NIB Health Funds Limited ACN 000 124 381 No 1

[2007] FCA 1018

FEDERAL COURT OF AUSTRALIA

NIB Health Funds Limited ACN 000 124 381 No 1 [2007] FCA 1018

NIB HEALTH FUNDS LIMITED ACN 000 124 381, IN THE MATTER OF NIB HEALTH FUNDS LIMITED ACN 000 124 381

NSD859 OF 2007

EMMETT J
6 JUNE 2007
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD859 OF 2007

IN THE MATTER OF NIB HEALTH FUNDS LIMITED ACN 000 124 381

NIB HEALTH FUNDS LIMITED Plaintiff
JUDGE:	EMMETT J
DATE OF ORDER:	6 JUNE 2007
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1.     The Plaintiff convene a meeting of its Eligible Policyholders (as defined in the draft explanatory statement contained in Exhibit 1) to be held at or about 10.00 am on Thursday, 19 July 2007 for the purposes of considering and, if thought fit, agreeing (with or without modification) to the scheme of arrangement (“Eligible Policyholders’ Scheme”) proposed to be made between the Plaintiff and its Eligible Policyholders, the terms of which are set out in Schedule 1 of the explanatory statement contained in exhibit 1 (“Eligible Policyholders’ Scheme Meeting”).

2.     The Plaintiff convene a meeting of its members to be held at or about 11.30 am on Thursday, 19 July 2007 (or as soon thereafter as the Eligible Policyholders’ Scheme Meeting is concluded or adjourned) for the purposes of considering and, if thought fit, agreeing (with or without modification) to the scheme of arrangement (“Company Members’ Scheme”) proposed to be made between the Plaintiff and its members, the terms of which are set out in Schedule 2 of the explanatory statement contained in Exhibit 1 (“Company Members’ Scheme Meeting”).

3.     The meetings referred to in orders 1 and 2 above be held at the Newcastle Entertainment Centre, Newcastle Showground, Brown Road, Broadmeadow in New South Wales.

4.     The draft explanatory statement contained in Exhibit 1 incorporating Schedule 1 and Schedule 2 be approved for distribution to members and Eligible Policyholders.

5.     Keith Stanton Lynch or, failing him, Mark Anthony Fitzgibbon, be authorised to act as chairperson for the meetings referred to in Orders 1 and 2 above (“Scheme Meetings”).

6.     The chairperson of the Scheme Meetings has the power to adjourn the Scheme Meetings for such time that the chairperson considers appropriate.

7.     There be dispatched by prepaid post addressed to the members, in respect of the Company Members’ Scheme, and the Eligible Policyholders, in respect of the Eligible Policyholders’ Scheme or personally served:

(a)a document substantially in the form of the explanatory statement contained in exhibit 1 together with its schedules;

(b)a proxy form for the eligible policyholders’ scheme meeting; and

(c)a proxy form for the company members’ scheme meeting.

8.     The time by which members and Eligible Policyholders must return their proxy forms for the Company Members’ Scheme Meeting and the Eligible Policyholders’ Scheme Meeting, respectively, be 48 hours prior to the commencement of the relevant meeting.

9.     Voting at each Scheme Meeting shall be on a poll, except for procedural motions.

10.   Other than regulation 5.6.13 of the Corporations Regulations 2001, Rule 2.15 of the Federal Court (Corporations) Rules 2000 shall not apply to the meetings referred to in orders 1 and 2 above.

11.   Notice of the hearing of the application for an order approving the proposed Eligible Policyholders’ Scheme and Company Members’ Scheme be published once in The Australian newspaper by an advertisement substantially in the form of Annexure “a” to these orders, such advertisement to be published on or before 18 July 2007.

12.   The proceedings be stood over until 23 July 2007 at 9.30 am before Emmett J, or as he directs, for consideration of orders approving the Schemes of Arrangement.

13.   The Plaintiff be granted liberty to apply.

14.   These orders be entered forthwith.

ANNEXURE “A”

NOTICE OF MEETING TO CONSIDER SCHEME OF ARRANGEMENT

(Rule 3.4)

TO:   All the members and creditors of NIB Health Funds Limited (ACN 000 124 381)

TAKE NOTICE that at 9.30 am on 23 July 2007, the Federal Court of Australia at Law Courts Building, Queens Square, Sydney, New South Wales will hear an application by NIB Health Funds Limited seeking:

(a)       the approval of a compromise or arrangement between the above-named company and its members, if agreed to by resolution to be considered and, if thought fit, passed by the meeting of such members to be held at 10.00 am (Sydney time) on 19 July 2007 at Newcastle Entertainment Centre, Newcastle Showground, Brown Road, Broadmeadow, New South Wales; and

(b)       The approval of a compromise or arrangement between the above-named company and a class of its creditors, if agreed to by resolution to be considered and, if thought fit, passed by the meeting of such class of creditors to be held at 11.30 am (Sydney time) on 19 July 2007 at Newcastle Entertainment Centre, Newcastle Showground, Brown Road, Broadmeadow, New South Wales.

If you wish to oppose the approval of either compromise or arrangement, you must file and serve on the Plaintiff a notice of appearance, in the prescribed form, together with any affidavit on which you wish to rely at the hearing.  The notice of appearance and affidavit must be served on the Plaintiff at its address for service at least 1 day before the date fixed for the hearing of the application.

The address for service of the plaintiff is: Attention Mr Roger Forbes, Mallesons Stephen Jaques, Level 61, Governor Phillip Tower, 1 Farrer Place, Sydney, New South Wales 2000.

Roger John Forbes
Solicitor for the plaintiff

Note:   Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD859 OF 2007

IN THE MATTER OF NIB HEALTH FUNDS LIMITED ACN 000 124 381

NIB HEALTH FUNDS LIMITED Plaintiff
JUDGE:	EMMETT J
DATE:	6 JUNE 2007
PLACE:	SYDNEY

REASONS FOR JUDGMENT

1. I have before me an application under s 411 of the Corporations Act 2001 (Cth) (the Act) by NIB Health Funds Limited (NIB) for orders convening meetings of the members of NIB and a class of creditors of NIB, for the purpose of considering schemes of arrangement. The object of the schemes is to demutualise NIB, on the assumption that NIB can presently fairly be described as a mutual body.

2. NIB was incorporated in 1953 as a company with no share capital or shareholders.  It has members whose liability is limited by guarantee.  NIB is a not-for-profit organisation.  It began operations at the Newcastle steelworks of the Broken Hill Proprietary Company Limited, as it was then known, and was originally called Newcastle Industrial Benefits Hospital Fund.  NIB is now Australia’s sixth largest private health insurance provider.  It provides health insurance cover for approximately 670,000 people.  That number includes those who are policyholders of NIB and those who are covered by the terms of policies issued by NIB to policyholders. 

3. NIB presently has 50 members. Under the present constitution of NIB (the Constitution), its objects are the conducting of health benefits funds. Under clause 5 of the Constitution, income and property of NIB must be applied solely towards the promotion of its objects and no part of its income or property may be paid to or distributed among its members except for remuneration of members for services actually rendered to NIB or for reimbursement of expenses incurred on behalf of NIB.

4. Under clause 7 of the Constitution, no member has any right to any surplus assets of NIB remaining after the completion of the winding up or dissolution of NIB. If, on the winding up or dissolution, there remain any assets, after the satisfaction of all liabilities, no part of the remaining assets may be paid or distributed among the members but must be given or transferred to one or more institutions selected by the members at or before the dissolution of NIB, being institutions having objects similar to the objects of NIB and whose constitution prohibits the distribution of its or their income or property to an extent at least as great as that imposed on NIB.

5. NIB’s health benefits fund is registered under the Private Health Insurance Act 2007 (Cth) (the PHI Act).  The PHI Act came into force on 1 April 2007.  NIB proposes to amend its rules governing its health benefits fund to reflect the terminology of the PHI Act, although the overall effect of the rules will not change. 

6. There are presently approximately 330,000 policyholders, who are described as “members” of the NIB Fund or as “policyholders”.  To become a policyholder a person must enter into an agreement with NIB, whereby the person agrees to be bound by the rules and bylaws promulgated by NIB governing membership of the NIB Fund.  In exchange for periodic payments, NIB agrees to pay defined health insurance benefits to policyholders in respect of claims made by the policyholders.  The rules published by NIB set out the entitlement to benefits. 

7. At present, 46 of the members of NIB are policyholders.  The other four members, while they are not policyholders, are insured under the terms of policies with NIB held by other persons who are not members.

8. The general effect of the proposed schemes is that NIB will be changed from a company limited by guarantee to a company limited by shares.  It is proposed that all of the shares in NIB following the completion of the schemes will be held by another company formed for the purpose, namely NIB Holdings Limited (NIB Holdings).  A class of policyholders will receive shares in NIB Holdings.  Following the completion of the schemes NIB will be a wholly-owned subsidiary of NIB Holdings and steps will be taken for the shares in NIB Holdings issued to policyholders to be listed for quotation by Australian Securities Exchange Limited (ASX).

9. The demutualisation proposal was announced on 21 March 2007 and the entitlement of policyholders to receive shares in NIB Holdings is determined by reference to 20 March 2007.  There are two schemes:  one with eligible policyholders and one with the members of NIB.  Thus, the following will receive shares in NIB Holdings:

   ·any person who is a policyholder on 20 March 2007 and remains a policyholder on the date of the proposed scheme meeting;

   ·any person who becomes a policyholder in respect of an existing policy in substitution for a previous policyholder, between 20 March 2007 and the date of the meeting, provided that previous policyholder was a policyholder on 20 March 2007 and the new policyholder remains a policyholder up to the date of the meeting. 

10. If the schemes come into effect, eligible policyholders must verify their details in order to receive shares.  If an eligible policyholder does not verify the relevant details, or if the address of an eligible policyholder is outside Australia, then shares will be issued not to the policyholder but to the trustee (the Trustee) of the Overseas Policyholders and Unverified Policyholders’ Trust, a trust that has been established for that purpose (the Trust). 

11. Approximately 460 million shares will be issued.  The shares will be issued in two stages.  After NIB has been converted to a company limited by shares, it will issue five shares to NIB Holdings and will also issue shares to eligible policyholders or the Trustee in accordance with Share Allocation Rules described below.  Following the issue of shares in NIB, the shares other than those issued to NIB Holdings, will be cancelled in consideration of the allotment of the same number of shares in NIB Holdings to eligible policyholders or the Trustee as the case may be.

12. There are three classes of eligible policyholder, being those who have Ambulance Only Policies, those who have Single Policies and those who have Family Policies.  Under the proposal, holders of Ambulance Only Policies will be allocated 10 shares for each year that they have been a policyholder, subject to a minimum allocation of 100 and a maximum allocation of 300 shares.  Single Policyholders will be allocated 100 shares for each year they have been a policyholder, subject to a minimum allocation of 300 and a maximum allocation of 3,000 shares.  Family Policyholders will be allocated 200 shares for each year they have been a policyholder, subject to a minimum allocation of 600 and a maximum allocation of 6,000 shares.  As at 28 May 2007 there were approximately 159,000 Single Policyholders, 152,000 Family Policyholders and 19,000 Ambulance Only Policyholders.

13. NIB Holdings and NIB, together with Messrs Keith Lynch Philip Gardiner and Mark Fitzgibbon, the initial directors of NIB Holdings, have entered into a Demutualisation Implementation Deed dated 31 May 2007 (the Implementation Deed).  The Implementation Deed is subject to certain conditions precedent including all relevant approvals being obtained, the passing of resolutions at the proposed scheme meetings, the approval of the proposed schemes by the Court and the approval of the schemes by the Private Health Insurance Advisory Council, (the Council). 

14. The Council is established under the PHI Act.  Under Part 4-4 of the PHI Act, private health insurers must operate health benefits funds in accordance with the requirements of that Part, including requirements relating to solvency and capital adequacy.  Section 137-10(2) of the PHI Act relevantly provides that the assets of a health benefits fund must not be applied for any purpose other than meeting policy liabilities, making investments, making a distribution under Division 149 of the PHI Act or a purpose specified in the Private Health Insurance Rules promulgated under that Act.  Division 149 is concerned with the termination of health benefits funds. 

15. Part 4-3 of the PHI Act is concerned with the registration of bodies as private health insurers.  Section 126-42 deals with the circumstances in which a private health insurer may apply to the Council for approval to be registered as a for profit insurer.  Under s 126-42(2), the application must be in the approved form and must include a conversion scheme that is in the approved from and is accompanied by such further information as is specified in the Private Health Insurance Registration Rules.  The application must also be given to the Council at least 90 days before the day on which the insurer proposes that it become registered as a for profit insurer.

16. NIB has lodged an application with the Council.  Under section 126-42(3), the Council must approve an application if it is satisfied that the conversion scheme would not, in substance, involve the demutualisation of the insurer.  That provision clearly does not apply in the present circumstances.  Accordingly, under section 126-42, the Council must cause a notice of the application to be published in a national newspaper and may give NIB written notice requiring it to give the Council such further information relating to the application as the Council specifies.  Under section 126-42, the Council must approve an application, so long as section 126-42(2) has been complied with in relation to the application and the Council is satisfied that the conversion scheme would not result in a financial benefit to any person who is not a policyholder of, or another person insured through, a health benefits fund conducted by the insurer, and that the conversion scheme would not result in financial benefits from the scheme being distributed inequitably between such policyholders and insured persons. 

17. “Policyholder” in relation to a health benefits fund is defined in the Dictionary in Schedule 1 to the PHI Act as a “holder of a policy that is referable to that fund”.  The “holder” of an insurance policy is a “person who is insured under the policy and who is not a dependent child”.  Dependent child is also defined in the Dictionary.  The effect of section 126-42(5) is not entirely clear and the proposed policyholders scheme makes provision for the possible application of those provisions at the behest of the Council.

18. The Council has not yet completed its deliberations in relation to NIB’s application.  The application will be considered at a meeting of the Council in two days’ time, although it is not known whether a decision will be made one way or the other at that time.  The Council has foreshadowed that it may meet again during July in order to finalise the application. 

19. By clause 3.1 of the Implementation Deed, the parties agree to implement the two schemes. In particular, under clause 3.2, NIB must prepare, lodge and use its reasonable endeavours to have the proposed explanatory statement registered with Australian Securities and Investments Commission (the Commission). NIB must apply to the Court under s 411 for orders convening the meetings. NIB Holdings must execute a deed poll, particulars of which I shall describe shortly. In addition, NIB must take the steps necessary for the convening of the scheme meetings.

20. In addition, NIB agrees to convene general meetings of its members for the purposes of converting NIB into a company limited by shares.  A regime is established whereby officers of NIB will be able to convene meetings of the proposed shareholders, following the conversion and allotment of shares, to effect the proposed cancellation of shares in NIB in exchange for the allotment of shares in NIB Holdings. 

21. NIB Holdings executed a Deed Poll on 31 May 2007, by which it covenants in favour of policyholders and current members of NIB to perform the steps attributed to it under the proposed schemes.  By the Deed Poll, NIB Holdings covenants to issue shares in its capital to each Eligible Policyholder in accordance with the schemes.  Its obligations to do so will be discharged, relevantly, by issuing shares to the Trustee in respect of overseas policyholders and unverified policyholders and issuing the shares to which an Eligible Policyholder is entitled.  By the Deed Poll NIB Holdings also agrees to take the steps necessary to become a member of NIB and to vote in favour of the proposed cancellation of shares.  By the Deed Poll NIB Holdings agrees that the Deed Poll may be relied upon and enforced by any Eligible Policyholder or member of NIB in accordance with its terms, notwithstanding that they are not parties to it. 

22. The proposed scheme between NIB and Eligible Policyholders is intended to give effect to the arrangements that I have briefly described.  It is also expressed to be conditional upon the same conditions precedent as is the Demutualisation Implementation Deed.  The Policyholders scheme provides that, on the Conversion Date, being the date when NIB changes from a company limited by guarantee to a company limited by shares, NIB will issue shares to Eligible Policyholders in accordance with the Share Allocation Rules and NIB Holdings will be allotted five shares. 

23. On the Demutualisation Date, which is expected to be 1 October 2007, NIB will reduce its capital and NIB will procure that NIB Holdings issues the same number of shares as are cancelled.  That obligation is to be discharged by issuing to the Trustee the shares to which overseas policyholders are entitled and the shares to which unverified policyholders are entitled. 

24. The question of who will be allotted shares is complicated by the operation of section 126-42(5).  It may be necessary for all insured persons under a policy to become joint holders of the shares issued in respect of that policy rather than simply issuing shares to the policyholder.  Shares to which an Eligible Policyholder is entitled will be issued to that policyholder, subject to a provision to take account of section 126-42(5).  Thus, if the board of NIB determines that it is necessary to do so, in order to secure the approval of the Council for the scheme, the board may decide that, where there is more than one person insured under a policy, the persons in whose names NIB Holdings shares will be issued will be the Eligible Policyholders and other persons specified by the board who are “holders” of the policy within the meaning of the PHI Act.  They will be issued with shares as joint holders.  If it makes such a determination, the board may adopt guidelines as to how the arrangements are to be implemented. 

1. The Policyholders Scheme also provides for the establishment of a committee to resolve disputes about the allocation of shares to Eligible Policyholders.  An Eligible Policyholder may give written notice requesting a review of the allocation and detailing the grounds for requesting the review.  After considering any request for review, the committee must calculate the number of shares which in the committee’s opinion should be or should have been issued in respect of the relevant policyholder in accordance with the Share Allocation Rules.  If the number of shares allocated to the Eligible Policyholder was less than the number calculated pursuant to the Share Allocation Rules, the committee must adjust the allocation so as to be in accordance with the Rules.  Any determination made by the committee is to be final and binding to the extent permitted by law. 

2. The proposed scheme between NIB and Eligible Policyholders is proposed as an arrangement between NIB and a class of creditors, being the class of creditors consisting of policyholders who satisfy the prerequisites that I have indicated.  Policyholders are taken to be contingent creditors of NIB, in the sense that, having paid the premium, the policyholder is entitled to be reimbursed for medical expenses incurred and which are covered by the rules of the NIB Fund.  The policyholder is entitled to be reimbursed in respect of such expenses incurred both by the policyholder and all other insured persons.  As I understand the position, it is only in the case of Family Policies that there would be more than one insured person, although the principle is the same in any event. 

3. A question was raised in the course of the hearing of this application as to how the value of the contingent debt of policyholders should be assessed.  It is proposed that policyholders will be treated as contingent creditors, each with a value of $1.  That, of course, does not reflect the value of any shares that will be received if the proposal is consummated.  Detailed records will be kept of the voting at the scheme meeting involving Eligible Policyholders.  A possible alternative method of valuing the debts of Eligible Policyholders, by reference to the premium paid in respect of policies, was canvassed.  Ultimately, this is a question that would need to be resolved, if at all, at the hearing of the application to approve the schemes, assuming that sufficient policyholders and members vote in favour of the schemes at the proposed meetings. If any Eligible Policyholder disagrees with the method of determining the value of debts of Eligible Policyholders, that Policyholder will be free to approach the Court at the time of the application to the Court for approval of the Schemes and make submissions on that issue to the Court. 

4. Another question that was considered in the course of the hearing was the extent to which there is in reality any arrangement between NIB and the Eligible Policyholders, as a class of creditor. The Eligible Policyholders are giving up nothing by the proposed arrangements. They will, in effect, receive a windfall. That, of course, is the object of the proposal. Nevertheless, there is an element of an arrangement between NIB, on the one hand, and the Eligible Policyholders, on the other, at least in relation to the issue of shares and the regime for the holding of meetings to effectuate the two schemes. I am satisfied that the proposed scheme between NIB and the class of creditors consisting of Eligible Policyholders is an arrangement within s 411 of the Act.

5. Another matter that concerns me was the basis of the Share Allocation Rules, coupled with the position of current members of NIB. Members at present have the right to attend and vote at meetings, including voting on the appointment and removal of directors. They also have the right to vote on a resolution for the amendment of the Constitution. They also have a residual right, in the event of winding up or dissolution, to determine the destination of any surplus of NIB. Their rights as members, however, are not transferable and, as I have also said, they have no right to participate in any profits or surplus of NIB.

6. At present, I have no information as to who the 50 members are or how they became members.  Ultimately, so long as the 50 members are properly informed, as to their rights and the consequences of the scheme that is being propounded, it is a matter for them.  In one sense, the scheme between NIB and its members is unfair to those members because they give up all of their rights as members.  All that they receive in return is the opportunity of participating in the other scheme.  That is to say, without their participation in the Members’ Scheme they would not have the opportunity of participating in the Policyholders’ Scheme. 

7. The principal effect of the Members’ Scheme is that, on the Conversion Date, all of their rights will be cancelled, the liability that each has as a guarantor, which is limited to $1, will be extinguished and each member will cease to be a member of the Company.  Each member will be issued with shares, but only in his or her capacity as an Eligible Policyholder and not in the capacity as a member.  The cancellation of the liability under the guarantee is in one sense a benefit, although it is a purely nominal benefit.  On the other hand the benefit of being a member itself is hard to value in any way. 

8. While I have said that, in one sense the Members’ Scheme is unfair, that is ultimately a matter for the members, so long as they are properly informed as to the consequences of voting in favour of the Members’ Scheme.  The consequential benefits are such that a reasonable member may perceive that it is in his or her interests to vote in favour of the Members’ Scheme in order to ensure that the surplus, otherwise tied up, will be released pursuant to the Policyholders’ Scheme.

9. NIB has prepared a proposed explanatory statement to be dispatched to both Eligible Policyholders and members.  The proposed explanatory memorandum has been submitted to the Commission.  By letter of 1 June 2007 to NIB’s solicitors, the Commission has indicated that it does not propose to appear to make submissions or intervene to oppose the proposed schemes.  The Commission noted that it has not conducted any legal assessment of whether it is appropriate to conduct a creditors’ scheme meeting for the Eligible Policyholders, although the Commission understood that NIB would ventilate the question as to the proposed voting threshold and how votes would be allocated for Eligible Policyholders.  On the basis that those matters will be brought to the attention of the Court for consideration, the Commission indicated that it did not propose to appear or make submissions on that question.  By email communication of 6 June 2007, the Commission has also indicated that it has reviewed subsequent amendments to the proposed explanatory memorandum and it does not wish to change the statements that it had made in its letter of 1 June 2007. 

10. As I have already said, the Council has not yet completed its deliberations concerning approval.  Nevertheless, I do not consider that that should delay the taking of steps to convene meetings for the purpose of propounding the schemes.  The draft explanatory memorandum explains the proposed schemes and their effect in some detail.  It draws attention to the changes in the regulation of private health funds that came into force on 1 April 2007 and gives a general overview of the history of NIB and its current business strategy.  It contains a recommendation by the directors of NIB that both Eligible Policyholders and members of NIB should vote in favour of the respective schemes and should vote at the general meetings that would be convened for the purposes of conversion of NIB into a company limited by shares and consultation of shares to be issued to Eligible Policyholders and the Trustee. 

11. A number of reports are to be included in the explanatory statement.  BDO Kendalls Corporate Finance (NSW) Pty Limited (BDO) was engaged to prepare a report to express their opinion as to whether the proposal to demutualise is in the best interests of policyholders and current members as a whole, and whether the proposal provides an equitable basis for allocating shares to Eligible Policyholders.  BDO express the opinion, after considering the main advantages and disadvantages of accepting the proposal, that, on balance, the proposal is in the best interests of Eligible Policyholders and current members of NIB as a whole.

12. BDO have assessed the proposed Share Allocation Rules.  BDO conclude that the distribution of shares in accordance with the Share Allocation Rules provides a superior value to policyholders and current members, compared to the alternatives.  They consider that the basis of share allocation is reasonable and that the proposal provides an equitable basis for allocating shares to Eligible Policyholders.  The report by BDO includes a detailed analysis of the health fund industry. 

13. A report from Mr Mark Bishop, NIB’s appointed actuary, is also included.  The purpose of that report was to express an opinion as to whether there is an impact on the rights and benefits of policyholders, whether policy benefits will remain adequately secure, whether future premium rates are likely to be affected by the proposal and whether alternative allocation approaches are appropriate.  Mr Bishop considers that appropriate safeguards for the security of policyholders’ benefits will continue to be provided after the proposal is completed. 

14. Mr Bishop also considered the question of future premium rates. He concluded that it would not be desirable for NIB to raise premiums continually beyond the point of competitive sustainability, either from the point of view of policyholders or future shareholders.  He expressed the view that the strategy proposed by NIB leads to factors that will enhance NIB’s ability to moderate premium increases.  He observed that the Board had recommended the Share Allocation Rules on the advice of NIB’s consulting actuary.  Mr Bishop considered it to be outside his scope to give an opinion on the Share Allocation Rules.  However, he expressed his opinion that, under the proposal, the rights and benefits of policyholders would not be adversely affected and that there would be adequate security for policyholders’ benefits.  He considered there will be no pressure to raise premiums in response to the proposal. 

15. Ernst & Young ABC Pty Limited, a firm of consulting actuaries, was engaged by NIB to prepare a report in relation to the proposed restructure.  Ernst & Young had previously provided the board of NIB with a report of 10 May 2007 entitled “NIB Health Funds Limited Share Allocation Methodology”.  Mr David Millington Goodsall, the author of that report, has sworn two affidavits confirming the opinions that are expressed in the reports. 

16. In the report of 10 May 2007, Mr Goodsall observed that there are several factors that must be considered when determining an appropriate share allocation basis, including who should participate in a demutualisation, what rights if any are being forfeited and what contribution has been made to retained profits or surplus by each individual.  In demutualisation, shares are typically given to interested parties on an equitable basis, usually in exchange for membership rights that are given up.  It is therefore important to consider what rights are being foregone in exchange for shares in the event of demutualisation. 

17. Mr Goodsall observes that members of NIB presently have effective control both of NIB and of its health benefits fund, but within the legislative framework that is overseen by the Council.  While, in theory, members of NIB may be able to force a sale or reconstruction of the health benefits fund for personal gain, the Council has strong powers to ensure that that does not occur.  Hence, the voting rights of members have no direct value, although they have an indirect value to the extent that they can appoint directors and influence the quality of those directors, which may have some effect on the way in which the health benefits fund is managed. 

18. The report of 10 May observed that an allocation of value could be considered recognition of the contribution to value or surplus of a member or group of members.  Thus, in many life company demutualisations, the historical contribution to surplus has been a consideration in determining the allocation basis.  Any share allocation rewards current members at the expense of past members, who may have also have contributed to the surplus but who no longer have rights to the surplus. 

19. However, as private health insurance in Australia is community rated, the contribution to surplus is unlikely to be a major criterion for many health funds considering demutualisation.  Mr Goodsall commented that community rating refers to the notion that everyone is charged the same premium for the same product, even though there is extensive statistical evidence that some groups of people have higher risks and hence, from one point of view, should be charged a higher premium.  In effect, community rating provides a process where good risks subsidise bad risks.  In a sense, he says, it is the equivalent of all people paying the same premium for life insurance, regardless of age, sex or smoking status.  Nevertheless, government policy has provided for community rating, although the rating system has recently been amended so that people who join a health benefits fund after age 30 pay an increased premium for 10 years.  Even so, that does not reflect the actual costs incurred. 

20. Mr Goodsall observed that, with life insurance and other insurance products, attempts are usually made to manage funds to achieve a particular profit margin, so that in broad terms the profits arising can be attributed to products and, in some cases, groups of policyholders within those products.  The historical analysis of earnings required to manage the products provides a source of information that can be used to determine the sources of the build up of earnings within the organisation. 

21. However, with health insurance, because of the policy of community rating imposed by government, a health benefits fund makes profits on young healthy lives and incurs losses on older unhealthy lives. Young people join with the expectation of making significant claims in the future.  Many older people, on the other hand, have been with a health benefits fund for a long time.  Even though people may stay with the health benefits fund for a long period of time, it is in fact a form of very short term insurance, as people pay premiums and make claims within a short time frame. 

22. Thus the historical financial analysis of contribution of members over a period has never been a feature of the health insurance industry. For that reason, the contribution to surplus from any given product of a health fund cannot be readily determined. For those reasons, Mr Goodsall concluded in his report of 10 May 2007 that, since the element of contribution to surplus is so complex and so highly subjective, it should not be a significant factor in the allocation of shares in the present case. Mr Goodsall also made the observation that, having regard to the terms of the Constitution, no one can be said to own the surplus. In that way, a health benefits fund is similar to many other funds, such as friendly societies, superannuation schemes and the like. The class of institution that would be benefited under the Constitution is so broad as to be almost meaningless.

23. In the report to be included in the explanatory statement, Ernst & Young repeat a number of the conclusions contained in the report of 10 May 2007.  They say that, while there is a wide range of possible allocation bases, they believe that the basis chosen represents an appropriate methodology for share allocation, given due consideration of all of the factors that they take into account, namely the voting rights of members, the position on winding up, eligibility for membership of the fund, contribution to surplus, equity, multiple policies and duration of policies. 

24. Ernst & Young also express the view that policy benefits are likely to remain adequately secured following the proposal.  They consider that competitive pressures and continued regulatory overview of premium rates mean that, while there may be some additional costs that NIB is likely to incur, there will also be an imperative for improvements in a range of controllable areas.  They consider that those elements together mean that there is unlikely to be any significant adverse impact on the future premiums as a result of the proposal.  They also conclude that the proposal will not have an adverse impact on the reasonable benefit expectations of policyholders under the policies issued by NIB. 

25. Finally, PricewaterhouseCoopers were asked to furnish advice in relation to Australian income tax consequences for members of NIB and Eligible Policyholders in respect of the proposal.  They conclude in their report, which is to be included in the explanatory statement, that the extinguishment of any identifiable rights of members of NIB will have no taxation consequences for them, since they did not pay any consideration to acquire the rights and no compensation will be given to them.  No income tax will be immediately payable by Eligible Policyholders as a consequence of receiving shares in NIB Holdings.  However, the tax treatment of the disposition of those shares is a different matter and the report sets out the possible consequences. 

26. PricewaterhouseCoopers also explain the tax consequences for NIB Holdings, which will be subject to income tax on annual taxable income at the normal corporate rate.  Further, NIB itself will cease to be income tax exempt from the date when it loses its non-profit status.  PricewaterhouseCoopers conclude that there will be no change to the taxation treatment of health insurance benefit payments received by shareholders under their insurance policies as a result of the proposal and no income tax would be payable on health benefit payments received. 

27. The trust deed establishing the trust for overseas and unverified policyholders provides a mechanism for the identification of unverified policyholders.  If three years after the Demutualisation Date there are unverified policyholders who have not been located, their interests will be sold or cancelled for the benefit of the continuing shareholders of NIB Holdings.  In relation to the entitlements of overseas policyholders, the proceeds of sales of the shares allocated in relation to those policyholders will be distributed to the policyholders on whose behalf they were sold.

28. NIB has employee retention arrangements to cover key employees whom the board consider to be critical to the proposal or are critical to the continuation of the business of NIB.  If the proposal is implemented, the transaction bonuses and retention payments in place will be given effect about six months after the proposed listing by ASX.  The transaction bonus is calculated in accordance with a formula that is dependent on the value of the shares following listing.  Those matters are disclosed in the explanatory statement. 

29. The ultimate effect of the proposal is as I have said to confer a windfall gain on Eligible Policyholders.  It is a windfall gain in the sense that, unless the proposal is implemented, they have no entitlement to share in the accumulated surplus in NIB, notwithstanding that, to a greater or lesser extent, they have contributed to that surplus.  On the other hand, there is no other discernable group who is entitled to share in the surplus.  As Mr Goodsall says, on one view, no one owns the surplus.  No doubt there are persons who have contributed to the surplus but who are no longer policyholders.  I have no material to indicate the numbers of former policyholders.  Nevertheless, in an arrangement such as this, there must always be a cut off and that sometimes results in anomalies. 

1. From a purely company law point of view, the members of NIB may be in a position to change the Constitution of NIB in a way that may give them a right to share in the surplus.  There may be very significant tax and other consequences that might flow from such a course.  However, if that course were proposed, it is clearly unlikely that the Council would give the necessary approval for the proposed scheme.  On the other hand it is possible that the law might change in the distant future in a way that might give members the opportunity of distributing the surplus.  Ultimately, as I have said, so long as the members are properly informed of the consequences of the scheme, it is a matter for them whether they approve it.

2. I am satisfied that the explanatory memorandum is appropriate.  I am satisfied that the schemes are schemes that reasonable policyholders and reasonable members of NIB, properly informed, could agree to.  I am also satisfied that, if the schemes are agreed to, they are such as the Court would approve, at least in an uncontested application, if such an application were made by NIB.  Accordingly I propose to make orders as asked by NIB. 

I certify that the preceding fifty-five (55) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.

Associate:

Dated:       22 August 2007

Counsel for the Plaintiff:	Mr MB Oakes SC
Solicitor for the Plaintiff:	Mallesons Stephen Jaques
Date of Hearing:	6 June 2007
Date of Judgment:	6 June 2007