House of Representatives

Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Bill 2008

Explanatory Memorandum

Circulated By the Authority of the Treasurer, the Hon Wayne Swan Mp

Chapter 6

Other measures: general insurance

Outline of chapter

6.1 Schedule 3 of the Bill amends the Insurance Act 1973 (Insurance Act) to establish a framework for the judicial management of certain general insurers, including foreign general insurers.

Context of amendments

6.2 The Insurance Act does not currently allow for the judicial management of general insurers. General insurers can be externally administered under the Corporations Act 2001 , which requires the company to be administered in the interests of creditors or members. There is no framework that allows general insurers to be externally administered in the interests of policyholders and financial system stability in Australia.

6.3 The inability to apply to the Federal Court of Australia (the Court) for the appointment of a judicial manager to manage a general insurer is a gap in the Australian Prudential Regulation Authority's (APRA) powers to respond in circumstances where the affairs of the general insurer may warrant intervention.

6.4 Schedule 3 establishes a framework that enables general insurers to be judicially managed in the interests of policyholders and the stability of the financial system. The framework is broadly modelled on the judicial management arrangements in the Life Insurance Act 1995 .

Summary of new law

6.5 APRA or a general insurer may apply to the Court for the appointment of a judicial manager.

6.6 The Court may appoint a judicial manager if the insurance business of the insurer has been investigated by APRA and the Court is satisfied that it is in the policyholders' interests. Alternatively, the Court can appoint a judicial manager if it is satisfied that the insurer (in the case of a foreign general insurer, its insurance business in Australia) is insolvent, has failed to comply with prudential standards or an APRA direction, or that the financial position or management of the general insurer may be unsatisfactory.

6.7 Once appointed, the judicial manager is required to report to the Court and recommend a course of action. The judicial manager has the power of the board to manage the general insurer, and must do so in accordance with the Court's oversight and instructions.

6.8 The judicial manager must recommend to the Court that: the business is transferred to another insurer; the insurer carry on after a period of judicial management; the insurer be recapitalised; the insurer be wound up; or some other course of action. The Court may then make appropriate orders.

Comparison of key features of new law and current law

New law Current law
A judicial manager can be appointed to a general insurer in certain circumstances, including where it is in the policyholders' interests.
The judicial manager can recommend a course of action, including transfer of business, recapitalisation, or the winding up of the distressed general insurer.
There is no judicial management framework in place for general insurers.
External administration of general insurers is currently contained within Chapter 5 of the Corporations Act, an arrangement that is not primarily concerned with policyholders' interests or financial system stability.

Detailed explanation of new law

6.9 The effect of schedule 3 of the Bill is outlined below. Where appropriate, any special or modified application to foreign general insurers is discussed. A 'foreign general insurer' is defined in section 3 of the Insurance Act as a body corporate that:

(a)
is a foreign corporation within the meaning of paragraph 51(xx) of the Constitution; and
(b)
is authorised to carry on insurance business in a foreign country; and
(c)
is authorised under section 12 to carry on insurance business in Australia.

6.10 Where a general insurer is established in Australia as a stand-alone insurer or as a subsidiary of either an Australian or international general insurance group, it is an Australia-registered corporation that is subject to the full scope of the Corporations Act and relevant parts of the Insurance Act. Such an insurer will be subject to all the judicial management provisions.

Appointment of judicial manager and termination of judicial management

6.11 Schedule 3 establishes the framework for the judicial management of general insurers in certain circumstances. A general insurer that is authorised under the Insurance Act, including a foreign general insurer, may be placed under judicial management.

6.12 Part VB provides a framework for the judicial management of general insurers. However, it does not preclude persons from exercising their rights under the Corporations Act or other legislation, unless this is inconsistent with the judicial management framework. [Schedule 3, item 5, subsection 3(1) and item 11, section 62Q ]

6.13 The object clause in the Insurance Act is amended so that it includes a reference to judicial management of general insurers whose circumstances are unsatisfactory. These appointments are made to ensure the stability of the financial system in Australia and to protect the interests of policyholders. [Schedule 3, item 1, subsection 2A(2)]

6.14 The concepts of policyholders' interests and financial system stability in Australia are broad and may be applied flexibility to assist APRA and the judicial manager to perform their functions and duties under the Insurance Act.

6.15 The general insurer or APRA may apply for the appointment of a judicial manager. However, a general insurer is required to give APRA at least one month's notice of its intention to apply. Both the general insurer and APRA will have the right to be heard at an application hearing. [Schedule 3, item 11, section 62K]

6.16 A judicial manager may be appointed by the Court where APRA has conducted an investigation of the general insurer under Part V of the Insurance Act, and the Court is satisfied that it is in the interests of policyholders that a judicial manager is appointed. [Schedule 3, item 11, section 62L]

6.17 Alternately, if the Court is satisfied that one or more of the following circumstances exist, and the time required to conduct or complete an investigation would be detrimental to policyholders' interests:

·
The general insurer has become, or is likely to become, unable to pay its policy or other liabilities;
·
in the case of a foreign general insurer, the entity has become, or is likely to become, unable to meet, from its assets in Australia, its liabilities in Australia other than pre-authorisation insurance liabilities as they fall due; [Schedule 3, item 6, subsection 3(1)]
·
the general insurer has failed to comply with a prudential standard;
·
the general insurer has failed to comply with an APRA direction; or
·
the management or financial position of the general insurer is unsatisfactory;
then a judicial manager can be appointed. [Schedule 3, item 11, section 62M]

6.18 The Court may order the appointment of a judicial manager if the Court considers that at least one of the grounds for appointment is satisfied. [Schedule 3, item 11, section 62L and 62M]

6.19 If the Court orders the appointment of a judicial manager, the order may specify that judicial management is taken to commence on a particular day and at a particular time. If the court does not so specify, judicial management is taken to commence when the order is made. This provision provides certainty as to commencement, and it also determines when the general insurer must cease making payments or issuing policies (a general insurer may not issue new policies after a judicial manager is appointed, unless it has the Court's consent). [Schedule 3, item 11, section 62N and subsection 62T(2)]

6.20 If the Court orders the appointment of a judicial manager, it must also appoint a person to be the judicial manager. There are no restrictions on who can be appointed a judicial manager. The Court may set the remuneration and terms of appointment for the judicial manager. [Schedule 3, item 11, section 62R and 62S,]

6.21 The Court may cancel the appointment of a particular judicial manager and appoint another person. [Schedule 3, item 11, section 62R]

6.22 A judicial manager appointed by the Court displaces the incumbent management of the company. This provision is identical in its term to the equivalent provision in the Life Insurance Act, and ensures that the directors and the board of management cease to have control of the general insurer from the time the judicial manager is appointed. This operates similarly to the appointment of an external administrator of a company under the Corporations Act. [Schedule 3, item 11, section 62T]

6.23 Division 1 of Part VB, concerning judicial management, only applies to the foreign general insurer's business within Australia. [Schedule 3, item 11, subsection 62T(3) and section 62ZO]

6.24 Foreign general insurers are required to comply with the Insurance Act and prudential standards. The foreign general insurer's assets in Australia and liabilities in Australia are affected by section 116A and the prudential standards. Section 116 of the Insurance Act requires all general insurers' assets in Australia to be applied to its liabilities in Australia on liquidation.

6.25 The test for appointing a judicial manager under subparagraph 62M(a)(ii) uses these concepts. Where a Court is satisfied that a foreign general insurer is likely to be unable to meet, from its assets in Australia, its liabilities in Australia (other than pre-authorisation liabilities) as they fall due, the Court will be able to order the appointment of a judicial manager. This test creates an artificial entity for the purposes of determining the solvency of a foreign general insurer's Australian operations. [Schedule 3, item 11, subsection 62M(a)(ii)]

6.26 The appointment of a judicial manager affects other persons in relation to the general insurer. In particular, it affects external administrators that are, or will potentially be, appointed to the general insurer; persons who have, or are proposing to commence proceedings against the general insurer; and some persons who have entered contracts with the general insurer.

External administration

6.27 The following amendments ensure that a judicial manager appointed by the Federal Court takes precedence over other forms of company external administration, where it is considered necessary to protect policyholders' interests and/or ensure financial system stability.

6.28 Judicial management overrides any other form of external administration of the general insurer, as defined under Chapter 5 of the Corporations Act. [Schedule 3, item 11, section 62U and Schedule 3, items 27 to 31]

6.29 A person who proposes to appoint an external administrator to a general insurer must give prior notice to APRA. APRA can be heard at an application hearing. This requirement ensures that APRA has timely notice of these applications and can respond where necessary. For example, APRA may wish to oppose the appointment of an external administrator under Chapter 5 of the Corporations Act on the grounds that it has applied for, or intends to apply for, the appointment of a judicial manager. [Schedule 3, item 11, section 62ZQ]

6.30 A person who applies for the appointment of an external administrator without first notifying APRA commits a strict liability offence. The maximum penalty for the offence is 60 penalty units. [Schedule 3, item 11, subsection 62ZQ(4)]

6.31 This is a strict liability offence, as it may be difficult to show that the person's omission to notify APRA in this circumstance was intentional. This provision provides maximum incentive for such persons to ensure APRA is notified prior to an application for an external administrator to be appointed to a general insurer.

6.32 While a judicial manager is appointed to the entity, all other forms of external administration are terminated and no other external administrator can be appointed. A purported appointment of another form of external administration, in contravention of this provision, is invalid. This ensures, for example, that creditors of the company cannot enforce a lien or charge over company property by appointing a receiver or other external administrator. [Schedule 3, item 11, section 62U]

6.33 However, the Insurance Act does not override other aspects of the Corporations Act. Absent the appointment of a judicial manager, creditors, ASIC and other persons may still exercise their rights under the Corporations Act to appoint other types of external administrators. Subject to the moratorium on all proceedings whilst a judicial manager is appointed, members, creditors and ASIC may also exercise their rights to wind up a general insurer (within the bounds of section 116, with requires all general insurers' assets in Australia to be first applied to its liabilities in Australia on liquidation). [Schedule 3, item 11, section 62ZP]

Proceedings

6.34 Appointing a judicial manager ceases all legal proceedings against the general insurer, or in relation to the general insurer's property, except where the judicial manager or Court has consented otherwise. It also prevents any person commencing new proceedings unless the judicial manager or Court consents. [Schedule 3, item 11, section 62P]

6.35 This provision is similar to the moratorium during external administration under section 440 of the Corporations Act, and ensures that the judicial manager has adequate powers to protect company assets. For example, creditors of the general insurer would not be able to use court proceedings to enforce a debt.

6.36 In some circumstances, the judicial manager may consent to proceedings being brought against the general insurer, because it may assist to clarify the general insurer's liability to a class of insureds. Doing so may save time and money for all parties. Such situations would be similar to external administrators who permit 'representative proceedings' to be brought, in order to determine whether the company owes liability to a party or parties.

6.37 This moratorium does not apply to criminal proceedings or civil penalty proceedings. This ensures that law enforcement can continue during judicial management, and is similar to the exemption for criminal proceedings and prescribed proceedings under section 440 of the Corporations Act. [Schedule 3, item 11, subsection 62P(2)]

6.38 The judicial manager is not liable to anyone for refusing to consent to a person commencing or continuing proceedings against the general insurer. This provision gives the judicial manager protection against claims for damages or other losses suffered by creditors, shareholders or other persons as a result of this refusal.

Contractual obligations

6.39 A contract with the general insurer cannot be terminated, or contractual obligations owed to the general insurer avoided, on the grounds that a judicial manager has been appointed. Where contractual clauses provide for specified events as grounds to terminate or vary the contract, this provision would override those clauses.

6.40 Without such provisions, the appointment of a judicial manager is likely to be an 'event of default' or other 'specific event' under many commercial contracts. These 'events' may have a number of consequences that are detrimental to the continuing operations of the general insurer. Such events may entitle the other party to the contract to cease meeting their contractual obligations, such as performing business services. If the contract is a loan or a type of debt, such events may allow the creditor to ask for immediate payment of the amount outstanding under the loan, and may have additional penalty clauses attached. If the contract relates to other transactions or trades, such events may entitle the other party to close out these transactions and ask for immediate settlement of any outstanding accounts. [Schedule 3, items 12-15 and 11, section 62V]

6.41 These provisions protect the financial position of the general insurer and policyholder interests until the judicial manager has had time to make an assessment as to an appropriate course of action. These provisions also ensure the judicial manager can allow the general insurer to continue trading if it is appropriate.

6.42 These provisions override any other form of external administration of a foreign general insurer. This would include receivers and receiver-controllers appointed over company assets. They also protect the foreign general insurer from proceedings against the company, and ensure that contractual obligations continue to be met by other parties.

6.43 The scope of these provisions is limited because a judicial manager would only have management of the Australian operations of the foreign general insurer. Therefore, the protections given under these provisions would only apply to the part of the foreign general insurer's operations that is under the judicial manager's control.

6.44 Where proceedings or contractual obligations relate to a part of the business that is in the general insurer's country of registration or another country, the protection given by these provisions would not be available.

APRA's powers in relation to the general insurer and judicial manager

6.45 The provisions of the Insurance Act and the Financial Sector (Collection of Data) Act 2001 continue to apply to a general insurer under judicial management. This means the general insurer under judicial management is still required to comply with the prudential framework including capital adequacy, audit and actuarial requirements. APRA may, however, exempt a specified person from specific requirements of the Insurance Act (section 7) modify the application of particular prudential standards (section 32) or issue a direction to the general insurer in certain circumstances (section 104). [Schedule 3, item 11, section 62W]

6.46 The general insurer under judicial management is required to submit returns under the Financial Sector (Collection of Data) Act 2001 . This maintains a key element of APRA's supervisory process.

6.47 APRA may also request information from the judicial manager at any stage of judicial management. The request for information must relate to the conduct of judicial management or the financial circumstances of the entity, including whether it is solvent. APRA may require information to be given within a specified, reasonable, time and the judicial manager must comply with the request. [Schedule 3, item 11, section 62ZD]

6.48 APRA can apply to the Court for the Court to give directions to the judicial manager. APRA is required to give prior notice to the judicial manager, and the judicial manager can be heard. [Schedule 3, item 11, section 62ZC]

6.49 This is in addition to APRA's power to make submissions in any proceedings relating to judicial management.

Powers and obligations of the judicial manager

6.50 The management of the general insurer vests in the judicial manager, which gives the judicial manager all the powers of the board of directors and management of the general insurer. This gives the judicial manager the flexibility to continue trading and issuing policies (subject to Court approval) if doing so would assist the general insurer's future viability and protect existing policyholders. The judicial manager has powers to take various actions in the name of the general insurer, and has additional powers necessary to effectively perform its functions. These powers include disposing of assets, obtaining credit, bringing and defending legal proceedings and proving in bankruptcy. The Court may also direct the judicial manager to exercise any other powers. [Schedule 3, item 11, section 62Y and subsection 62T(2)]

6.51 Once appointed, the judicial manager is subject to the Court's control and is required to manage the general insurer economically and efficiently. [Schedule 3, item 11, sections 62X and 62ZG]

6.52 The judicial manager may apply to the court for instructions concerning the management of the general insurer. Before the judicial manager makes the application, it is required to give notice to APRA and APRA can be heard on the application. [Schedule 3, item 11, subsection 62X(3) to (5)]

6.53 The judicial manager has the power to disclaim onerous property, under Division 7A of Part 5.6 of the Corporations Act. This essentially gives the power that a liquidator has under the Corporations Act to the judicial manager to disclaim onerous property of the general insurer. It can disclaim property that consists of land burdened with onerous covenants, shares, property that is unsaleable or may give rise to a liability or onerous obligation or a contract. [Schedule 3, item 11, section 62ZH]

6.54 The judicial manager is not liable for anything done in good faith, while performing their functions. This protects the judicial manager and ensures that they can effectively perform their functions and duties in relation to the entity without the fear of future liability. [Schedule 3, item 11, section 62ZM]

Report by the judicial manager and Court orders

6.55 The judicial manager has the obligation to report to the Court as soon as possible and recommend a course of action. A course of action ordered by the Court is binding on all persons. The recommended course of action may include: transfer of business of the general insurer; continuing to carry on insurance business after a period of judicial management; recapitalise the general insurer; wind up the general insurer; or any other course of action considered desirable.

Reporting to court

6.56 Once appointed, the judicial manager is required to compile a report for the Court on the financial circumstances of the entity. In the report, the judicial manager must recommend a course of action for the general insurer with a view to acting in the general interests of the policyholders while promoting financial system stability in Australia. This procedure is modelled on the reporting procedure established by Part 8 of the Life Insurance Act. [Schedule 3, item 11, section 62ZI,]

6.57 The judicial manager may make one or more reports to the court, where it is necessary to do so. [Schedule 3, item 11, subsection 62ZI(4)]

6.58 After filing the report with the Court, the judicial manager is required to give a copy of the report to APRA. APRA may be heard on applications by the judicial manager to give effect to recommendations in the report. APRA, as the prudential regulator, is therefore informed of the progress of judicial management and is able to support, oppose or suggest modifications to the report recommendations. [Schedule 3, item 11, subsection 62ZI(6)]

6.59 In the report, the judicial manager must recommend a course of action for the general insurer, or different courses of action for different parts of the general insurer's business. The recommendations are not limited by legislation, but may include: the transfer of business of the general insurer to another general insurer; allow the general insurer to carry on business after period of judicial management; wind up the general insurer; or take such other course of action as the judicial manager considers desirable (which might include altering the company constitution rules, or other arrangements for governance). [Schedule 3, item 11, subsection 62ZI(2)]

6.60 The broad scope of these recommendations ensures that the judicial manager can recommend action that is appropriate for the circumstances of the general insurer so as to protect the policyholders' interests while promoting financial system stability in Australia.

6.61 One of the recommendations that can be made by the judicial manager is to change the company's constitution, rules or other arrangements for governance, where it may assist the judicial manager to perform its functions and duties as a judicial manager.

6.62 This possible recommendation provides the judicial manager with flexibility, as the clauses in the company's constitution or its governance arrangements may hinder a quick and decisive resolution of the failing general insurer's affairs.

6.63 When the judicial manager applies to the Court, the Court may give any order that it considers advantageous to the general interests of policyholders, while promoting financial system stability in Australia. The Court may vary the recommended action or make any other orders it considers appropriate. The Court's order is binding despite the Corporations Act, the company's constitution, any contract to which the general insurer is a party, or the listing rules of a financial market. [Schedule 3, item 11, section 62ZJ]

Recapitalisation

6.64 The recapitalisation of a financial institution is an internationally recognised method of addressing a distressed institution and restoring the institution's financial health. Capital provided to a distressed institution provides a cushion to support any losses and it enhances its ability to operate competitively in the market. Importantly, it does not impose a repayment obligation on an already weak institution.

6.65 A judicial manager may facilitate a recapitalisation: through issuing new shares or rights to acquire shares; selling those shares or rights; cancelling existing shares or rights; or varying or restricting rights attached to shares. The judicial manager could also reduce the company's share capital by cancelling any paid-up share capital that is not represented by available assets. [Schedule 3, item 11, section 62Z]

6.66 As an example, a judicial manager could facilitate a capital injection into a general insurer by issuing new shares and selling them to a new investor. Under this example the new investor would gain a stake in the company and pre-existing shareholders would have their stake in the company diluted but would retain their shares in the company.

6.67 As an alternative to the above, it would also be possible to cancel existing shareholders' shares, which, for example, could be used to facilitate a new investor taking 100 per cent control of a general insurer.

6.68 The recapitalisation powers are intended to be strong and flexible in order to allow a judicial manager to respond quickly and decisively to a range of circumstances.

6.69 A judicial manager of a foreign general insurer would not be able to issue new shares in the entity, or write down or cancel existing shares, where the senior management of the Australian branch does not have such powers. All other powers and recommendations are open to the judicial manager.

6.70 Prior to undertaking an action to recapitalise the general insurer, the judicial manager is required to obtain an independent valuation report which sets out the expert's opinion of the fair value for each of the shares and rights, or the fair value of the rights affected. The judicial manager is required to consider the report, and may draw on its content, but is not compelled to follow the recommendations of the report when determining the terms of a recapitalisation action. [Schedule 3, item 11, subsection 62ZA(2)]

6.71 Section 127A ensures that any action that would result in an acquisition of property from a person otherwise than on just terms would remain valid, with the Commonwealth liable to pay compensation of a reasonable amount as agreed with the person. Many potential recapitalisation actions however, are unlikely to result in an 'acquisition of property'. An example would be where existing shareholders' stakes in the company are diluted by the statutory manager issuing and selling new shares in the company. [Schedule 3, Item 25, section 127A]

6.72 The requirements applying to the expert valuation report, in relation to issuing, selling or cancelling shares, are similar to those of compulsory share acquisitions under the Corporations Act. Where the expert valuation report is required to give the fair value of rights attached to shares, the legislation does not prescribe how the valuation may be conducted so as to provide flexibility to the expert valuer. This reflects the fact that there may be many types of rights attached to shares and different valuation methods would be appropriate for different types of rights. [Schedule 3, item 11, section 62ZA]

6.73 Where the valuation report concerns issuing, selling or cancelling shares, or restricting or varying share rights, the Minister can give written notice to the expert valuer about the valuation assumptions to be used in the report (these provisions specify that the instruments are not legislative instruments in order to assist readers, as the instrument is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act). [Schedule 3, item 11, subsections 62ZA(4) and (6)]

6.74 The judicial manager is also required to comply with further procedural requirements, such as notifying all affected shareholders. [Schedule 3, item 11, section 62Z(2)]

6.75 APRA may determine that there is to be an exemption from the valuation requirement. APRA may give this exemption if it considers that it is in the interests of policyholders, and where applicable, the stability of the financial system, for recapitalisation to be completed before the valuation report is completed, as the time needed to complete a valuation report would be detrimental to policyholders' interests or the stability of the financial system. [Schedule 3, item 11, subsections 62ZA(1) and (8)]

6.76 An exemption made by APRA from the valuation requirement is not a legislative instrument (this provision is included to assist readers, as the instrument is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act). [Schedule 3, item 11, subsections 62ZA(8) and (10)]

6.77 In the interests of a timely recapitalisation, this power overrides any Corporations Act requirements, markets listing rules, any contractual arrangements and any provision in the entity's constitution. This means that members will not be able to seek members' remedies under the Corporations Act or seek a court injunction under that Act to delay the recapitalisation. This means that recapitalisation may occur even if the company constitution prohibits issuing a specified class of shares or prohibits a share issue unless certain 'entrenched' requirements are satisfied. The judicial manager may also amend the company constitution, rules or other governance arrangements to carry out recapitalisation. [Schedule 3, items 11, subsection 62Z(4)]

6.78 A recapitalisation transaction cannot be used to trigger default or protective clauses under a contract with the general insurer, so that the other party to the contract cannot deny contractual obligations, accelerate debt payments or close out transactions merely because the judicial manager has implemented a recapitalisation. This limitation only applies to contracts made after the commencement of the section. [Schedule 3, item 11, section 62ZB and item 12]

6.79 The recapitalisation mechanism above ensures the judicial manager has power to carry out the transaction effectively and quickly. At the same time, it protects the interests of those affected by the transaction, particularly the entity's shareholders.

Business transfer

6.80 If the court orders that the general insurer's business be transferred to another entity, the judicial manager is required to formulate a transfer scheme under Division 3A of Part III of the Insurance Act. The Court must approve a transfer under Division 3A. Approval may also be required for a transfer under the Insurance Acquisitions and Takeovers Act 1991 . [Schedule 3, items 7-8 and 11, section 62ZK]

Exemption from competition assessments

6.81 A range of actions taken by the judicial manager are exempt from competition assessment under the Trade Practices Act 1974 . This is because a competition assessment may frustrate, unduly delay or create undue uncertainty in relation to action that promotes the interests of policyholders and financial system stability in Australia. Such an exemption ensures that the judicial manager and APRA have maximum flexibility when considering ways to rehabilitate a distressed general insurer. [Schedule 3, item 11, section 62ZN]

Ending judicial management

6.82 Judicial management continues until it is cancelled by the Court or the general insurer is wound up. The judicial manager, APRA and any other interested person may apply to Court for the cancellation of judicial management. Where the judicial manager or another interested person applies for the cancellation, they must give prior notice to APRA and APRA can be heard on the application. [Schedule 3, item 11, sections 62ZE and 62ZF]

6.83 If the Court cancels the appointment of the judicial manager and does not appoint another judicial manager under section 62R, the management of the entity will vest in the board of directors or other governing body. [Schedule 3, item 11, sections 62R and 62ZF(5)]

6.84 The judicial manager can resign the appointment as judicial manager for any reason, however they must do this by filing their resignation with the Court. [Schedule 3, item 11, section 62ZL]

External administration and winding up

External administration

6.85 Under the Corporations Act, a person who makes an application to a Court to appoint an external administrator must give APRA written notice of the application. [Schedule 3, item 11, section 62ZQ and item 2, subsection 3(1)]

Winding up

6.86 APRA is able to apply to Court to wind up a general insurer under the Insurance Act rather than under Chapter 5 of the Corporations Act, after an investigation into the insurer's affairs. The Insurance Act provisions allow the Court to wind up the general insurer if this is in the policyholders' interests. This provision is modelled on section 181 of the Life Insurance Act. [Schedule 3, item 11, section 62ZU and items 27 to 31]

6.87 If an order to wind up a general insurer is made under the Insurance Act, the winding up process is conducted in accordance with Corporations Act winding up provisions. [Schedule 3, item 11, section 62ZV]

6.88 APRA will also have an additional role during the wind up of a general insurer. Where the liquidator of a general insurer proposes to apply to court in relation to a winding up, they must give prior notice to APRA and APRA can be heard on the application. This provision is modelled on section 183 of the Life Insurance Act and ensures that APRA may make submissions on issues that affect the entity's policyholders, or the stability of the financial system in Australia, where it is appropriate to do so. This power relates to winding up initiated under the Corporations Act as well as winding up initiated under the Insurance Act. [Schedule 3, item 11, section 62ZR]

6.89 APRA can also apply to the Court for directions in relation to any matter in the winding up of the general insurer. This ensures that APRA may make submissions on issues that affect the entity's policyholders, or the stability of the financial system in Australia, where it is appropriate to do so. This power relates to winding up initiated under the Corporations Act as well as winding up initiated under the Insurance Act. [Schedule 3, item 11, section 62ZS]

6.90 In addition, APRA can request information from the liquidator concerning the liquidation of the entity. This ensures that APRA has access to information that may be relevant to protecting the interests of the entity's policyholders. Where APRA is administering the Financial Claims Scheme in respect of the general insurer, APRA will also be able to access information that would assist its functions as scheme administrator. [Schedule 3, item 11, section 62ZT]

Compensation for acquisition of property

6.91 Section 127A is inserted into the Insurance Act and provides that if the operation of the Act results in an acquisition of property by the Commonwealth on unjust terms, the Commonwealth is liable to pay compensation. This schedule provides a mechanism to determine the compensation payable. [Schedule 3, Item 25, section 127A]

Minister's power to authorise contracts or arrangements to protect policyholders or to promote financial stability

6.92 Ministers have inherent powers to enter into contracts or arrangements on behalf of the Commonwealth. However, in order to be able to make payments in accordance with the Commonwealth's obligations under such contracts or arrangements an appropriation authority is required. A special appropriation mechanism is introduced into the Banking Act in order to allow such authority to be obtained in a timely manner if required.

6.93 The Minister may, with the written approval of the Finance Minister, authorise the making of contracts or arrangements for the purposes of protecting the interests of policyholders and financial system stability in Australia. [Schedule 3, item 3, subsection 3(1) and item 26, section 131A]

6.94 This does not limit any other powers of the Minister to enter into contracts or arrangements.

6.95 The Minister must specify an amount in the authorisation to be credited to the Financial System Stability Special Account (the FSS Special Account). [Schedule 3, item 4, subsection 3(1)]

6.96 The FSS Special Account is established in the Banking Act in order to provide an appropriation authority for payments under contracts and arrangements authorised under the Banking Act, the Insurance Act and the Life Insurance Act. [Schedule 2 item 23, sections 70E to 70H]

6.97 The balance of the FSS Special Account attributable to such authorisations - total amounts credited under these authorisations but not yet expended for the purpose of meeting payments under authorised contracts or arrangements - must be less than $10,000,000,000 at any time. The amount specified can be amended but not revoked.

6.98 If the Minister has authorised a contract or arrangement, the Minister is also provided with a borrowing power, subject to the written approval of the Finance Minister. [Schedule 3, item 26, section 131B]

6.99 The Minister may borrow on behalf of the Commonwealth for up to 24 months for amounts totalling not more than $10,000,000,000 at any time. The borrowing power is intended as a contingency measure in order to ensure that the Commonwealth could obtain sufficient liquidity to meet obligations under contracts or arrangements if payments were required at very short notice. If cash was available at the time from consolidated revenue it is not envisioned that the use of the borrowing power would be required.

6.100 Similar provisions for authorising a contract or arrangement and associated borrowing are to be included in the Banking Act and Life Insurance Act. [Schedule 2, item 23, sections 70C and 70D, and schedule 4, item 34, sections 251A and 251B]

6.101 The authorisation by the Minister regarding the making of contracts or arrangements takes effect from the time it is made. The exclusion of an authorisation under this Part from the effect of subsections 12(1) and 12(2) of the Legislative Instruments Act 2003 is necessary to ensure that delays in the registration do not unduly delay an authorisation which is ultimately done in the interests of policyholders or financial system stability in Australia.

Pre - authorisation liabilities ; assets and liabilities in Australia

6.102 Sections 28 and 116 of the Insurance Act are being amended to distinguish between a general insurer's liabilities before and after becoming authorised (under section 12 of the Act) to carry on insurance business in Australia. Note that the amendment to section 116 is applied retrospectively. However, the retrospective application of this amendment does not amount to an acquisition of a property right on unjust terms and would be beneficial to policyholders with current policies that have purchased insurance from the general insurer after it was authorised should it be wound up. [Schedule 3, items 6, 9, 10, 16 and 17]

6.103 Section 116A of the Insurance is being amended to apply its modified definitions of 'assets in Australia' and 'liabilities in Australia' to the judicial management regime in Part VB. This will ensure that the consideration of assets and liabilities in determining a general insurer's solvency for the purposes of the judicial management regime will be consistent with the existing provisions of the Insurance Act. [Schedule 3, items 18-24]

Application and transitional provisions

6.104 These provisions apply to transactions or contracts entered into, or Court applications lodged, after the commencement of these provisions. [Schedule 3, items 12 - 15, and section 2A of Insurance Act 1973]


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