Insurance & Superannuation Commission v Regal Life Insurance Ltd
[1994] FCA 203
•21 APRIL 1994
INSURANCE AND SUPERANNUATION COMMISSIONER v. REGAL LIFE INSURANCE LIMITED
No. VG317 of 1990
FED No. 203/94
Number of pages - 11
Bankruptcy
(1994) 8 ANZ Insurance Cases 61-220
(1994) FCR 468
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
LOCKHART J
CATCHWORDS
Bankruptcy - proposal made by judicial manager of an insurance fund - whether Court has power under s64 Life Insurance Act to implement the proposals - whether proposal was one which gave effect to a course which was most advantageous to the general interests of the policy owners, as required by s64 - whether the proposed course was inequitable and discrimiatory against one policy owner - whether former policy owners, whose policies had been transferred, were being preferred over the owners of the one owner, whose policy remained with the company under judicial management.
Life Insurance Act 1945 (Cth): ss 60, 62, 64, 66
HEARING
SYDNEY, 10, 11 February 1994
#DATE 21:4:1994
Counsel for the Applicant: Mr R J Weber
Solicitors for the Applicant: Australian Government Solicitor
Counsel for the Respondent: Mr D L Williams
Solicitors for the Respondent: Andrew Fairley and Associates
Counsel for the Judicial Manager: Mr Hutley
Solicitors for the Judicial Manager: Phillips Fox
ORDER
THE COURT ORDERS THAT:
1. The respondent, Regal Life Insurance Limited, pay to the trustees
of the Regal Life Assurance Staff Superannuation Fund out of its No. 2 Statutory Fund the amount of any reasonable legal and actuarial costs incurred by the said trustees of and incident to this motion on an indemnity basis;
2. There be the usual order in relation to the Judicial Manager's
costs, charges and expenses of the motion;
3. Liberty be reserved to any party to apply on seven days
notice;
4. The notice of motion dated 12 August 1993 otherwise be dismissed.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
LOCKHART J Richard John Grellman, the Judicial Manager of Regal Life Insurance Limited (Regal), moves the Court for an order that the sum insured payable under Capital Guaranteed Superannuation Bond No. 328678-9 be reduced by the sum of $1.765million.
The circumstances in which the order is sought by the Judicial Manager are somewhat complicated. Mr Grellman was appointed Judicial Manager of Regal on 7 November 1990. The Judicial Manager is required by s. 62 of the Life Insurance Act 1945 (the Act) to file with the Court a report stating which of a number of courses specified in the section is in the circumstances most advantageous to the general interests of the owners of the policies of the company. The Judicial Manager has filed more than one report with the Court pursuant to s. 62 (a Judicial Manager may file more than one s. 62 report: see Insurance and Superannuation Commissioner v Occidental Life Insurance Co of Australia Limited (1991) 28 FCR 437 per Lockhart J. at 442). A report dated 25 February 1993 of the Judicial Manager was filed with the Court recommending that the remaining life insurance business of Regal be transferred to Mercantile Mutual Life Insurance Company Limited (MML). On 10 May 1993 the Court made orders for the transfer of the business of Regal to MML. That process has been completed and most of the policies previously held by policy holders with Regal have been transferred to MML.
Following a motion to this Court by the Judicial Manager and directions given by it on 25 June 1993 the Judicial Manager decided to lodge a further report pursuant to s. 62 of the Act. That report, dated 23 July 1993, recites a number of facts and refers to various circumstances to form the basis of the facts stated by me in this judgment. Most of the facts referred to by the Judicial Manager are not in dispute.
The evidence is not very clear as to the number and types of policies with Regal that have not been transferred to MML, but it seems they are few in number and they include the policy with which this motion is concerned. That policy is a Capital Guaranteed Superannuation Bond (No 328678-9) in Regal's Number 2 Statutory Fund (the policy). The policy is owned by the Trustees of the Royal Life Australia Staff Superannuation Fund (the Fund). Royal Life Insurance Australia Limited was Regal's former name. The Fund was established by trust deed dated 15 September 1988. The Fund provided defined benefits to its members upon retirement from their employment by Regal. The report of the Judicial Manager states (para. 2) that by 1990 the Fund had built up a substantial surplus as a result of Regal having made contributions higher than necessary to provide for payment of those benefits. The accuracy of this statement was in issue before me. Although the point is not entirely clear from the evidence, in my opinion the better view is that the surplus in the Fund has not arisen because of Regal's having made contributions higher than necessary to provide for payment of benefits; but has arisen because the moneys in the Fund represented by the policy consist of amounts originally transferred from the Royal Insurance Fund (being a superannuation fund sponsored by Royal Insurance Australia Limited) plus further contributions of members.
The sole asset of the Fund consists of the policy. At 30 September 1990 (if full value had been available) the Bond had a face value of approximately $3.64million. At that date the accrued benefit liabilities of the Fund were calculated at $2.29m.
Prior to 30 September 1990 the trustees of the Fund had proposed that the trust deed be amended to allow for the benefits of members to be improved and for the balance of the surplus, after the benefit improvement (which at that stage was estimated at approximately $1.15m), to be returned to Regal. The proposed amendments to the trust deed, designed to improve members' benefits, was structured so as to make the trust deed consistent with the arrangement that existed for employees of Occidental Life Insurance Company of Australia Limited. This proposal, although agreed to by the members of the Fund, had not been put into effect prior to Mr Grellman's appointment as Judicial Manager of Regal on 7 November 1990.
Subsequent to Mr Grellman's appointment as Judicial Manager of Regal the trustees of the Fund proposed that the Judicial Manager execute a deed amending the trust deed to reflect the proposed increase in benefits and "repatriation" of the surplus. After receiving actuarial advice, and having regard to the state of uncertainty in relation to the recovery of assets in the Regal No. 2 Statutory Fund (the relevant fund supporting the policy), the Judicial Manager declined to agree to the amendments put forward by the trustees of the Fund.
Taking into account the current liquidity of the Regal No. 2 Fund (set at 91.45%), the policy has a current value of $1.765m.
The employment of members of the Fund by Regal has now been terminated and they have been paid in full the defined benefits pursuant to the terms of the trust deed.
Throughout the course of the judicial management, further discussions have taken place between the Judicial Manager and the trustees of the Fund in an endeavour to reach some common ground, but a settlement was not reached. Due to various reasons, the details of which are not important for present purposes, the position of the Regal No. 2 Statutory Fund has improved significantly. Policy holders in the fund whose policies were transferred to MML have to date received 91.45 cents in the dollar. The policy matured before the transfer of policies to MML, so was not one of the policies transferred.
After meeting the defined benefits of all members of the Fund the position of the Fund as at 30 June 1993 is as follows:
$ 000 Value of assets being current
value of policy at a liquidity
percentage of 91.45% 1,765 Accrued defined benefit liabilities - Surplus 1,765
On 18 December 1992 the trustees of the Fund resolved to wind up the Fund pursuant to clause 13(a)(iii) of the Trust Deed. Following that resolution the trustees were advised by their legal advisers that the total assets of the Fund should be distributed in appropriate shares amongst the existing members of the Fund. At the date of the resolution to wind up, 17 employees of Regal remained members of the Fund. The trustees argued, upon legal advice, that the winding up of the Fund crystallizes the remaining 17 members' rights to share in the total assets of the Fund and that therefore no surplus arises.
In his report, the Judicial Manager sets out a schedule which provides, with respect to the remaining 17 members of the Fund, the amount of vested benefit that has been paid to date calculated at 18 December 1992 and contains a calculation of the amount available to each of the remaining 17 members if the surplus assets totalling $1.765m are distributed to them.
It is unnecessary to set out the details with respect to each member; but there is considerable variation between the amount of vested benefit that has been paid to date, varying from nothing in the case of two of the 17 members to the highest vested benefit of $164,633 in the case of one member. If surplus assets totalling $1.765m are distributed to the members they will receive greatly increased amounts of money. For example, in the case of the two members who have no vested benefit they would receive an estimated distribution of the surplus of $25,456 and $29,216 respectively; and with respect to the member whose vested benefit stands at $164,633, that member would receive a share of the surplus of a further $337,232.
The Judicial Manager summarizes in his report the options available to him in the following terms:-
(a) Do nothing. Under that option Regal would pay an amount of $1.765m representing the balance of the value of the policy to the trustees of the Fund. It is likely that the trustees would seek to share the remaining total assets of the Fund among the 17 members of the Fund that existed at 18 December 1992 (being the date of the resolution to wind up the Fund) in the manner to which I have briefly referred.
The Judicial Manager states that the major advantages of this proposal are as follows:-
. the issue between himself and the trustees of the Fund would be resolved simply;
. no further costs would be incurred; and . the remaining 17 members of the Fund would receive a large "one off" benefit.
The Judicial Manager states that the major disadvantages of the proposal appear to be:-
. the remaining 17 members would share in the remaining assets of the Fund to the exclusion of the members of the Fund who were members at 30 September 1990, but prior to 18 December 1992 were paid out their entitlement and thus are no longer members of the Fund. The solicitors acting for the trustees of the Fund have advised that those former members would have no right to share in the surplus;
. the policy holders of the Regal No. 2 Statutory Fund have suffered a shortfall on their claims. To date the Regal No. 2 Statutory Fund has been able to meet the claims of policy holders at the rate of 91.45%;
. it does not seem desirable that the remaining members of the Fund should receive a "windfall" gain whilst ever there are policy holders in the Regal No. 2 Statutory Fund who have not received 100 cents in the dollar on their investment. Should the surplus of the Fund be "repatriated" by Regal and applied to the Regal No. 2 Statutory Fund, the return available to policy holders of the No. 2 Statutory Fund would increase from 91.45% to 93.6%.
(b) Effect a reduction in value of the Bond (i.e. the policy). The
Judicial Manager states that this option, which is the foundation of the motion presently before the Court, would reduce the benefits payable under the policy. If successful, it will have the effect of "repatriating" the remaining assets of the policy to the Regal No. 2 Statutory Fund.
The Judicial Manager says that the major advantages of this option include:-
. the "repatriation" of the remaining assets of the Bond to the Regal No. 2 Statutory Fund which would have the effect of increasing the ultimate return to policy holders of the Regal No. 2 Statutory Fund from 91.45% to 93.6%; . by dealing with the issue in this manner, all members of the Fund would be treated equally. They would receive their defined entitlement from the Fund in addition to the generous redundancy payments that were made to all employees of Regal.
He says that the major disadvantage of this option is that the remaining members of the Fund would now only receive their defined benefits as opposed to a windfall gain. The remaining members, on legal advice, would have been under the impression that the windfall gain was their legal entitlement.
Accordingly, the Judicial Manager makes the following recommendations:-
(a) that the proceeds of the policy, as the remaining asset of the Fund be made available to the policy owners of the Regal No. 2 Statutory Fund (including policies transferred to MML with reduced benefits); and
(b) that this principle be effected by reducing the value of the policy by $1.765m, less an amount of reasonable legal and actuarial costs incurred by the trustees.
It is this recommendation that is the foundation for the orders sought in the notice of motion, namely, that the sum insured payable under the policy be reduced by the sum of $1.765m. The Judicial Manager's recommendation is supported in a written submission advanced on behalf of the Finance Sector Union of Australia. That body did not seek representation at the hearing of the motion. The Judicial Manager's recommendations were supported also by Ms Judith McNay, a former member of the Fund. The Insurance and Superannuation Commissioner (the Commissioner) also supports the recommendations of the Judicial Manager.
The recommendations of the Judicial Manager are opposed only by the trustees of the Fund. This is hardly surprising (I leave aside the Commissioner) because the other interested parties would benefit from the implementation of the recommendations. The only parties who would appear to be adversely affected are the remaining 17 members of the Fund whose interests are represented by the trustees of the Fund.
Counsel for the trustees of the Fund made various submissions to the Court which I summarize as follows:-
. The Court does not have power under s. 64 of the Act to implement the Judicial Manager's recommendations; . the proposal is not one which gives effect to a course which is most advantageous to the general interests of owners of the policies of Regal (a necessary prerequisite of the exercise of the power under s. 64);
. the proposed course is inequitable and discriminatory against one policy owner (the trustees of the Fund) which is treated unequally from all of the other policy owners; . the trustees are the owners of the only policy left with Regal and not transferred to MML; and thus the only present owner of a policy in the relevant statutory Fund. The interests of the former policy owners, whose policies were transferred to MML, cannot and ought not to be preferred over those of the owners of the one policy which remains with the Judicial Manager, namely, the trustees of the Fund.
The other parties made submissions which in essence supported the reasoning and recommendations of the Judicial Manager in his report.
Two questions were addressed by counsel in argument: first, can the Court make an order of the kind recommended by the Judicial Manager; and, secondly, if it can, in all the circumstances should the Court adopt those recommendations?
The First Question
26. The relevant statutory provisions and the scheme of the Act were considered by me in my judgment in Occidental Life, so I do not find it necessary to repeat what I said there. It is sufficient for present purposes to refer to ss. 62 and 64 of the Act and to note s. 66. Section 62 is in the following terms:
"(1) The judicial manager shall conduct the management with the greatest economy compatible with efficiency, and shall, as soon as possible, file with the Court a report stating which of the following courses is in the circumstances, in his opinion, most advantageous to the general interest of the owners of the policies of the company:
(a) the transfer of the business of the company to some other company, in pursuance of a scheme to be prepared in accordance with Division 9 (whether the policies of the business continue for the original sums insured, with the addition of bonuses that attach to the policies, or for reduced amounts);
(b) the carrying on of its business by the company (whether the policies of the business continue for the original sums insured, with the addition of bonuses that attach to the policies, or for reduced amounts);
(c) the winding-up of the company or of any part of the business of the company;
(d) the dealing with part of the business of the company in one way, and with part of that business in another way; or
(e) such other course as he deems advisable.
(2) The judicial manager shall forthwith after filing the report furnish a copy of the report to the Commissioner and make an application in writing to the Court for an order to give effect to the course stated in the report.
(3) The report or a copy of the report shall be open for inspection by any person during official hours, at the Registry of the Court in which the report is filed or at such place as the Commissioner determines."
Section 64 provides:
"(1) The Court shall on the hearing of an application made under subsection 62(2):
(a) after hearing the Commissioner, the judicial manager and any other person who in the opinion of the Court is entitled to be heard; and
(b) after considering the report of the judicial manager;
make an order giving effect to the course which it considers in the circumstances to be most advantageous to the general interests of the owners of the policies of the company.
(2) The order of the Court shall be binding on all persons, and shall have effect notwithstanding anything in the instruments constituting the company, or in the articles of association or other rules of the company."
Section 66, upon which reliance was placed in argument, empowers the Court in certain circumstances there specified to cancel or vary any contract or agreement (other than policies) between the company and any other person, which the Court is satisfied is detrimental to the interests of the policy owners.
Two points arise with respect to the question of power. First, whether the Judicial Manager's report with which this case is concerned is of the kind authorized by s. 62; also whether s. 64 is directed to a course of action which encompasses the present motion. These two matters are really facets of one and the same question.
In Occidental I considered the nature of a s. 62 report and said at 442-3:
"... the essence of a report under s. 62 is, speaking generally, that the judicial manager states what in his opinion what should in effect be the fate of the company after it has ceased to be under judicial management ... It seems to me that s. 62 is simply the mechanism adopted by the legislature for ensuring that as soon as possible the court may make orders which it considers to be most advantageous to the general interests of the owners of policies of the company with respect to the affairs of the company in the longer term. At one time the judicial manager may take the view, for example, that part of the business of the company should be dealt with in a particular way and file an s. 62 report accordingly. The court may then hear the application of the judicial manager for an order to give effect to the course stated in his report and thus bring into play the relevant provisions of Div 8 including s. 64. Some time later it may be appropriate that the balance of business of the company be dealt with in a particular way and a further s. 62 report can be filed with respect to that matter and again enlivening the provisions of Div 8 including s. 64".
At 442 I said:
"It is plain from the text of Div 8 itself that judicial management 'is intended to be only a temporary phase to protect the interests of the policy owners' ..."
In my opinion ss. 62 and 64 are concerned with "courses" which relate to the future general administration of the company. They include the transfer of a company's business to some other company in pursuance of a scheme to be prepared in accordance with Division 9 (para. (a)); the carrying on of its business by the company (para (b)); the winding up of the company or any part of its business (para (c)); or the dealing with part of the company's business in one way and with part of that business in another way (para (d)). Each "course" is directed to some future administration of the company or conduct of its business or affairs. Paragraph (e) of s. 62(1) is not to be read evidem generis with paragraphs (a) to (d), but it nevertheless envisages a "course" relating to the administration of the company or the conduct of its business or affairs. These are the concepts that are embodied in the word "course" and its plural form where they appear in ss. 62 and 64.
It may be that a "course" recommended by the Judicial Manager would involve adjustments of rights and liabilities of persons; but whatever else falls within the scope of the sections it does not, in my opinion, include the recommendation of the kind to which the report in the present case is directed, namely, the discriminatory treatment of one policy holder (the trustees of the Fund) for the benefit of other policy holders, even if the owners of policies in MML previously held in Regal are persons whose interests may be considered at this stage in the judicial management for the purposes of ss. 62 and 64.
Section 60 (in particular sub-ss. (6) and (7)) enables the Judicial Manager to seek directions for instructions from the Court with respect to his powers and duties and matters arising concerning the conduct by him of the judicial management. They are not necessarily directed to matters concerning the general administration or the ultimate future of the company which has been placed under judicial management. The present application to the Court is not put by the Judicial Manager as falling within s. 60; nor, as at present advised, could it be.
The Judicial Manager's application is to reduce the benefits payable on the policy owned by the trustees of the Fund by discriminating against the trustees in not paying them the full amount due to them under the terms of the policy, after taking into account the shortfall in the Statutory Fund. That is the nub of the present application. It is not one of the kind to which s. 64 is directed; nor does it arise from a report of the kind contemplated by s. 62.
There is a second reason why, in my opinion, ss. 62 and 64 cannot be vehicles for the proposal which is central to the s. 62 report of the Judicial Manager in this case and to the application to the Court that flows from it. A judicial manager's report under s. 62(1) must be one which states which of the specified courses of action is in the Judicial Manager's opinion "most advantageous to the general interest of the owners of the policies of the company". This requirement is mirrored in s. 64 which empowers the Court, on hearing an application made under s. 62(2), to give effect to the course which it considers in the circumstances "to be the most advantageous to the general interests of the owners of the policies of companies".
I held in Occidental that a judicial manager may, pursuant to s. 62(1), file with the Court more than one report during the course of the judicial management. I accept that at different times during the judicial management, the identity of the owners of policies of the company may change from time to time and that this may be reflected in reports made pursuant to s. 62, and later in any order of the Court made under s. 64. But when the effect of the Court's confirmation of a scheme prepared in accordance with Division 9 of the Act involving the transfer of policies of a company to the transferee company is that the former owners of policies cease to be owners of those policies and become owners of the policies held by the transferee company, I do not accept that the policies any longer answer the description of "the policies of the company" for the purposes of ss. 62 and 64.
In the present case the scheme of arrangement has taken effect and the former owners of policies in Regal are now owners of policies in MML. The relevant business of Regal has been transferred to MML. It is no longer the business of Regal. It is fundamental to the proposals before the Court that there would be inequality or unfairness if the surplus is distributed to the trustees of the Fund as the owners of the only remaining (or only relevantly remaining) policy in Regal, namely, injustice to former policy owners of Regal. That is a consideration which, in my view, cannot be taken into account in the report of the Judicial Manager in this case or the application which is made to the Court under s. 64.
The Second Question
39. Although it is not strictly necessary to do so I shall consider the second question because it was the subject of argument before me. The effect of the recommendations, if approved by the Court, would be to discriminate against the trustees of the Fund, which is the only relevant policy left with Regal and not transferred to MML. There may be some policies that have already matured and the owners of which have been paid their rateable percentage. For all practical purposes, however, the only relevant remaining policy with Regal is the policy owned by the trustees of the Fund. Even if it were legitimate to take into consideration the interests of the former policy holders of Regal (who are now policy holders of MML, not Regal, following the transfer of the remaining life insurance business of Regal to MML last year), I am not satisfied that such a discriminatory exercise of the Court's discretion would be justified.
The Judicial Manager and the Court cannot take the interests of the former owners of the policies into account as the Judicial Manager seeks to do in this case. It may be that in an appropriate case when the Court is considering the propriety of a particular course of conduct, it may have regard to what has occurred with respect to the transfer of former policies and the business of the company to another company perhaps as part of the general background to the matter; but it cannot take existing policies of the company in substance and amend the entitlements of the policy holders by reducing them in favour of former policy holders.
To give effect to the recommendations would mean that the Court would be sanctioning a course whereby moneys due in law by Regal to a policy owner, namely, the trustees of the Fund, would not be paid fully to the policy owner, but would be spread to benefit other persons by an essentially discriminatory action.
It is of course more than discriminatory. The trustees of the Fund have a legal right to receive from Regal whatever their benefit in law is, and that benefit includes the amount of $1.765m to which reference has previously been made. It has been called a "windfall"; and in one sense it is, because were it not for the transfer of most of the Regal policies to MML, the "windfall" would not have accrued solely to the 17 members of the Fund who presently remain its members. But it is the legal right of the trustees of the Fund to receive the moneys due under the policy.
Also, the effect of the approval of the course recommended by the Judicial Manager would be in substance to vary the provisions of the Trust Deed of the Fund and deprive the present members of it from the benefit of their legal rights. The Court would be interfering with the operation of the Trust Deed itself which is its constitutional document and under which the policy with Regal was issued to the trustees.
It may be an anomaly that has given rise to the present motion; but other anomalies may exist with respect to certain of the other policies (and there are many of them) that were previously transferred to MML from Regal pursuant to the scheme of arrangement confirmed by the Court. The Judicial Manager frankly said in evidence that he did not know whether there may be other people who would be deriving "windfalls" or not because he had not made enquiries to ascertain this.
Even if it were correct that the Court may take into account the interests of the former policy owners whose policies have been transferred to MML, having regard to the general interests of the owners of the policies of the company, which is a concept central to the operation of ss. 62 and 64, the Court would not lightly single out and treat discriminately the owners of one policy as compared to the owners of other policies of Regal. The proposed treatment is discriminatory. I am not persuaded on the whole of the evidence that this is a course that would be justified simply because in the light of past events the remaining 17 members of the Fund would receive a "windfall".
The Court therefore declines to make the orders sought in the notice of motion.
The orders of the Court are as follows:-
1. The respondent, Regal Life Insurance Limited, pay to the trustees
of the Regal Life Assurance Staff Superannuation Fund out of its No. 2 Statutory Fund the amount of any reasonable legal and actuarial costs incurred by the said trustees of and incident to this motion on an indemnity basis.
2. The usual order be made in relation to the Judicial Manager's
costs, charges and expenses of the motion.
3. Liberty be reserved to any party to apply on seven days notice.
4. Otherwise the notice of motion dated 12 August 1993 be dismissed.
Although the Court declines to make the orders sought by the Judicial Manager in the notice of motion, in my opinion it was, in all the circumstances, a proper application for the Judicial Manager to make to the Court.
The Court makes no order for the costs of the Commissioner as his counsel said that it was not sought. Finance Sector of Australia is not entitled to an order for costs since it did not appear on the hearing. Ms McNay did not appear. Her submissions were in writing made after the Court reserved its decision and the other parties and the Commission were given an opportunity to respond to them in writing. No order for costs should be made for or against Ms McNay.
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