Lifetime Income Limited
[2022] NZHC 810
•20 April 2022
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2021-485-616
[2022] NZHC 810
UNDER Part 15 of the Companies Act 1993 IN THE MATTER
of an application for approval of a scheme of arrangement
BETWEEN
LIFETIME INCOME LIMITED
Applicant
Hearing: 12 April 2022 Counsel:
E B Moran for Applicant
L M McKeown for Interested Parties A V McArley and E C Mackay
R J B Fowler QC as Amicus CuriaeJudgment:
20 April 2022
REASONS JUDGMENT OF ELLIS J
[1] Lifetime Income Limited (LIL) is a licensed insurer and variable annuity provider, established in 2014. LIL is a wholly owned subsidiary of Retirement Income Group Limited (RIG).
[2] LIL has applied for orders approving a scheme of arrangement or compromise under s 236 of the Companies Act 1993. By way of summary, approval is sought to:
(a)sell the assets in a statutory fund (SF2) and repay LIL’s policyholders’ respective interests in those assets; and
(b)cancel the policies held by those policyholders.
RE LIFETIME INCOME LIMITED [2022] NZHC 810 [20 April 2022]
[3] The application was opposed by two of the affected policyholders. The remaining policyholders have taken no formal steps.
[4] On 14 April 2022 I issued a results judgment approving the proposed scheme, with reasons to follow. These are my reasons.
RIG and LIL
[5] RIG was founded in 2013 by Mr Ralph Stewart. Mr Stewart is a long-time participant in the financial services sector and has significant insurance experience. He says his intention was to create New Zealand’s first variable annuity product. In 2015 this product—called Lifetime Income—was launched. Lifetime Income is managed through two wholly owned subsidiaries of RIG: LIL and Lifetime Assets Management Limited (LAM). LAM is the investment management company and LIL manages the insurance component.
[6] As an investment management company, LAM is licensed by the Financial Markets Authority and is regulated under the Financial Markets Conduct Act 2013. It manages annuity customers’ assets invested in the Lifetime Income Fund (LIF).
[7] As an insurer, LIL is licensed by the Reserve Bank of New Zealand (the Bank) under the Insurance (Prudential Supervision) Act (IPSA).1 The Bank is charged by s 12 of the IPSA to undertake prudential supervision of licensed insurers.2
LIL’s acquisition of the Foundation Life business
[8] In November 2017 and March 2018, the Bank approved LIL’s acquisition of Foundation Life (NZ) Limited’s guarantee business.3 As of 7 April 2022, the business acquired by LIL comprised:
1 In 2015, the Bank granted LIL a variable annuity insurance licence under the IPSA. Pursuant to the licence, LIL is required to appoint an actuary to provide tri-annual financial condition reviews and an annual financial condition report, provide independently audited financial statements and obtain an independent credit rating.
2 Relevant provisions in the IPSA are discussed in more detail later in this judgment.
3 The acquired policies were originally issued by Government Life, which became Tower Life (NZ) Limited. Tower Life sold its run-off life business (which included the products later acquired by LIL) to Foundation Life in 2014.
(a)163 life annuity policyholders; and
(b)186 customers with life investment contracts.
[9] There has been no opposition to the proposed scheme from anyone falling in the second (investment) class. The focus of this judgment is therefore primarily on the objection taken by two members of the first (annuity) class, Mrs McArley and Mr Mackay (who holds a joint policy with his wife, Joyce Mackay). As of 31 March 2021, the life annuity policy holders had an average age of 89 and were each paid on average approximately $572 per month (or a little less than $7,000 per year). But the policies belonging to Mrs McArley and Mr Mackay yield considerably more sizeable annuities. Mrs McArley (who is 89) receives $94,334.64 per annum. The Mackays (who are 81 and 79 respectively) receive $58,252.50 per annum.
[10]These policies do not contemplate or permit cancellation by the underwriter.
The Insurance (Prudential Supervision) Act 2010 and the requirement for a statutory fund
[11] The purposes of the IPSA are to promote the maintenance of a sound and efficient insurance sector and promote public confidence in the insurance sector. The way in which the Act achieves those purposes is by establishing a system for licensing insurers, imposing prudential requirements on insurers, providing for the supervision of compliance with those requirements by the Bank and conferring powers on the Bank to act in respect of insurers in financial distress or other difficulties.
[12] Section 4 sets out the principles that must be taken into account by the Bank in meeting the purposes of this Act. Those principles relevantly include:
(a)the importance of insurance to members of the public in terms of their personal or business risk management:
…
(c)the importance of dealing with an insurer in financial distress or other difficulties in a manner that aims to—
(i)adequately protect the interests of its policyholders and the public interest; and
(ii)ensure that any failure, or possible failure, of the insurer does not have the potential to significantly damage the financial system or the economy of New Zealand:
(d)the importance of recognising—
(i)that it is not a purpose of this Act to eliminate all risk of insurer failure; and
(ii)that members of the public are responsible for their own decisions relating to insurance:
(e)the desirability of providing to the public adequate information to enable members of the public to make those decisions:
…
(i)the desirability of sound governance of insurers:
(j)the desirability of effective risk management by insurers.
Statutory funds
[13] The New Zealand life insurance market is unusual because there is no policyholder protection scheme that provides a safety net in the event of insurer failure. Instead, the IPSA requires all life insurers to have at least one statutory fund in respect of its life insurance business.4 Failure to comply with the statutory fund provisions is a criminal offence punishable by a fine of up to $500,000.5
[14] Specific statutory duties are imposed on life insurers in relation to statutory funds. In investing, administering and managing the assets of a statutory fund they are required to comply with the detailed provisions of subpt 3 of pt 2 of the IPSA including, amongst other things, the obligation to see that the life insurer “gives priority to the interests of policyholders of life policies referable to the fund”, especially where there is a conflict between the interests of policyholders and shareholders.6 Under s 106, the Bank may give notice to a life insurer who has failed to comply with subpt 2 requiring it to take specific action to remedy the default. Failure to comply can give rise to joint and several liability on the part of the directors
4 Section 82.
5 Section 118.
6 Section 87.
for resulting losses to the statutory fund.7 Under s 108 the Bank has the power to sue the directors in the name of the life insurer.
[15] A life insurer can only restructure or terminate its statutory funds with the approval of the Bank. Of some relevance here is s 110, which governs termination. It provides:
110 Termination of statutory funds
(1)A life insurer may apply to the Bank to terminate 1 or more of its statutory funds.
(2)If the application is approved, the termination may take place in accordance with any conditions that the Bank may impose.
(3)The conditions may include (without limitation) conditions relating to the following:
(a)a requirement to notify interested parties of the outcome of the application:
(b)matters connected with how the termination takes place, including the following:
(i)distribution or application of assets:
(ii)settling of liabilities:
(iii)the timing of the termination.
(4)The Bank must not approve the application if it considers that—
(a)the termination will result in unfairness to the policyholders of life policies referable to the fund or funds when those policyholders are viewed as a group; or
(b)the life insurer is being liquidated or wound up when the application is made.
Application to LIL: the increased capital requirements
[16] LIL meets the definition of a life insurer in s 6 of the IPSA because it is liable under life policies, as defined in s 84 of that Act. That definition includes contracts of insurance that provide “for the payment of an annuity for a term dependent in the
7 Section 107.
continuance of human life” (annuity policies). The interested parties in these proceedings are the holders of two such policies.
[17] LIL had four statutory funds, three of which have been closed. LIL’s ex- Foundation business is separate from LIL’s other business and is still supported by a specific statutory fund (SF2) required under the IPSA.8
[18] Section 19 of the IPSA makes it clear that an applicant is only entitled to be granted a licence as an insurer under the Act if the Bank is satisfied the applicant “holds and has the ability to maintain a minimum amount of capital that is specified in an applicable solvency standard”.9 Section 21 empowers the Bank to impose conditions on a licence, including:
(c)conditions that require a life insurer to maintain solvency margins in respect of the statutory funds of the insurer in accordance with an applicable solvency standard (including requiring the insurer to maintain a minimum amount of capital in accordance with the standard):
[19] Despite regular reviews by the Bank, its advisers, and LIL’s own appointed actuary and auditors, in April 2020 LIL identified an issue with the solvency calculation methodology used to determine the capital required to support the variable annuity business under the applicable Solvency Standard. It became apparent that, since 2015 (when LIL was first licensed) it had been holding less capital than was considered prudent under the Standard.
[20] LIL duly reported its discovery to the Bank. An exchange of correspondence and Bank directives under the IPSA ensued. In late August 2020, the Bank directed that LIL was to maintain increased solvency margins. Certain transitional solvency margins were specified for periods leading up to 29 June 2021, but from 30 June 2021 onwards the solvency margin required to be maintained was:
a.in accordance with the “Solvency Standard for Variable Annuity Business 2015” issued April 2015, of at least $9.0 million for the
8 As of 31 March 2021, LIL held in a dedicated statutory fund $21.87 million of assets against expected policy holder liabilities of $21.06 million, comprised of $9.73 million in respect of annuities and $11.32 million in respect of unit-linked and investment account policies.
9 Solvency standards are promulgated under s 55.
statutory fund of the insurer that relates to variable annuity business directly with Lifetime Asset Management/ Retirement Income Group;
b.in accordance with the “Solvency Standard for Variable Annuity Business 2015” issued April 2015, of at least $0.5 million for each statutory fund of the insurer that relates to variable annuity business excluding the business covered in paragraph a above; and
c.in accordance with the “Solvency Standard for Life Insurance Business 2014” issued December 2014, of at least $0 for each other Life Fund of the insurer.
[21] The net effect of the new direction is that the minimum level of regulatory capital reserve was increased from $5 million to $10 million. As well, LIL would be required to hold a solvency margin buffer above the $10 million requirement as the Bank would not allow it to continue to operate if it was not in excess of its prudent capital requirements.
[22] As Mr Stewart explained, the Bank’s decision to direct LIL to hold more capital was, in part, driven by a heightened risk of adverse events due to the (then) current low interest rate environment, heightened market volatility and the uncertainty wrought by COVID-19.
LIL’s business no longer sustainable
[23] Mr Stewart deposed that RIG was unable to raise enough new capital to meet the higher capital reserve requirements. The directors of LIL and LAM (LIL, LAM and RIG have identical boards) therefore made the decision to wind-up LIL. This decision was taken after exploring all options in consultation with the Bank and the FMA to avoid this outcome. Mr Stewart’s evidence was that the options explored included:
(a)unsuccessfully applying to the Bank to reduce the capital reserve requirements;
(b)attempting a public capital raise sponsored by Forsyth Barr, which did not reach the minimum required (following this attempt, the shareholder value of RIG decreased by 45 per cent);
(c)unsuccessfully seeking the Bank’s approval to convert LIL into a mutual insurer;
(d)unsuccessfully seeking assistance from the Minister of Finance;
(e)unsuccessfully applying to the FMA to convert LIL from a life company to a defined benefit superannuation scheme; and
(f)unsuccessfully applying to move LIL into the Government sponsored National Provident Fund.
[24] In addition, Mr Stewart says he unsuccessfully approached all credible and relevant insurers in both New Zealand and Australia to see if they would be interested in taking over LIL’s variable annuity product.
[25] Having reviewed all these initiatives, the assessment of Mr Fowler QC as counsel appointed to assist the Court was that “keeping those rights and benefits intact by some sort of ‘external’ means has been thoroughly explored and covered”. It is difficult to disagree.
The need for a scheme
[26] As noted earlier, the policies held by Policyholders do not contemplate termination by the underwriter. LIL therefore has two options: seek voluntary liquidation, or seek orders under pt 15 of the Companies Act 1993 to vary the policies to permit them to be terminated on the terms of the arrangement below. LIL formed the view (after discussions with the Bank) that seeking a court approved scheme to cancel the policies was in the best interests of policyholders.
[27] As well as the significant increase in the capital reserve and buffer requirements, it was considered relevant that LIL no longer had a variable annuity business, which was the major contributor to meeting the associated fixed costs and overheads. The direct costs of maintaining LIL include:
(a)staffing costs of $100,000 per annum;
(b)credit rating of $70,000 per annum;
(c)appointed actuary costs of $85,000 per annum;
(d)annual audit costs of $50,000 per annum; and
(e)regulatory costs of $5,000 per annum.
[28] LIL maintains it is neither possible nor realistic to preserve these annual fixed costs of operation, in addition to the $10 million-plus capital reserve to maintain liability coverage, for a relatively small group (163) of life annuitants.
[29]Mr Fowler concurred:
… on what I have seen so far there seems to be a serious issue that without critical mass for the annuity business (there are only about 160 policy holders) it will be impossible for LIL to sustain a $10M capital requirement and meet all the other compliance and regulatory costs associated as well with a business of that relatively modest scale.
The proposed scheme
[30] As noted earlier, the annuity policies that are referable to SF2 do not contemplate or permit cancellation by the underwriter. The proposed scheme would enable termination of SF2 by varying these contracts—authorising their cancellation—with the effect that the policyholders’ annual entitlements would cease. Instead, the assets held in SF2 would be sold and used to pay each policyholder a lump sum in accordance with their respective interests in the fund and in an amount that fairly reflects the future value of their particular policy. For obvious reasons, this calculation requires appropriate account to be taken of the likely life expectancy of each policy holder.
[31] Initially the necessary actuarial work was performed by an actuary appointed by the Board, Mr Charles Hett. But at the direction of the Bank an independent actuary, Mr Bernard Higgins, was appointed to form a view regarding an appropriate and fair payment to policyholders in lieu of their annuities under their policies. More specifically, Mr Higgins was required to conduct the review in accordance with the
appropriate professional standard of the New Zealand Society of Actuaries and charged with:
(a)summarising the method and assumptions applied to generate fair and equitable compensation for loss of insurance and annuity cover in respect of each ex-Foundation policy and determining the aggregate estimated compensation for each category of insurance; and
(b)ensuring that the compensation complies with all legal and regulatory requirements and prioritises “the interests of policyholders viewed as a group” over those of shareholders or other interested parties, as required by s 110(4) of the IPSA; and
[32] Mr Higgins’ methodology was in most respects similar to Mr Hett’s. There were, however, two recommended differences in approach, both of which favoured policyholders.
[33] The first was Mr Higgins’ recommendation of a 0.5% adjustment to the calculated lump sum entitlements to compensate policyholders for the cost of transfer to another investment manager or provider. The second—and more significant in financial terms—was his recommendation that three years effectively be added to each policyholder’s life expectancy, which would result in all annuitants receiving a lump sum benefit greater than LIL’s current liability to them.10
[34] LIL accepted those recommendations. Mr Higgins’ draft report was provided to both the Bank and LIL before being finalised and made available to policyholders.
[35] Mr Stewart says that if the scheme of arrangement is not approved, he and the Board see the only realistic option as to voluntarily liquidate LIL.
Schemes of arrangement, amalgamation and compromise: the law
[36]Section 236 of the Companies Act 1993 relevantly provides:
10 It may also be noted in passing that the increase in interest rates since the time of Mr Higgins’
assessment will result in further benefit to the policyholders.
236 Approval of arrangements, amalgamations, and compromises
(1)Notwithstanding the provisions of this Act or the constitution of a company, the Court may, on the application of a company or any shareholder or creditor of a company, order that an arrangement or amalgamation or compromise shall be binding on the company and on such other persons or classes of persons as the Court may specify and any such order may be made on such terms and conditions as the Court thinks fit.
(2)Before making an order under subsection (1) of this section, the Court may, on the application of the company or any shareholder or creditor or other person who appears to the Court to be interested, or of its own motion, make any one or more of the following orders:
(a)an order that notice of the application, together with such information relating to it as the Court thinks fit, be given in such form and in such manner and to such persons or classes of persons as the Court may specify:
(b)an order directing the holding of a meeting or meetings of shareholders or any class of shareholders or creditors or any class of creditors of a company to consider and, if thought fit, to approve, in such manner as the Court may specify, the proposed arrangement or amalgamation or compromise and, for that purpose, may determine the shareholders or creditors that constitute a class of shareholders or creditors of a company:
(c)an order requiring that a report on the proposed arrangement or amalgamation or compromise be prepared for the Court by a person specified by the Court and, if the Court thinks fit, be supplied to the shareholders or any class of shareholders or creditors or any class of creditors of a company or to any other person who appears to the Court to be interested:
(d)an order as to the payment of the costs incurred in the preparation of any such report:
(e)an order specifying the persons who shall be entitled to appear and be heard on the application to approve the arrangement or amalgamation or compromise.
(2A) If the arrangement or amalgamation or compromise involves a transfer or amalgamation that requires the written approval of the Reserve Bank of New Zealand under section 44 of the Insurance (Prudential Supervision) Act 2010, the Court may not make an order under this section unless that approval has been given.
…
[37] There is no dispute that the Court has a broad discretionary power under section 236, or that the relevant principles to be applied when determining an application made under it are:11
(a)whether there has been compliance with the applicable statutory provisions;
(b)whether the scheme has been fairly put before the class concerned; and
(c)whether the scheme is such that an intelligent and honest businessperson (being a member of the class concerned and acting in respect of that interest) might reasonably approve.
[38] The Court must also consider whether the proposed compromise is fair and equitable.12
[39] In exercising that discretion and applying those principles, the IPSA is also potentially relevant. Although this is not a case that engages s 236(2A) of the Companies Act (which specifically refers to, and was inserted by, the IPSA), the object of the scheme here is to remove a barrier to termination of the SF2 under s 110 of the IPSA, by permitting the fund to be realised and the life policies referable to SF2 themselves to be cancelled. If there was, for example, no prospect of the Bank permitting termination of SF2 under s 110, then approval of the scheme would be difficult to justify. Conversely, if the Court had approved the scheme under s 236 after applying the subjective (class-focused) “intelligent and honest businessperson” test, it seems unlikely that the Bank would then conclude (under s 110(4)) that termination of SF2 would result in unfairness to the relevant policyholders when viewed as a group.
11 Re CM Banks Limited [1944] NZLR 248 (SC), approved in Re Milne and Choyce Limited [l953] NZLR 724 (CA), in which the Court of Appeal accepted that “the test of the intelligent and honest businessperson” adopted in Re CM Banks Limited included consideration of whether the arrangement is “fair and reasonable to all the classes concerned”.
12 Re Milne and Choyce Limited, above n 11, at 745; Weatherston v Waltus Property Investments Limited [2001] 2 NZLR 103 (CA) at [35] – [36], applied in an insurance context by the High Court in Re ACS (NZ) Ltd [2012] NZHC 1396 at [6].
[40] Accordingly, to the extent the s 110 unfairness inquiry might add anything to the “intelligent and honest businessperson” test, I agree that it should be considered here. I also agree that the overarching focus on the interests of life policyholders that is evident from the provisions of subpt 3 of pt 2 is also a matter that is potentially relevant in this case. I did not understand either counsel or Mr Fowler to take issue with that.
[41] It seems that s 236 schemes involving insurance policies have not often come before the Courts. Approval of schemes involving the transfer of life insurance policy obligations occurred in the pre-IPSA case of Re Prefsure Life Ltd) and the cases referred to at [16] of that decision. As Ms McKeown submitted however, the transfer in Prefsure (and possibly in those other cases) did not affect policyholders’ rights and benefits. Approval was also given to a scheme of arrangement affecting insurance (but not life insurance) policyholders in the post-earthquake (and post-IPSA) case of Re ACS (NZ) Ltd.13 But in that case, the affected policy holders had effectively agreed to the scheme by the time of the hearing.
[42] Nonetheless, and subject to what I have just said about the potential interplay with the IPSA above, I can see no reason to approach this application differently from any other scheme of arrangement, amalgamation or compromise that comes before the Court for approval.
Notification
[43] On 20 October 2021, after being informed of the proposed scheme, the Bank advised it did not object to it and gave its approval to the bringing of this application by LIL. LIL then made a without notice application to this Court, seeking directions as to appropriate notification and other related matters. It proposed that:
(a)policyholders be notified of the proposed arrangement by letter in a form approved by the Court (with the letter and further information also being posted on LIL’s website);
13 Re ACS (NZ) Ltd, above n 13, at [16].
(b)any Policyholder notifying LIL of an objection to the proposed arrangement would then be formally served with the application;
(c)any Policyholder so served and wishing to be heard would then file a notice of opposition; and
(d)the Court appoint an amicus to review the arrangement for compliance with Part 15 of the Companies Act 1993, having specific regard to the interests of the Policyholders and any objections received.
[44]The without notice application expressly stated that LIL was not proposing:
(a)a process whereby parties other than the Policyholders (and the Bank, should it develop concerns about the proposal) could be heard; or
(b)a process for seeking the approval of creditors (including the Policyholders), such as a meeting.
[45] These steps summarised at [43] above were approved by Associate Judge Johnston on 10 November 2021 and then implemented by LIL. Mr Fowler QC was appointed as the amicus and he both prepared a report in advance of the hearing and made oral submissions.
The interested parties’ opposition
[46] As at 31 March 2021, Mrs McArley and Mr Mackay’s life annuity policies made up around 12 or 13 per cent of SF2. As noted earlier, their annuities are
$94,334.64 and $58,252.50 respectively. Both are considerably more than the value of the average annuity held by affected policyholders, which is around $6,809 per annum.
[47] Mrs McArley and Mr Mackay say—and I have no hesitation in accepting— that for several perfectly rational reasons they do not want to receive a lump sum in lieu of these annual (in fact, monthly) payments. These reasons include the anxiety that comes with being confronted, in old age, with a large capital sum about which
difficult investment decisions will need to be made. This is the opposite, they say, of the peace of mind they signed up for. While they accept that payment of a lump sum may (if they live for less time than estimated by the independent actuary) in fact leave them financially better off, that is a risk they are prepared to take. There is, in any event, also a risk (if they live longer than predicted) that they will be financially worse off. They say are prepared to take the risks associated with what LIL says is the only alternative to the scheme, namely liquidation.
[48] More specifically, the notice of opposition filed on behalf of Mrs McArley and Mr Mackay asserts that:
(a)the scheme would breach their existing policies;
(b)LIL could continue to operate and/or has not made sufficient effort and attempts to raise new capital or explore alternatives to maintain cover;
(c)the scheme is contrary to certain purposes and principles of IPSA which they say apply to this application;
(d)the directors of LIL have breached their duty to policyholders under section 105 of IPSA;
(e)the Bank has not approved termination of the fund under IPSA and should not do so;
(f)the proposed arrangement is neither fair nor equitable; and
(g)LIL has failed to follow a fair process in terms of policyholder notice and appointment of the independent actuary.
[49] To the extent these contentions engage with the usual matters for consideration referred to at [37] to [39] above, I will address them in the next part of this judgment. But some can usefully be dealt with and put to one side at the outset.
[50] First, it must necessarily be accepted that the scheme would “breach” the policies (or at least overrides the contractual inability by the underwriter to cancel them); it is the perceived need to do so that has prompted the proposed scheme.
[51] Secondly, the evidence summarised above makes it clear that LIL has made extensive, but unsuccessful, efforts to explore alternatives and to avoid the need to apply for approval of a scheme.
[52] Thirdly, I agree with Mr Fowler that—absent some relatively clear sign of bad faith, dishonesty, fundamental error or relevant misconduct—it is not for the policyholders (or the Court) to second-guess the running of LIL’s business, or its decision-making. And I agree that the relevant focus here is on the continued viability of the relevant portfolio, rather than LIL’s solvency, per se.
[53]But even if that were not so, LIL’s evidence establishes that:
(a)LIL has, to date, been able to meet Bank’s capital reserve requirements for SF2 by way of a transfer of funds from LIL’s other statutory funds following the Bank’s termination of those funds.14
(b)The funds thus transferred to SF2 do not relate to that fund; they belong to RIG. LIL’s ability to meet its capital reserve requirements is therefore based on the temporary use of its parent company’s assets and required the Bank to temporarily alter LIL’s licence conditions to permit it to do so.
(c)It is not realistic for LIL to sustain its capital reserve in this way. If the arrangement is not approved by the end of this month, RIG will need to attempt to enter a bridging finance arrangement or risk default in relation to another transaction.
14 That transfer of funds occurred with the Bank’s approval.
(d)The costs of an insurance business are not limited to the capital required to support it. There are fixed, regular costs that make the LIL business unviable in an ongoing sense.
(e)The Lifetime Retirement Income Fund’s product cannot support the ongoing costs of SF2; that fund is a separate legal entity governed by a Trust Deed. There is no connection between it and SF2.
(f)There is no truth in the suggestion that LIL might have acted improperly in closing statutory funds relating to other products, benefiting shareholders to the detriment of policyholders. Rather, the closure of LIL’s variable annuity business has had a significant adverse effect on RIG’s shareholders.
(g)The closure of statutory funds for unrelated products (which was actioned by the Bank on application by LIL) resulted in a capital distribution to RIG as LIL’s parent company (approved by the Bank) that was applied to repay the debt it took on in February 2020 in order to provide additional regulatory capital to LIL.
(h)The residual capital that will be left if the scheme is approved will be applied to contribute to the cost of capital, operating costs and expenses associated with the scheme. RIG’s regulatory capital investment of
$10 million will be returned to it.
[54] Thirdly, no evidence was put forward as a basis for suggesting that the directors of LIL have breached their duty to policyholders under section 105 of IPSA. Some of the evidence to which I have just referred makes the opposite quite clear.
[55] Lastly, it is true that the Bank has not approved termination of the fund under IPSA. That is because termination is the logical next step, when and if the scheme is approved and provided the Bank determines termination is appropriate.
[56] With those things in mind, I turn now to consider the orthodox criteria for approval.
Discussion: have the criteria for approving the scheme been met?
Has there been compliance with the applicable statutory provisions?
[57] The interested parties are concerned that there has been no meeting of policyholders or vote. Although it is acknowledged that—by contrast to the predecessor to s 236 (s 205 of the Companies Act 1955)15—a meeting is not mandatory, Ms McKeown pointed out that in 2018 the Supreme Court observed:16
… The power under s 236(1) to approve a compromise is not expressly subject to approval at court ordered meetings albeit that there are no reported cases in which a compromise has been sanctioned without prior approval of the creditors.
[58] Here, Mr Stewart deposed that LIL chose the process approved by the Court rather than a meeting because:
… the process proposed is more appropriate having regard to the particular impacted Policyholders because:
50.1Policyholders will have the right to object and be heard if they choose.
50.2It avoids the need for Policyholders (most of whom are very elderly) to travel to attend a meeting in person for their views to be considered.
50.3It provides the Court with objective expert and independent advice as to whether the Arrangement is fair, equitable and might reasonably be approved by an intelligent and informed policyholder (through the appointment of both an independent actuary and an amicus).
50.4To the extent the amicus recommends any changes to the proposed scheme, LIL can make necessary adjustments in a fully informed manner to ensure the legal requirement met (while also having regard to the available options and alternative of voluntary liquidation).
50.5Because of the age profile of the Policyholders and the risk that most may not participate in a vote, it avoids the risk of a very small number voting causing a perverse outcome.
15 Section 205 required that the arrangement or compromise be approved by a majority of 75% of the votes cast at the meeting.
16 Trends Publishing International Ltd v Advicewise People Ltd [2018] NZSC 62 at [35].
50.6The Court has ultimate responsibility for approving the scheme and can make the scheme subject to additional terms and conditions it considers appropriate.
[59]In Mr Fowler’s report to the Court, he commented:
15.The question of holding a meeting of policyholders has been raised. LIL has taken the approach that it was more beneficial to a group of mostly elderly policyholders to offer free financial aid actuarial advice, the opportunity to meet with LIL staff in person and to create a website, whereas the arranging of a meeting of relatively elderly policyholders (whether in person or remotely) would present some challenges.
16.If the position on continuation is as unviable as is currently being suggested, I am not sure that I can see the utility of a meeting. The issue then devolves to the adequacy of the payments to policyholders, and that is just as amenable to the views of individuals and the experts, as it is to the views of numbers manifested at a meeting, whether of classes of policy-holders or otherwise.
[60] At the hearing before me, Mr Fowler confirmed his earlier view that there would be little utility in a meeting. As he said, the response of individual policyholders to the proposed scheme will depend on their own personal circumstances. Beyond any question of the overall fairness of the scheme (which cannot depend on the subjective preference of individual policyholders) there would be little to discuss. There is no contest between classes. Moreover, as noted earlier, absent some clear problem, it is not appropriate for policyholders to second-guess the need for the scheme and the continued viability of LIL. I agree with Mr Fowler that the provision of free advice and points of contact to discuss and help policyholders with their concerns is a better process than a meeting would have been, in this case.
Has the scheme has been fairly put before the class concerned?
[61] Ms McKeown submitted that the letter sent to policyholders just before Christmas in 2021 provided insufficient information about why the scheme was needed. In particular, she noted that although the letter advised that LIL “has not been able to raise enough capital to meet the higher RBNZ regulatory capital requirements”, the reserve requirement has, in fact, been met since January 2022. She said that policyholders were unable to assess LIL’s financial position and were therefore unable to judge the scheme properly.
[62] It is clear from the material before me that a very considerable amount of information has been provided to the interested parties by LIL in the months following the December 2021 letter in response to their requests.17 But the more fundamental point is the one made a number of times above. The proper focus here is on the scheme itself, not disputing LIL’s assessment that the scheme is needed. And as I have said, the evidence filed supports that assessment in any event.
[63] In my view the scheme has been fairly put before the relevant policyholders. There is no dispute that LIL has correctly demarcated the classes in the proposed arrangement, the Court-approved notification process is apt and effective, and the material provided—and subsequently made available to—the affected policyholders is informative and accurate. Mr Fowler advised that he was “comfortably satisfied” as to the fulfilment of this requirement, and so am I.
Is the scheme one that an intelligent and honest businessperson (being a member of the class concerned and acting in respect of that interest) might reasonably approve?
[64] As Mr Fowler said, the “class intelligence” test is the pivotal consideration here. The focus of the policyholders’ submissions on this point was, again, on the asserted absence of information indicating that LIL was no longer financially viable (and the existence of information said to show that it is) and so there is no need for a scheme. But given the evidence in this case, I am unable to accept that. The starting proposition must be that a scheme of some kind is needed, because the portfolio is no longer financially viable and the Bank’s solvency standard for SF2 cannot be met.
[65] The interested parties have not suggested any other specific scheme, or any amendments to the scheme that has been proposed.18 That is, no doubt, because their fundamental objection is to the termination of their policies which is, of course, the very point of the scheme. Instead, they say they would prefer to take the risk of what LIL says is the only available alternative: liquidation.
17 There has, of course, been no formal discovery process.
18 Although there is mention of a “staged” scheme of the sort approved in Re ACS (NZ) Ltd it is far from clear how that would work and far from clear whether that would, in fact, operate in the best interests of the policyholders.
[66] I do not consider that the potential liquidation of LIL is something that an intelligent and honest business-minded member of the relevant class of policyholders would prefer to the proposed scheme. It is a less transparent process and is administratively more complex. The policyholders would have little say in a liquidation process and it carries with it several risks and uncertainties that are entirely absent from this scheme. And—bearing in mind that the starting point for the scheme is that the policies must be cancelled—the scheme is one that would see each policyholder receive a lump sum that is objectively linked to and approximates the value of their respective policy (in, if anything, a generous way). It is impossible not to conclude that an intelligent and honest businessperson (being a member of the class concerned and acting in respect of that interest) would reasonably approve the scheme. Mr Fowler confirmed at the hearing that this was his view, too.
Fair and equitable?
[67] Again, the interested parties’ submissions focus on the unfairness of cancelling their policies and on challenging LIL’s position that SF2 is no longer viable. It adds nothing to the matters already discussed. But for completeness:
(a)those Policyholders with unit linked accounts will receive the full value of their funds in SF2 without any exit penalties or fee applied together with an additional component in respect of any attaching levels or life cover and where there is an interest in a reserve fund, an appropriate share of that fund;
(b)annuity policyholders will get a payment now that reflects—insofar as possible—the payments they would otherwise have received for the remainder of their life given their current age;
(c)while some Policyholders may outlive their payment, they also gain important benefits such as immediate access to funds, a wider choice on investment profile and the possibility of a better tax position in relation to future investment returns.
Do IPSA considerations make a difference?
[68] In this case I think there is little difference between the “class intelligence” and “fairness and equity” tests and the s 110(4) inquiry as to any unfairness to the relevant policyholders, viewed as a group. While I appreciate that the interested parties view the cancellation of their policies as, itself, unfair, there is nothing to suggest that this view is shared by others in the group.19 The scheme undoubtedly operates fairly—in monetary terms—as between policyholders in the group (and arguably more fairly than the policies do, given that each annuity ceases upon the death of the individual policyholder). There is no external group with which a relevant comparison could be made. There is nothing before me to suggest that shareholders’ interests have been preferred to the interests of the policyholders; the opposite appears to be the case.
[69] Significantly, the involvement, supervision and implicit approval of the prudential supervisor—the Bank—in this whole process must necessarily constitute a solid foundation for inferring that the scheme is properly seen as IPSA compliant. So, for completeness, I record that the Bank:
(a)approved the bringing of this application by LIL;
(b)reviewed the draft proceedings in advance of filing;
(c)approved the appointment of Mr Higgins as independent actuary and reviewed his report prior to finalisation;
(d)was served with the final application and provided with an opportunity to object and/or be heard;
19 There is one further policyholder who has made her views known to Mr Fowler and has concerns about the scheme. Her concern (as described by Mr Fowler) is that the lump sum calculated for her would have to be invested at 7 per cent without allowance for tax (9.6% with tax) to equate to the value of her current annuity, based on her expectation that she will live into her 90s. She has been advised that her lump sum would need to be augmented by something of the order of $45,000 to equate with her current prospective entitlements.
(e)has been kept informed of the issues arising during this proceeding and provided with the opposition, evidence filed in support and amicus report; and
(f)has engaged directly with Mrs McArley and Mr Mackay, and their counsel, to discuss the application and address their concerns about the Bank’s role in this process.
Conclusion
[70] For the reasons I have given, I consider the criteria relevant to the Court’s discretion to approve the scheme are met here. That is also Mr Fowler’s view.
[71]I therefore make orders:
(a)Approving a scheme of arrangement to:
(i)sell the assets in LIL’s statutory fund two (SF2);
(ii)cancel LIL’s obligations to policyholders in SF2; and
(iii)Cause LIL to pay out policyholders whose polices are in force as at the end of the month in which the Arrangement is approved in accordance with the approach described in sections 6 to 10 of the independent actuary report annexed to the affidavit of Bernard Gilbert Higgins filed in support of the application.
(b)Directing that the Arrangement is binding on:
(i)LIL and its shareholders;
(ii)LIL’s policyholders; and
(iii)Any other persons necessary to give effect to the Arrangement.
[72]The Arrangement shall take effect from the date of the order.
Rebecca Ellis J
Solicitors:
D L A Piper for Applicant
Duncan Cotterill for Interested Parties