
PETER HEDGE in his capacity as Administrator of the Goldfields Medical Fund Incorporated (Administrator Appointed)
ApplicantJUDGE:
FRENCH J
DATE:
23 OCTOBER 2002
PLACE:
PERTH
REASONS FOR JUDGMENT ON DIRECTIONS
FOR SCHEME OF ARRANGEMENT APPROVALIntroduction
The Goldfields Medical Fund Incorporated (“GMF”) is a registered organisation under the National Health Act 1953 (Cth) (“the Act”). As a result of a decision of the statutory regulator, the Private Health Insurance Administration Council (“PHIAC”) it has been under administration since November 2001 because of concerns about its diminishing capital. The administrator has recommended to PHIAC that GMF enter into a scheme of arrangement with another registered health insurance organisation called Healthguard Health Benefits Fund Limited (“Healthguard”). Under the scheme of arrangement the bulk of GMF’s assets and liabilities would be transferred to Healthguard. This is proposed on the basis that the merged organisation would meet and continue to meet the capital adequacy requirements prescribed by PHIAC. PHIAC has directed the administrator to apply to this Court for an order giving effect to the scheme of arrangement. Directions for notification to contributors have been sought by the administrator who also submits that a meeting of contributors is not necessary and, in effect, seeks a direction that he not be required to hold such a meeting. The question of the notification of creditors of GMF has been raised by the Court at the directions hearing, although it is accepted that the fund is solvent and continues to comply with the solvency adequacy standard prescribed by PHIAC.
The following reasons set out the background against which the relevant directions are sought and against which the ultimate relief of an order giving effect to the scheme of arrangement is sought.
Factual Background
The GMF has conducted a health insurance business out of Kalgoorlie in Western Australia for over 45 years. It is a registered organisation under the Act.
On 28 November 2001, PHIAC, a body corporate established under the Act with prudential regulatory functions, appointed Peter Hedge, a Chartered Accountant and Registered Liquidator, as an investigator under s 82R of the Act to investigate the affairs of GMF. The appointment was based on the following grounds:
(a)Information provided to PHIAC by GMF’s actuary and by GMF raised serious concerns about the reported level of claims, decreasing reserves, liquidity, the carrying value of assets and whether or not the management of the business of GMF was in conflict with the actuary’s recommendations to preserve the financial stability of GMF;
(b)PHIAC’s review of financial information provided by GMF led PHIAC to suspect that GMF’s reserves may, or may in the near future, become insufficient to satisfy the capital adequacy requirements under the Act;
(c)PHIAC had been informed that GMF had lost several key executive staff including the Chief Executive Officer, the accountant and an experienced senior manager;
(d)PHIAC suspected that GMF may not have experienced internal managers to effectively manage the operations of the Fund in the interests of contributors.
Mr Hedge was appointed on 23 December 2001 as administrator of GMF under s 82XF of the Act.
Although GMF had been established and had operated for many years as a health insurer for contributors predominantly based in regional Western Australia, over the two years up to the appointment of Mr Hedge as investigator, the fund conducted by GMF had grown by more than 400%. It now services approximately 70,000 contributors with more than 50% of the membership located in the States of Victoria, New South Wales and Queensland. Mr Hedge’s examination of the business and affairs of GMF led him to conclude that what he described as “the phenomenal growth in membership of the GMF fund” was attributable to uneconomic pricing decisions that resulted in the fund breaching capital adequacy standards prescribed under the Act. His examination also disclosed inadequate management and corporate governance and continued substantial losses and breaches of the capital adequacy standards.
The audited financial statements of GMF for the year ended 30 June 2002 disclosed a net loss of $8,309,386 against a net profit in the preceding year of $4,838,854. While total revenue had increased by over $7 million, benefits expenses had increased by more than $17 million. Salaries and employee expenses had increased by $1 million and professional services expenses increased by about $1.2 million. Asset writedowns represented $1.695 million As at 30 June 2002, the balance sheet showed net assets of $7,065,186 against a net asset position in the previous year of $15,374,572. Notes to the financial statements indicated that although the Fund was solvent at 30 June 2002, it had breached its capital adequacy requirement as defined by PHIAC under the Act by $4,550,000.
A subsequent report to PHIAC from GMF showed that as at 31 August 2002 GMF’s solvency was $2.443 million in excess of the full solvency requirement. However its capital position was $3.399 million less than the full capital adequacy basis required by PHIAC.
On 12 September 2002, Mr Hedge provided PHIAC with a final report under s 82XZC of the Act. In that report he recommended, pursuant to s 82XZC(8)(a)(i) that the fund conducted by GMF be merged with the fund conducted by Healthguard in accordance with a scheme of arrangement deed to be executed by Healthguard, GMF and Mr Hedge as administrator. PHIAC considered the report at a meeting of its board on 13 September 2002 and concluded that the course of action recommended by the administrator would be in the best interests of the contributors of the fund conducted by GMF. On 16 September, PHIAC announced that it had accepted the administrator’s recommendation to merge the GMF fund with that conducted by Healthguard. It issued a statement to all GMF contributors on that date. It foreshadowed that the administrator would be seeking approval from this Court for the merger in accordance with procedures laid down by the Act. On 4 October 2002, an application was filed in this Court by Mr Hedge accordingly.
The Application
The primary relief claimed in the application is in the following terms:
“1.Pursuant to section 82XZE of the National Health Act 1953 (“the Act”) the scheme of arrangement set out in the Scheme of Arrangement Deed between Healthguard Health Benefits Fund Limited, Goldfields Medical Fund Incorporated (Administrator Appointed) (“GMF”) and the Applicant dated 2 October 2002 (the “Deed”) be given effect to in accordance with the terms of the Deed.
2.Pursuant to section 447A of the Corporations Act (as applied by section 82XB of the Act), the operation of section 82XZJ(3)(e) of the Act be varied and Part IVA of the Act operates so that, notwithstanding the order in paragraph 1, the administration of GMF ends on the earlier of:
(a)when the Applicant has completed all his obligations under clause 13 of the Deed; or
(b)6 months from the date of this order.
3.The Applicant shall, in accordance with the terms of Schedule 2 of the Deed, within 1 month and 5 business days of the date of this order:
(a)cause to be published in a newspaper or newspapers circulating generally in each State and Territory of Australia in which GMF conducts business an advertisement substantially in the form of that set out in Schedule 3 of the Deed; and
(b)send to each known creditor of GMF at their last known address a notice substantially in the form of that set out in Schedule 3 of the Deed.
4.That the 28 day period prescribed in paragraph 2.2 of Schedule 2 to the Deed be the date on or before which creditors of GMF are to prove their debts or claims against GMF in accordance with the terms of Schedule 2 and after which any unproved debts or claims will be forever extinguished.
…”
An order is also sought that the costs of the application be the costs and expenses of the administration of GMF.
The Proposed Directions
At the first directions hearing on the return of the application, orders in the following terms were sought:
“1.The requirements of Order 55 Rules 4 and 5, to the extent that they apply, be waived.
2.The Applicant not be required to hold a meeting or meetings of contributors of Goldfields Medical Fund Incorporated (Administrator Appointed) (“GMF”).
3.The Applicant shall, within 5 business days after the date of this order, send to each contributor [of] GMF by normal pre-paid post:
(a)a notice substantially in the form of the draft notice annexed to the affidavit of Peter James Hedge sworn 3 October 2002 as annexure “PJH8”;
(b)a copy of the application; and
(c)a notice setting out the terms of paragraphs 4, 5 and 6 of this order.
4.If any contributor of GMF seeks to be heard on the application, the contributor must, within 21 days of the date of the notice referred to in paragraph 3(a):
(a)enter an appearance by filing a notice of appearance in accordance with Form 15 at the Western Australian District Registry, Commonwealth Law Courts Building, 1 Victoria Avenue, Perth in the State of Western Australia; and
(b)serve a copy of the notice of appearance at the Applicant’s address of service.
5.If any contributor of GMF enters an appearance in accordance with paragraph 4:
(a)the contributor must, within 14 days of the expiry of the 21 day period referred to in paragraph 4, file and serve any affidavit setting out the matters in respect of which it wishes to be heard;
(b)the Applicant have leave to file and serve any affidavit in response within 7 days thereafter; and
(c)the matter be listed for further directions as soon as possible thereafter.
6.If no contributor of GMF enters an appearance in accordance with paragraph 2 (sic):
(a)the application be listed for hearing before a Judge at am/pm on November 2002 with an estimated hearing time of half a day; and
(b)the Applicant have leave to file and serve any further or supplementary affidavits up to the day of the hearing.
7.The costs of this directions hearing be the costs and expenses of the administration.
8.There be liberty to apply.”
Statutory Framework – The National Health Act 1953 – Judicial Management Provisions Prior to 1999
Section 67(1) of the Act provides that:
“A person (other than a registered organization) shall not carry on health insurance business.”
Prior to 1999, applications for registration of organisations were made to and determined by the Minister for Health. Such applications were referred first to a Registration Committee (ss 70 and 71) which would report to the Minister (s 72). The Minister, after considering the report of the committee, was empowered to grant or refuse the application (s 73(1)).
A body called the Private Health Insurance Administration Council was established (s 82B) which had a variety of functions including the receipt of regular reports from registered organisations about their financial affairs (s 82G(1)(bb)), the examination of the financial affairs of such organisations (s 82G(1)(d)), the determination whether a registered organisation was or was about to be in breach of a minimum reserve condition specified under s 73BAB, (s 82G(1)(f)), and the making of recommendations, including recommendations that the Minister apply for the judicial management or winding up of a fund (s 82G(1)(g)(ii)).
Part VIA, as it stood prior to 1999, provided for the conduct and supervision of the affairs of registered organisations. By s 82R the Minister could serve a notice on a registered organisation requiring it to show cause within fourteen days or more as specified, why an inspector should not be appointed to investigate the affairs of the organisation (s 82R(1)). The powers of such inspectors and the duties of persons to comply with their requirements were set out in ss 82S and 82U. The inspector was required to report to the Minister on the completion or termination of an investigation (s 82W).
After consideration of an inspector’s report or any recommendation of PHIAC, the Minister, if of opinion that it was necessary or proper to do so, could apply to the Court for an order for the fund conducted by the organisation to be placed under judicial management or to be wound up. Section 82ZA provided for the Court to make orders for the judicial management of a fund and for the appointment of a judicial manager in whom management of the fund would vest. The Court could issue directions to the judicial manager who would act under the control of the Court and could apply to the Court at any time for instructions as to the manner in which he or she should conduct the judicial management or in relation to any matter arising in the course of that judicial management. There was also provision for the cancellation of judicial management orders (s 82ZB) and the filing with the Court of a report by the judicial manager stating which of certain specified courses was, in the circumstances, in the judicial manager’s opinion, most advantageous to the general interests of the contributors to the fund. These options included the transfer, in accordance with a scheme to be prepared by the judicial manager, of the business of the fund to the fund conducted by another registered organisation (s 82ZE). The judicial manager could make an application to the court for an order to give effect to the recommended course. On such an application, the Court could make such order as it considered to be most advantageous for the interests of the contributors to the fund (s 82ZE(6)). Where an order was made by the Court for the transfer of the business of a fund to the fund conducted by another registered organisation, the judicial manager was to prepare a scheme for the transfer, submit the scheme to the proposed transferee organisation for its approval and when the scheme had been so prepared and approved, was to apply to the Court for its confirmation (s 82ZF(1)).
Order 55 of the Federal Court Rules was made to deal with applications for judicial management orders. That order attracts to applications under Part 6A of the Act as it stood, the same provisions about the commencement of the proceedings by application and the conduct of directions hearings as apply to applications generally. Order 55 rules 4 and 5 contemplate the calling of meetings of contributors or creditors or any other person or class of persons whose interests may be affected in such manner as the Court directs. Order 4 requires such evidence to be adduced by an applicant at a directions hearing as is necessary to enable the Court to order a meeting or meetings of any of those classes of person. The evidence should include a form of notice of meeting, forms of proxy, proposed forms of advertisement, the proposed scheme, an explanatory statement, the consent of the proposed chairman and the most recent audited accounts and balance sheets of the fund. Order 55 rule 5 requires that in every notice summoning the meeting given by advertisement there shall be included a notification of the day to which the application stands adjourned by order of the Court under rule 7 and a notification of the place at which, and the manner in which, contributors or creditors or others entitled to attend the meeting may obtain copies of the explanatory statement. Order 55 rule 7 provides that upon directions being given by the Court, the application will stand adjourned to such day as the Court may appoint. On the further hearing of the application the rule requires evidence as to due compliance with the Court’s directions, the report of the chairman of the meeting or meetings by affidavit and evidence of the views expressed by any interested person who opposes the scheme.
Order 55 was made in the context of the regulatory scheme as it existed prior to 1999.
Statutory Framework – The National Health Act – Prudential Regulation after 1999
The preceding regulatory provisions were substantially altered by the Health Legislation Amendment Act (No 3) 1999 (No 159 of 1999). An overview of the changes was given in the Second Reading Speech for the Bill. It was said, inter alia, to address concerns of the government, consumers and the private health industry about the prudential regulation of the private health insurance industry which had been identified in the 1997 Industry Commission report on private health insurance. The Second Reading Speech went on:
“In 1989, the Private Health Insurance Administrative Council, PHIAC, was established under the National Health Act 1953 to provide advice on the prudential regulation of the private health industry. In line with the Industry Commission recommendations, the government amended the act so that PHIAC now has an independent board. However, up until now PHIAC’s powers have been limited, in that it is essentially an advisory and administrative body and as such may only make recommendations. This bill will make essential regulation of the private health industry more efficient. The transfer of the function of approving registration and mergers from my department to PHIAC and the strengthening of deregistration provisions will make PHIAC’s roles consistent with other insurance regulators. This move from the government to an independent regulator will take any politics out of the equation and put independent expert decision-making in.” (Parl Deb H of R 11/3/1999 p 3731)
The essential features of the new prudential regulation provisions were set out in the Explanatory Memorandum for the Bill. It described the main items contained in the schedule to the Bill dealing with the prudential regulation of registered organisations as including the following:
- the repeal of minimum reserve requirements and their replacement with a scheme providing for solvency standards and capital adequacy standards
- empowering both the Minister and the PHIAC to appoint inspectors to examine the affairs of registered organisations where illegal or inappropriate conduct is suspected
- the repeal of the court ordered judicial management, compulsory transfer and winding up of funds provisions and their replacement with a new administration and winding up scheme
-empowering the PHIAC to appoint an administrator to either a fund or an organisation in difficulty, to have the administrator operate in the interests of contributors, and requiring the administrator to make a recommendation to PHIAC as to the most appropriate options for the fund or registered organisation
- requiring court approval before a fund or registered organisation in difficulty can be forced to comply with a scheme of arrangement or be wound up
Under the new system set out in Part VI dealing with health benefits organisations, the basic rule continues that only a registered organisation can carry on health insurance business (s 67). Organisations may apply to the PHIAC for registration as registered health benefits organisations (s 68). Applications for registration are to be referred by PHIAC to a Registration Committee which shall submit a report to PHIAC and recommend that registration be granted or refused (ss 71 and 72). PHIAC may, after considering the report of the Committee, grant or refuse the application (s 73(1)).
A new Division 3A was introduced dealing with the solvency standards for registered organisations. The purpose of the Division is to establish and require registered organisations to comply with standards of solvency in order to ensure that the health benefits fund conducted by each such organisation remains solvent (s 73BCA). PHIAC was required, as soon as practicable but, in any case, not later than 1 January 2001, to establish, in writing, a solvency standard for the purposes of the Division (s 73BCB). The solvency standard could vary according to the fund or class of fund or apply to a fund only in circumstances specified in the standard (s 73BCB(2)). The stated purpose of the solvency standard is set out in s 73BCC:
“The purpose of the solvency standard is to ensure, as far as practicable, that at any time the financial position of the health benefits fund conducted by a registered organization is such that the organization will be able, out of the assets of the fund, to meet all liabilities referable to the health insurance business of the organization as those liabilities become due.”
Every registered organisation is required to comply with the solvency standard as it applies in respect of that organisation (s 73BCD(1)). PHIAC is also empowered to give solvency directions to an organisation where it is satisfied that there are reasonable grounds for believing that the organisation may not be able to meet, out of the assets of the fund, all liabilities referable to the business of the fund as they become due.
A new Division 3B introduced provision for a capital adequacy standard for registered organisations. PHIAC was required, on the same day as it established a solvency standard, to establish in writing a capital adequacy standard for the purposes of that Division (s 73BCG). Every registered organisation is required to comply with the capital adequacy standard as it applies in respect of that organisation (s 73BCI). PHIAC is also empowered to give capital adequacy directions where it is satisfied that there are reasonable grounds for believing that the assets of a fund will not provide adequate capital for the conduct of the health insurance business in accordance with the Act (s 73BCJ).
The PHIAC continues under Division 2 of Part VIIAA of the Act. Its functions include the appointment of inspectors under s 82R to investigate the affairs of registered organisations (s 82G(db), the appointment of administrators of registered organisations, the receipt of reports of such administrators under s 82XZC and dealing with such reports under s 82XZD.
Part VIA dealing with the conduct and supervision of the affairs of registered organisations comprises five divisions. They are referred to in outline in s 82QA thus:
(1)Division 1 sets out the purpose of Part VIA and defines concepts used in the Part.
(2)Division 2 provides that the Minister or PHIAC may appoint an inspector to investigate and report on the affairs of a registered organisation and sets out the powers and duties of an inspector.
(3)Division 3 describes the circumstances in which, and the legal basis on which, a fund or a registered organisation can be placed under administration and sets out the duties and powers of an administrator.
(4)Division 4 describes the circumstances in which, and the legal basis on which, a fund or a registered organisation can be wound up and, to the extent that Commonwealth law affects those circumstances or that manner, sets out the relevant Commonwealth law.
(5)Division 5 contains provisions dealing with miscellaneous matters.
Section 82R provides for the appointment of an inspector to investigate the affairs of a registered organisation. Section 82W requires the inspector to make a report to the appointing authority, which is the Minister or PHIAC, as the case may be. Division 3 of Part VIA then deals with the administration of funds and registered organisations. The purposes of the Division, as set out in s 82XA, are to permit the business, affairs and property of a fund or organisation under administration to be administered in a way:
(a)that maximises the chance that the persons who are contributors to the fund under administration, or to the fund of the organisation under administration, as the case requires, continue to be covered for health insurance either by the fund to which they contribute or by another fund to which the business of the fund is transferred; or
(b)if it is not possible for that coverage to be maintained – that to the extent possible, safeguards the financial interests of those contributors in the event of an eventual winding up of the fund or organisation under administration.
Section 82XB provides, inter alia:
“(1) Subject to this Act, the provisions of the Commonwealth, State or Territory law that, but for this section, would relate to the administration of a registered organization, whether it is a company, an incorporated association or an unincorporated entity, cease, by force of this section, to apply to that registered organization.
(2) The administration of a registered organization is regulated instead, and the administration of a fund conducted by a registered organization is also regulated:
(a)by the provisions of this Division; and
(b)by the provisions of Divisions 6, 7, 8, 10, 11, 13 and 16 of Part 5.3A of Chapter 5 of the Corporations Act 2001 and of Division 7A of Part 5.6 of that Chapter, all applying, so far as they are capable of so doing, subject to such modifications as are set out in this Act or as are prescribed.
.
.
.
(5) In the application of the provisions of the Corporations Act 2001 referred to in subsection (2) in relation to the administration of a registered organization, those provisions apply as if:
(a)a reference to the company were a reference to the registered organization (whether the registered organization is a company under the Corporations Act 2001 or not); and
(b)a reference to the administrator were a reference to the administrator of the registered organization appointed under this Act; and
(c)a reference to the Court were a reference to the Federal Court of Australia.
(6) The regulations may provide for different modifications according to the nature of the fund or registered organization that is to be, or that is being, administered.”
The power of PHIAC to appoint an administrator is conferred by s 82XD. Section 82XE sets out the qualifications for appointment of an administrator and s 82XF the grounds for such appointment. Subdivision 6 of Division 3 deals with the report by the administrator to PHIAC.
Statutory Framework – The National Health Act - Schemes of Arrangement after 1999
Section 82XZC requires an administrator, appointed by PHIAC, to conclude an examination of the business, affairs and property of the organisation within three months of appointment and make a final written report to PHIAC. The administrator may recommend, in the report, the execution of a voluntary deed of arrangement. That term is defined in s 82Q primarily as a deed of arrangement agreed on by creditors in a meeting convened under s 82XZ. There is no such deed in this case. But the administrator may also recommend a scheme of arrangement. In that connection s 82XZC(7) provides:
“(7) If:
(a)the administrator has not proposed a voluntary deed of arrangement; or
(b)the administrator has proposed such a deed but:
(i)the creditors of the fund or organization under administration have resolved to reject the deed; or
(ii)the creditors of the fund or organization under administration have resolved to vary it and the administrator is not satisfied that, as so varied, it is, in the circumstances, still protective of the interests of the contributors to the fund concerned; or
(c)the administrator has proposed such a deed but, because of the operation of subsection (4), the administrator must not recommend that the Council approve the execution of the deed;
the administrator must, in the report to the Council:
(d)recommend a course of action listed in subsection (8) that, in the opinion of the administrator, is, in the circumstances, in the best interests of contributors to the fund concerned; and
(e)set out the reasons for that recommendation.”
Subsection 82XZC(8) provides:
“(8) The courses of action that the administrator might recommend that the Council approve are:
(a)subject to the Court’s making an order or orders in relation to the matter:
(i)that the conducting organization or the registered organization, as the case requires, implement a scheme of arrangement (which may involve the execution of a deed in the same terms as the voluntary deed that the creditors rejected) concerning the business of the fund or organization under administration; or
(ii)that the fund or organization under administration be wound up; or
(b)that the administration cease and that the business of the fund or organization under administration be resumed by the conducting organization or the registered organization, as the case requires.”
A scheme recommended under subs (8)(a)(i) may provide for the transfer to another registered organisation; on terms set out in the scheme, of the fund under administration or of the fund conducted by the organisation under administration (s 82XZC(9)(b)).
PHIAC, if satisfied that a course of action recommended by the administrator under s 82XZC(7) will be in the best interests of the contributors to the fund, must so inform the administrator. If the course of action is of a kind specified under s 82XZC(8)(a)(i) the PHIAC must direct the administrator to make an application in accordance with s 82XZE(1) to give effect to that course of action.
The present application is made under s 82XZE which provides, inter alia:
“82XZE(1) If the Council informs the administrator that it is satisfied that a course of action of a kind specified in subparagraph 82XZC(a)(i) is, in the circumstances, in the best interests of contributors to the fund concerned, the administrator must apply to the Court for an order or orders to give effect to the course of action.
(2) On an application for such an order or orders:
(a)the Council and any other person interested are entitled to be heard; and
(b)the Court may make such order or orders in respect of the course of action the subject of the application as it considers to be, in all the circumstances, in the interests of persons who are contributors to the fund concerned.
(3)An order under this section:
(a)is binding on all persons; and
(b)takes effect despite anything in the constitution or other rules of the registered organization concerned.
(4)For the avoidance of doubt, an order of the Court is not required:
(a)in order to give effect to a voluntary deed of arrangement – if the Council approves the execution of the deed; or
(b)in order to effect a termination of an administration that is recommended under paragraph 82XZC(8)(b) – if the Council accepts the recommendation.”
Reference should also be made to s 82XZI in subdivision 8 which applies s 447B of the Corporations Act 2001 as if the power there conferred to make application to the court were a power conferred on PHIAC. The general provision, s 82XB attracts the application of s 447A which appears in Division 13 of Part 5.3A of the Corporations Act 2001. That section confers power on the Court to make orders in relation to a company under administration with a view to executing a deed of company arrangement. Relevantly this section provides:
“447A(1) The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.
(2) For example, if the Court is satisfied that the administration of a company should end:
(a)because the company is solvent; or
(b)because provisions of this Part are being abused; or
(c)for some other reason;
the Court may order under subsection (1) that the administration is to end.
(3)An order may be made subject to conditions.
(4)An order may be made on the application of:
(a)the company; or
(b)a creditor of the company; or
(c)in the case of a company under administration – the administrator of the company; or
(d)in the case of a company that has executed a deed of company arrangement – the deed’s administrator; or
(e)ASIC; or
(f)any other interested person.”
The Proposed Scheme of Arrangement - Overview
The scheme of arrangement deed is executed between GMF, Healthguard and Mr Hedge. Recital H of the deed describes it as setting out the terms on which the proposed transaction will, subject to PHIAC’s approval under s 82XZD of the Act and the Court making orders in relation to the matter under s 82XZE of the Act and s 447A of the Corporations Act as applied by s 82XB of the Act, be effected by the parties.
The key aspects of the scheme of arrangement are described in Mr Hedge’s affidavit of 3 October 2002 thus:
(a)All GMF contributors will be transferred to Healthguard together with the liabilities associated with their policies.
(b)The assets of GMF will be transferred to Healthguard, excluding amounts estimated to meet GMF’s remaining liabilities and any other assets agreed by the parties. It is estimated that assets valued in excess of the estimated liabilities associated with the GMF contributors will be transferred to Healthguard at the time the GMF contributors are transferred.
(c)The balance of assets held by GMF are to be realised and the proceeds used to discharge GMF’s remaining outstanding liabilities. The balance of the proceeds will then be paid to Healthguard.
(d)Healthguard undertakes, unless otherwise agreed by PHIAC, to maintain GMF’s operations in Kalgoorlie, with trading continuing under the GMF brand.
(e)All GMF staff will be offered new employment contracts.
(f)Healthguard undertakes that at least two non-executive directors from the board of HBF and at least two non-executive directors residing in the Goldfields region will be appointed to the Healthguard board.
(g)Healthguard will convert GMF’s information technology systems to the “WHICS” health insurance management software system without adversely affecting the services to GMF contributors.
(h)Healthguard will accept each GMF contributor on terms no less favourable than the GMF policy held by the GMF contributor.
(i)Each GMF contributor that transfers to Healthguard will be deemed to have a continuous period of membership with Healthguard (including for the purposes of waiting periods).
(j)Premiums payable by and benefits offered to each GMF contributor under policies held will remain unchanged until 31 March 2003 unless requested earlier by PHIAC for solvency or capital adequacy reasons.
Mr Hedge contends that the merger of the GMF fund with the Healthguard fund should provide GMF contributors with established, experienced and proven management and a board of directors which will enable it to meet PHIAC’s requirements. The merger should also provide GMF contributors with a financially viable fund with improved capital reserves. He would expect the merged fund to meet the prudential requirements under the Act. He states his opinion that in all the circumstances the best interests of the contributors of GMF are served by merging the fund conducted by GMF with the fund conducted by Healthguard in accordance with the scheme of arrangement outlined in the deed. If the scheme of arrangement is not approved by the Court then, in Mr Hedge’s opinion, the administration will continue subject to PHIAC and the Act. He believes the fund would continue to be in breach of its prudential requirements under the Act. Under these circumstances PHIAC had indicated that it is likely that it would not be in a position to renew the fund’s registration and operating licence.
The scheme contemplated under the deed involves a two step process for the transfer of GMF’s net assets and liabilities to Healthguard. In the first step, which occurs on the “Effective Date”, a defined “Base Amount” is paid to Healthguard when all liabilities of GMF for “Transferring Contributors” are transferred to Healthguard. In the second step, Mr Hedge would proceed to realise the “Balance Assets”, discharge GMF’s remaining liabilities and pay the “Realised Amount” to Healthguard. There are two principal reasons for structuring the scheme using this two step process. The first is that there are certain GMF assets designated “problem” assets which the parties consider would be better dealt with and realised by Mr Hedge as administrator, rather than transferred to Healthguard. These involve GMF’s interests in contracts to purchase three apartments at Mounts Bay Village in Mounts Bay Road, Perth, WA. A dispute has arisen with the vendor under these contracts which will need to be settled by the courts if it cannot be resolved by agreement.
The second reason is that Healthguard is reluctant to assume all the liabilities of GMF in circumstances where it could not determine the extent of those liabilities. Mr Hedge says he is informed by Healthguard that it is particularly concerned about presently unknown and unforeseen liabilities emerging and claims being made against the merged fund after the transfer. He believes a procedure established in cl 13.4 and schedule 2 to the deed will enable GMF’s outstanding liabilities to be finally determined and discharged. This would achieve the finality and certainty necessary in the interests of the contributors of GMF and the merged fund.
The Proposed Scheme of Arrangement – Determination of Outstanding Liabilities of GMF
Clause 13.4 of the deed provides that:
“The procedures for the Administrator satisfying the outstanding liabilities of GMF is as set out in Schedule 2.”
Schedule 2 provides for the administrator to create a “Admitted List of Admitted Claims by Creditors”. Within one month of the Effective Date under the deed, the administrator must, under schedule 2, place an advertisement in the form of that set out in schedule 3 once in a newspaper or newspapers circulating generally in each State and Territory of Australia in which GMF conducts business and send to each named creditor at their last address a notice substantially in the form of that set out in schedule 3 requiring each creditor asserting a claim to notify the administrator in writing, within twenty eight days of the date of the advertisement, of the asserted claim. The administrator, under cl 2.6, must determine whether all or part of an asserted claim should be entered on the Admitted List. There is provision under cl 2.10 for a creditor who receives a notice from the administrator of the admission of none or all or part of a claim on the Admitted List to commence a “proceeding in a court nominated by the administrator appealing the administrator’s decision”. Unless the creditor commences a proceeding within a twenty one day period or any further period the Court allows, the administrator’s decision would be final.
It does not appear that this provision has any statutory support. During the directions hearing, counsel suggested that there might be a specific provision in the Corporations Act applying the appeal provisions in respect of a liquidator’s rejection of a proof of debt (contained in reg 5.6.54 of the Corporations Regulations) to an administrator. Counsel has advised subsequently that having researched the position, there is no such provision in the Corporations Act or Regulations. The problem is more fundamental than that. No deed can confer jurisdiction on the Court. The Act does not in terms authorise applications to the Court to resolve questions relating to or arising out of the discharge of the scheme administrator’s duties and powers. And if there be jurisdiction to challenge a decision of the administrator, parties cannot be bound to the choice of court nominated by the administrator – see generally Minister for Health (Cth) v Trustees of the Ancient Order of Foresters Friendly Society in Queensland (1985) 10 FCR 27 (Pincus J). It may be the case of course that the deed being made “binding on all persons” by virtue of s 82XZE(1), that federal jurisdiction may be attracted in respect of disputes arising under the deed by virtue of s 39B(1A) of the Judiciary Act 1903 (Cth). Plainly this aspect of the proposed deed of arrangement will require consideration when it comes to the question of Court approval. It is doubtful that it could be approved in that form. At this point it is also relevant to the issue whether or not the Court should require notice of the application for approval to be given to creditors.
A further aspect of the orders sought in the application is an extension of the administration for a further period of six months to allow Mr Hedge to complete his obligations under the deed. Under s 82KZJ(3)(e) of the Act, the administration of GMF would come to an end upon the Court making the orders sought in the application. It is for that reason that Mr Hedge seeks the orders set out in par 2 of his application. In that respect he would rely upon s 447A of the Corporations Act as applied by the Act.
Mr Hedge says in his affidavit that he does not consider it necessary to hold a meeting or meetings of contributors to consider the scheme of arrangement set out in the deed. Instead he proposes sending a notice to each contributor. The notice would attach a statement explaining the effect of the scheme and the rights of the contributors in relation to the scheme and the application. He points out that PHIAC has accepted his recommendation and has informed him that it is satisfied that his recommended course of action is in all the circumstances, in the best interests of the GMF contributors. Any resolution passed at a meeting of contributors would not be binding on GMF, the administrator, PHIAC or the Court. He points out that Order 55 of the Federal Court Rules, which appears to require the calling of meetings of contributors, has not been amended to reflect the amendments to the Act. GMF contributors are entitled under the Act to be heard on the application. They are therefore not denied an opportunity to express any objections or concerns by reason of the fact that no meeting is held. And to the extent that GMF contributors consider it not in their interests to continue as contributors of the merged fund, they are entitled and free to transfer to any other registered fund or organisation. This is on the basis of the statutory rights of transferability under the health insurance regime regulated by the Act. Mr Hedge says that given the geographical spread of the GMF contributors, the cost of organising and holding what would most likely be multiple meetings of contributors in different State capital cities, would be significant. The current membership profile of GMF as at 31 August 2002 is summarised as follows:
State Number of Contributors Percentage of Contributors NSW and ACT 5,126 7.4% Vic 30,096 43.2% Qld 4,014 5.8% SA 1,384 2% WA and other 28,980 41.6% Total 69,600 100%
Given the deteriorating financial position of GMF, Mr Hedge did not consider the incurring of such significant costs to be in the best interests of GMF contributors or contributors to the merged funds.
In support of the urgency of the application, he says that the currently marginal trading performance of the GMF fund is unlikely to improve in the immediate future. As a result it is likely that GMF’s capital position will continue to fall below the capital adequacy standard. The administration of the fund has introduced a degree of uncertainty about its future among employees and contributors. The sooner the scheme of arrangement under the deed is implemented then, it is said, the sooner contributors and employees of GMF can be part of a normally trading fund not tainted by the uncertainty of administration.
The Proposed Directions
I accept the force of Mr Hedge’s contentions as to the suggested procedure for notifying contributors of the application and am prepared to make directions accordingly. My concern is whether or not creditors should be notified.
Under s 82XZF(2), on an application for an order for approval of a scheme of arrangement, PHIAC “and any other person interested” are entitled to be heard. There is no doubt about the interests of the creditors. There is no suggestion that GMF is insolvent, the evidence is to the contrary, and the proposed procedures under the scheme make provision for what amount to “proofs of debt” and the paying out of all creditors by the administrator. There are, however, some uncertainties attached to that process including, as already mentioned above, the appeal provision for creditors in schedule 2. In my opinion, it is desirable that notice of the proposed application be given generally so that any interested person may seek leave to appear. I will not require notices to be sent individually to creditors of GMF as many ordinary trade creditors might expect to be paid out in full prior to the hearing of the application and in the meantime new debts may be incurred in the ordinary course of GMF’s trading. I think it sufficient therefore that a notice be placed in specified national, State and local newspapers inviting any person interested to file a notice of appearance and affidavits within the same timeframes as provided for contributors, save that the time limited for filing a notice of appearance shall run from the date of publication of the latest newspaper advertisements. Subject to that addition, I am prepared to make the directions set out in the minute.
I certify that the preceding forty one (41) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French. Acting Associate:
Dated: 23 October 2002
Counsel for the Applicant: Mr A Siopis Solicitor for the Applicant: Blake Dawson Waldron Date of Hearing: 18 October 2002 Date of Judgment: 23 October 2002
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