House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)

Chapter 2 - Statutory and judicial management

Outline of chapter

2.1 Schedules 1-3, 5 and 6 to this Bill amend the Industry Acts, the PSN Act and the APRA Act to enhance APRA's powers related to the statutory and judicial management of regulated entities, authorised NOHCs, and subsidiaries thereof.

Context of amendments

2.2 Statutory and judicial management are existing powers in APRA's crisis resolution toolkit. APRA can appoint itself or a third party to take control of an ADI under statutory management, and can apply to the Court for the appointment of a judicial manager to take control of an insurer. Where a statutory or judicial manager is appointed to an entity, it replaces the board of directors and takes control of the entity.

2.3 Statutory and judicial management are important tools for dealing with a financial institution in acute distress. APRA may need to use these powers to take control of an entity in cases where it does not have confidence that the board and management is capable of resolving a crisis satisfactorily, or where the board and management are mismanaging the entity, including where it is insolvent or near insolvent.

2.4 The appointment of a statutory or judicial manager can help stabilise a failing entity, so that steps can be taken to implement an orderly resolution in a way that protects the interests of depositors and policyholders, and maintains financial system stability. Depending on the circumstances, this could include maintaining some or all of the entity as a going concern, recapitalising the entity, facilitating the transfer of some or all of the business to another entity, or putting the entity into partial or complete wind-up (with declaration of the FCS where relevant).

2.5 Given the high level of intervention which it involves, statutory and judicial management would generally be used as a measure of last resort. To date, no statutory manager has been appointed to an ADI, reflecting the long period of financial stability that Australia has enjoyed. In the case of insurers, the Court has only appointed a judicial manager on APRA's application on two occasions. Both instances involved small general insurers that had been in run-off for many years (that is, they were unable to write any new insurance business).

2.6 This Bill enhances the legislative framework underpinning the statutory and judicial management regimes to ensure their effective operation in a crisis situation, including providing for the appointment of a statutory manager to an insurer in certain special circumstances, and extending the scope of statutory management to authorised NOHCs of a regulated entity and domestically incorporated subsidiaries of an authorised NOHC or regulated entity, to address the resolution of groups, in each case subject to appropriate pre-conditions and safeguards.

2.7 Under the Insurance and Life Insurance Acts, APRA may apply to the Federal Court for the appointment of a judicial manager to assume control of an insurer where certain statutory preconditions are met, such as where an insurer has failed to comply with a prudential standard or a direction from APRA, or is in financial distress. In contrast, under the Banking Act, it is APRA that appoints a statutory manager to an ADI without application to the Court.

2.8 While applying to the Court for the appointment of a judicial manager is likely to represent an appropriate resolution tool for a failing insurer in most circumstances, there may be specific situations where APRA needs the ability to appoint a statutory manager to an insurer. In particular, this could be the case where the insurer is large or part of a complex financial group, or its distress poses a risk to the financial system or economy, so that a more rapid resolution response may be needed.

2.9 In relation to groups, the global financial crisis demonstrated that it is particularly difficult to ensure the effective resolution of a failing entity that is part of a wider group of companies. The structures of financial groups can be complex, involving numerous business lines and support services linked through different ownership and contractual arrangements. It may not be clear exactly how the different members of a group are linked by inter-dependencies, for example through the provision of critical intra-group services, or where the risks and control in a group ultimately lie.

2.10 Understanding the position of the failing regulated entity, disentangling its affairs from those of the rest of the group, and ensuring it can be resolved quickly and effectively present considerable challenges. In the absence of effective group resolution powers, it may be particularly difficult to resolve a distressed regulated entity or group quickly and effectively.

2.11 Extending the statutory management regime to apply to insurers in certain circumstances, and to address the resolution of groups, is consistent with relevant international standards on resolution regimes. The Key Attributes note the need for resolution powers to apply to relevant group entities, and were updated in 2014 to include sector-specific guidance on the resolution of insurers. The BCBS and IAIS have also taken steps to incorporate the Key Attributes into their standards.

2.12 Other amendments include new powers to appoint a statutory manager to the Australian business of a foreign ADI or insurer (see Chapter 7 for further details), and enhanced moratorium and immunity provisions in respect of statutory and judicial management. In recognition that the use of statutory management powers could affect third party rights, including those of creditors, the Bill also introduces certain new preconditions and safeguards as appropriate.

Summary of new law

2.13 Schedules 1-3, 5 and 6 to this Bill amends the Industry Acts, the PSN Act and APRA Act to:

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enhance APRA's statutory management powers in respect of ADIs, including new statutory management powers in relation to foreign ADIs;

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provide APRA with new statutory management powers in respect of insurers;

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provide APRA with new statutory management powers in respect of authorised NOHCs of regulated entities, and domestically incorporated subsidiaries of authorised NOHCs or regulated entities;

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enhance the moratorium provisions with respect to the statutory and judicial management provisions of the Industry Acts; and

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enhance the statutory immunity provisions applying to statutory and judicial managers.

2.14 The Bill also includes a number of other technical amendments to the Industry Acts in relation to statutory and judicial management, to:

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ensure that the Insurance and Life Insurance Acts prevail over the Corporations Act to the extent of any inconsistency (as is already the case under the Banking Act);

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confirm that the PGPA Act does not apply to an entity under the control of a statutory manager;

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clarify that APRA can replace a statutory manager and provide APRA with standing to apply for the replacement of a judicial manager with another person;

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confirm that more than one person can be appointed as a statutory or judicial manager;

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clarify the effect of the appointment of a judicial manager to an insurer on the directors and officers of that entity; and

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repeal unnecessary sections in the Insurance and Life Insurance Acts relating to judicial management.

Comparison of key features of new law and current law

Detailed explanation of new law

General provisions

2.15 The Bill expands the existing statutory management regime for ADIs to apply to related bodies corporate of the regulated entity in certain circumstances. This expanded statutory management regime under the Banking Act is then adapted into the Insurance and Life Insurance Acts (see 2.41 to 2.43) so that a statutory manager can now be appointed to a regulated entity, its authorised NOHC, and a domestically incorporated subsidiary of the authorised NOHC or a subsidiary of the regulated entity.

2.16 For ease of reading, the Explanatory Memorandum will first address the amendments applying the statutory management regime to related bodies corporate in the Banking Act, followed by an explanation of how the newly expanded Banking Act statutory management regime is transposed into the Insurance and Life Insurance Acts. Cross-references to the equivalent new provisions of the Insurance and Life Insurance Acts in the Schedules to the Bill are included below for ease of reference.

Statutory management of group entities

Definitions - related body corporate

2.17 The Bill inserts a new definition of 'related body corporate'. It is defined as a body corporate that is related to the first-mentioned body corporate. For the purposes of the Banking Act, this is determined in the same way as the Corporations Act. [Schedule 1, items 10 and 11, subsections 5(1) and 5(2A) of the Banking Act; Schedule 2, items 7 and 8, subsections 3(1) and section 4B of the Insurance Act; Schedule 3, item 115, of the Schedule Dictionary of the Life Insurance Act]

2.18 This new definition is used throughout the Banking Act, including in the provisions that place safeguards on the exercise of a statutory manager's powers and functions (see 2.34 to 2.40).

Definitions - Banking Act statutory manager

2.19 The Bill repeals the definition of 'ADI statutory manager' and inserts a new definition of 'Banking Act statutory manager'. [Schedule 1, items 1 and 4, subsection 5(1) of the Banking Act]

2.20 A Banking Act statutory manager is either APRA (where it is in control) or an administrator appointed by APRA to control an entity under the Banking Act. [Schedule 1, item 65, subsection 13A(2) of the Banking Act]

2.21 The reason for the change in definition is that, as a result of the amendments in the Bill, it will be possible to appoint a statutory manager to not only an ADI but also an authorised NOHC or a domestically incorporated subsidiary of an ADI or authorised NOHC under the Banking Act. The term 'ADI statutory manager' is therefore no longer appropriate.

Definitions - target body corporate and relevant ADI

2.22 The Bill amends section 13A of the Banking Act, which currently provides for statutory management of only ADIs, to extend the statutory management regime to authorised NOHCs and domestically incorporated subsidiaries of authorised NOHCs and ADIs. The amendments allow APRA to appoint a statutory manager to a 'target body corporate' that is incorporated in Australia in certain circumstances. [Schedule 1, item 65, subsection 13A(1B) of the Banking Act; Schedule 2, item 58, subsection 62ZOA(3) of the Insurance Act; Schedule 3, item 52, subsection 179AA(3)of the Life Insurance Act]

2.23 The term 'relevant ADI' is defined with respect to its relationship to the target body corporate. For example, if a Banking Act statutory manager takes control of an authorised NOHC, the ADI subsidiary of that authorised NOHC, in connection with which the appointment was made, would be the 'relevant ADI'.

2.24 The Bill also allows regulations to exclude the kinds of entities specified in the regulations from the scope of the statutory management regime. For example, regulations might carve out entities that are regulated under other legislation and subject to a bespoke external administration regime. [Schedule 1, item 65, paragraph 13A(1B)(d) of the Banking Act; Schedule 2, item 58, paragraph 62ZOA(3)(d) of the Insurance Act; Schedule 3, item 52, paragraph 179AA(3)(d) of the Life Insurance Act]

Pre-conditions to appointing a statutory manager to target entities

2.25 The Bill provides that APRA may take control of a target body corporate or appoint an administrator to take control of a target body corporate in certain circumstances. [Schedule 1, item 65, subsection 13A(1C) of the Banking Act; Schedule 2, item 58, subsection 62ZOA(4) of the Insurance Act; Schedule 3, item 52, subsection 179AA(4) of the Life Insurance Act]

2.26 The Bill amends section 13A of the Banking Act to set out the circumstances where a Banking Act statutory manager may take control of a target body corporate. [Schedule 1, item 65, subsections 13A(1B), 13A(1E) and 13A(1F) of the Banking Act]

2.27 A Banking Act statutory manager may take control of a target body corporate if:

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APRA has appointed a statutory manager to the relevant ADI, or has a statutory basis and intention to do so; and

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the target body corporate provides services or conducts functions or business considered essential to maintain the operations of the relevant ADI. [Schedule 1, item 65, subsection 13A(1D) of the Banking Act; Schedule 2, item 58, subsection 62ZOA(5) of the Insurance Act; Schedule 3, item 52, subsection 179AA(5) of the Life Insurance Act]

2.28 Group entities may perform services or functions that are essential to the operation of the relevant ADI, including for example IT and human resource functions, treasury and corporate services, custodial services, funding and other specialist financial services. Further, groups can be structured so that entities in the group may hold assets or liabilities on behalf of each other, including the relevant ADI. Subject to the relevant pre-conditions being met, APRA may take control of such a target body corporate, enhancing APRA's ability to stabilise the operations of the relevant ADI in a crisis situation.

2.29 The Bill also permits a Banking Act statutory manager to take control of a target body corporate where:

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APRA has appointed a statutory manager to the relevant ADI, or has a statutory basis and intention to do so; and

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APRA considers that it is necessary for a Banking Act statutory manager to take control of the target body corporate to facilitate the resolution of the relevant ADI, an authorised NOHC of the relevant ADI, a 'relevant group of bodies corporate' of which the relevant ADI is a member, or a member or members of such a group. The term 'resolution' is further explained at Chapter 10. [Schedule 1, item 65, subsection 13A(1E) of the Banking Act; Schedule 2, item 58, subsection 62ZOA(6) of the Insurance Act; Schedule 3, item 52, subsection 179AA(6) of the Life Insurance Act]

2.30 A 'relevant group of bodies corporate' is defined in existing section 5 of the Banking Act as either the group comprising an ADI and its subsidiaries together or the group comprising an authorised NOHC and its subsidiaries together.

2.31 A Banking Act statutory manager may also take control of a target body corporate where:

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an external administrator has been appointed to the target body corporate, or APRA considers that, in the absence of external support, the target body corporate may become unable to meet its obligations or may suspend payment; and

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APRA considers that it is necessary for a Banking Act statutory manager to take control of the target body corporate to enable the relevant ADI to maintain its operations, or to facilitate the resolution of the relevant ADI, an authorised NOHC of the relevant ADI, a relevant group of bodies corporate of which the relevant ADI is a member, or a particular member or members of such a group. [Schedule 1, item 65, subsection 13A(1F) of the Banking Act; Schedule 2, item 58, subsection 62ZOA(7) of the Insurance Act; Schedule 3, item 52, subsection 179AA(7) of the Life Insurance Act]

2.32 This is intended to address the circumstances where the appointment of an external administrator to an entity in the group, or more generally the financial distress of such an entity, may cause or exacerbate distress in the relevant ADI. This could arise through a number of channels, including as a result of adverse contagion impacts to the relevant ADI, or through interruption to essential services provided to the relevant ADI by the target body corporate.

2.33 This provision also allows APRA to co-ordinate resolution of the relevant ADI, including the continued provision of appropriate services within the group, in circumstances where this might be frustrated if an external administrator of another kind is appointed with conflicting duties. [Schedule 1, item 65, subsection 13A(1F) of the Banking Act Schedule 2, item 58, subsection 62ZOA(7) of the Insurance Act; Schedule 3, item 52, subsection 179AA(7) of the Life Insurance Act]

Safeguards on the powers and functions of a statutory manager of a target body corporate

2.34 The amendments provide safeguards in relation to the use of a Banking Act statutory manager's powers and functions for certain target bodies corporate. These are intended to provide additional protections for the interests of relevant stakeholders (for example, shareholders and creditors) of the target body corporate or other entity in the group. [Schedule 1, item 131, section 14AAA of the Banking Act; Schedule 2, item 58, section 62ZOE of the Insurance Act; Schedule 3, item 52, section 179AE of the Life Insurance Act]

2.35 The first safeguard generally requires the Banking Act statutory manager to consider fair value where performing or exercising its powers and functions to require the provision of services to or by the target body corporate.

2.36 Specifically, this section prevents the provision of services between related bodies corporate or transfer of assets (including cash or other funds) between the entity under management and another entity in the group in certain circumstances. The prohibition will not apply if:

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the supply or transfer is made for fair value; or

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the supply or transfer occurs under a binding arrangement that existed before the statutory management; or

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in the case of an asset transfer (including a transfer of cash or other funds), if it was in the ordinary course of business; or

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in the case of a transfer of funds, the shareholders of the body corporate have agreed by ordinary resolution to that use of the funds (see 2.39) [Schedule 1, item 131, section 14AAA of the Banking Act; Schedule 2, item 58, section 62ZOE) of the Insurance Act; Schedule 3, item 52, section 179AE) of the Life Insurance Act]

2.37 As noted, in relation to this safeguard, the statutory manager may rely on existing binding arrangements (such as intra-group arrangements) that existed before its appointment whether or not at fair value, or to otherwise only make new arrangements which are for fair value.

2.38 The second safeguard prevents the use of a Banking Act statutory manager's powers and functions over an authorised NOHC of an ADI where:

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the performance or the exercise requires using funds of the authorised NOHC or a subsidiary of the authorised NOHC to increase the level of capital of the relevant ADI to a specified level; and

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the shareholders of the authorised NOHC have not agreed, by ordinary resolution, to that use of the funds. [Schedule 1, item 131, subsection 14AAA(3) of the Banking Act, Schedule 2, item 58, subsection 62ZOE(3) of the Insurance Act; Schedule 3, item 52, subsection 179AE(3) of the Life Insurance Act]

2.39 In this subsection, the term 'ordinary resolution' refers to the ordinary meaning of the term in company law - generally, this means an ordinary resolution that is passed by a majority of votes cast by shareholders of the company entitled to vote on the resolution at the meeting in person or by proxy (if proxies are allowed).

2.40 This amendment does not prevent a statutory manager of an authorised NOHC from using funds of the authorised NOHC to increase the level of capital of the relevant ADI, where those funds were raised following the exercise of the statutory manager's power to facilitate a recapitalisation under section 14AA (as amended by the Bill) of the Banking Act .

Statutory management of insurers

2.41 The Bill amends the Insurance and Life Insurance Acts to create a statutory management regime for insurers.

2.42 The statutory management regimes in the Insurance and Life Insurance Acts are intended to substantially align with the Banking Act (as amended by this Bill) where appropriate. This includes applying the expanded statutory management regime for ADIs (and related body corporates) detailed at 2.17 to 2.40 (with relevant modifications) to insurers and their related bodies corporate. This means that a statutory manager can now be appointed to an insurer, its authorised NOHC, and a domestically incorporated subsidiary of the authorised NOHC or insurer, with appropriate safeguards. [Schedule 2, item 58, sections 62ZOA to 62ZOZ, 62 ZOZA and 62ZOZB of the Insurance Act; Schedule 3, item 52, sections 179AA to, 179AZ, 179AZA and 179AZB of the Life Insurance Act]

2.43 There are some important differences with respect to statutory management between the Industry Acts, in particular in relation to the circumstances in which a statutory manager can take control of an insurer, as explained below.

Power to take control of an insurer

2.44 The Bill empowers APRA to appoint a statutory manager to an insurer, an authorised NOHC of an insurer, and a domestically incorporated subsidiary of an authorised NOHC or insurer in certain circumstances. [Schedule 2, item 58, section 62ZOA) of the Insurance Act; Schedule 3, item 52, section 179AA) of the Life Insurance Act]

2.45 The Bill amends the Insurance and Life Insurance Acts to provide for the pre-conditions that must be satisfied in order for APRA to appoint a statutory manager to a general insurer or life insurer [Schedule 2, item 58, section 62ZOA of the Insurance Act; Schedule 3, item 52, section 179AA of the Life Insurance Act ]

2.46 These require that APRA be satisfied that at least one of the grounds for appointing a judicial manager to an insurer be met (see sections 62L and 62M of the Insurance Act, and sections 158 and 159 of the Life Insurance Act, as amended) and further statutory management pre-conditions are met. [Schedule 2, item 58, paragraph 62ZOA(1)(a) of the Insurance Act; Schedule 3, item 52, paragraph 179AA(1)(a) of the Life Insurance Act]

2.47 Under the existing law, the Court has power to appoint a judicial manager under section 62L of the Insurance Act or section 159 of the Life Insurance Act if APRA has undertaken a formal investigation of the insurer and, having regard to the results of the investigation, it is in the interests of policyholders that the order be made. The Court also has power to appoint a judicial manager under section 62M of the Insurance Act or section 159 of the Life Insurance Act if, in general terms, the insurer is in financial difficulty or something has occurred that may threaten its position, or it has defaulted in compliance with a regulatory requirement. Under sections 62M of the Insurance Act and 159 of the Life Insurance Act, the Court must also consider that the time needed to make or complete an investigation of the insurer would be likely to prejudice the interests of policyholders.

2.48 Note that the Bill separately makes amendments to sections 62M of the Insurance Act and 159 of the Life Insurance Act in relation to the grounds for appointment of a judicial manager in situations where an investigation has not been undertaken; see 2.69.

2.49 Specifically, in addition to being satisfied that a ground exists for the appointment of a judicial manager, APRA must also be satisfied that one of five further conditions (or triggers) is met in order for an Insurance Act statutory manager or a Life Insurance Act statutory manager to be appointed to a general insurer or life insurer respectively. These further pre-conditions reflect the fact that judicial management is likely to remain an appropriate means of resolving a failing insurer in most circumstances, whereas statutory management is only expected to be used where further specific pre-conditions are met. [Schedule 2, item 58, subsection 62ZOA(1) of the Insurance Act; Schedule 3, item 52, subsection 179AA(1) of the Life Insurance Act]

2.50 The five triggers for the appointment of an Insurance Act statutory manager or a Life Insurance Act statutory manager require that APRA be satisfied that:

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an Australian financial sector statutory manager (or AFS statutory manager) has taken control of a related body corporate to the insurer (for example, a Banking Act statutory manager has been appointed to a related ADI to the insurer); or

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the insurer's financial position is deteriorating rapidly or is likely to deteriorate rapidly, and failure to respond quickly to the deterioration would be likely to prejudice policyholders of the insurer; or

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it is likely that the insurer will be unable to carry on insurance business in a way that is consistent with the stability of the financial system in Australia; or

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an external administrator has been appointed to a holding company of the insurer (or a similar appointment has been made in a foreign country in respect of such a holding company) and the appointment poses a significant threat to the operation or soundness of the insurer, the interests of policyholders of the insurer, or the stability of the financial system in Australia; or

•

if the insurer is a foreign insurer:

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an application for the appointment of an external administrator (or for a similar procedure) has been made in a foreign country); or

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an appointment of an external administrator to the foreign insurer (or a similar appointment has been made) in a foreign country.

[Schedule 2, item 58, subsection 62ZOA(2)of the Insurance Act; Schedule 3, item 52, subsection 179AA(2) of the Life Insurance Act]

2.51 The term 'AFS statutory manager' is defined in the Insurance and Life Insurance Acts as a Banking Act statutory manager under the Banking Act, an Insurance Act statutory manager under the Insurance Act, or a Life Insurance Act statutory manager under the Life Insurance Act. [Schedule 2, item 1, subsection 3(1) of the Insurance Act; Schedule 3, item 110, Schedule Dictionary of the Life Insurance Act]

2.52 The first trigger above addresses circumstances where a statutory manager has been (or will be) appointed to another entity in the same group as the insurer; for example, an ADI. The fact that a statutory manager has been appointed to another entity in the group will often be indicative of wider group problems requiring co-ordinated resolution. In these situations, rather than having both a statutory manager and a judicial manager in place within the same group, it may be desirable to have the same person in charge of the different entities in the group, appointed under the same or similar terms of engagement, and subject to directions from APRA. However, depending on the particular circumstances, it is also possible that APRA may choose to appoint different statutory managers, or to apply for the Court to appoint a judicial manager, to different entities in the group. [Schedule 2, item 58, paragraph 62ZOA(2)(a) of the Insurance Act; Schedule 3, item 52, paragraph 179AA(2)(a) of the Life Insurance Act]

2.53 The second trigger addresses circumstances where the deterioration or likely deterioration of an insurer's financial position is rapid enough to warrant a quicker and more certain means of stabilising the insurer, and implementing a resolution, than applying to the Court for appointment of a judicial manager. Speed of action and certainty could be particularly important in situations where an insurer's financial condition is deteriorating rapidly, such as where it is part of a financial group and is adversely affected by intra-group contagion. [Schedule 2, item 58, paragraph 62ZOA(2)(b) of the Insurance Act; Schedule 3, item 52, paragraph 179AA(2)(b) of the Life Insurance Act]

2.54 The third trigger addresses circumstances where an insurer may conduct activities that are sufficiently critical to the stability of the Australian financial system (and potentially the real economy) that the financial distress of the insurer requires rapid action to be taken in the interests of financial stability. [Schedule 2, item 58, paragraph 62ZOA(2)(c) of the Insurance Act; Schedule 3, item 52, paragraph 179AA(2)(c) of the Life Insurance Act]

2.55 The fourth trigger addresses circumstances where an appointment of an external administrator to a holding company of a insurer has the potential to trigger contagion impacts within the group, which could lead to or exacerbate distress in the insurer. The Bill also inserts this trigger in the Banking Act (see 2.59 to 2.65 for more detail). [Schedule 1, item 64, paragraph 13A(1)(d) of the Banking Act, Schedule 2, item 58, paragraph 62ZOA(2)(d)of the Insurance Act; Schedule 3, item 52, paragraph 179AA(2)(d) of the Life Insurance Act]

2.56 The fifth trigger applies only to foreign insurers and applies where:

•

an application for the appointment of an external administrator in a foreign jurisdiction or jurisdictions, or for a similar procedure, has been made in a foreign jurisdiction; or

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an external administrator has been appointed, or a similar appointment has been made, in a foreign jurisdiction.

2.57 This trigger captures situations where, for example, a court process has been commenced in foreign jurisdictions for an appointment of an external administrator, or a foreign regulator has directly appointed an external administrator or similar person, or a secured creditor has appointed an external administrator under a deed or contract. See 2.66 to 2.68 for more detail. [Schedule 2, item 58, paragraph 62ZOA(2)(e) of the Insurance Act; Schedule 3, item 52, paragraph 179AA(2)(e) of the Life Insurance Act]

2.58 As described above, the statutory management regimes for the Insurance and Life Insurance Act will include the power to appoint a statutory manager to target bodies corporate of the relevant insurer (see 2.25 to 2.36), subject to the same preconditions and safeguards on these powers described at 2.34 to 2.40.

Other reforms to the statutory and judicial management frameworks

Appointment of external administrator to holding company as grounds for taking control of a regulated entity

2.59 In a situation where an external administrator (for example, a liquidator or receiver) is appointed to a holding company of a regulated entity, this has the potential to trigger contagion impacts within the group that could lead to or exacerbate distress in the regulated entity. In particular, the appointment of an external administrator to a holding company may adversely affect the financial condition or orderly resolution of regulated entities that are subsidiaries of the holding company. This is because the external administrator of the holding company may take actions, through the holding company, that affect those subsidiaries of the holding company.

2.60 In these circumstances, it may be necessary for APRA to move quickly to assume control of the subsidiary regulated entity via statutory management, or to apply to the Court for the appointment of a judicial manager to the regulated entity (where it is an insurer), where the holding company's external administration presents serious risks to the regulated entity.

2.61 As such, the Bill provides an additional trigger for the appointment of a statutory manager to a regulated entity. This provides that a Banking Act statutory manager can be appointed to take control of a regulated entity's business where the regulated entity is a subsidiary of a holding company and an external administrator has been appointed to the holding company (or a similar appointment has been made in a foreign country in respect of such a holding company). As noted above, an equivalent trigger is included in the new statutory management regime for insurers in the Insurance Act and Life Insurance Act

2.62 This trigger is subject to the further condition that APRA be satisfied that the appointment of an external administrator (or similar person) to the holding company poses a significant threat to either:

•

the operation or soundness of the regulated entity; or

•

the interests of depositors or policy holders of the regulated entity; or

•

the stability of the financial system in Australia. [Schedule 1, item 64, paragraph 13A(1)(d)of the Banking Act; Schedule 2, item 58,paragraph 62ZOA(2)(d)of the Insurance Act; Schedule 3, item 52, paragraph 179AA(2)(d)of the Life Insurance Act]

2.63 These provisions refer to a 'holding company' with respect to the regulated entity. The Bill defines the term 'holding company' for various purposes in the Industry Acts to mean a body corporate of which another body corporate is a subsidiary, with subsidiary generally having the same meaning as in the Corporations Act. The definition is based on the definition of 'holding company' in existing subsection 4(1) of the Transfer Act, and includes bodies corporate that are incorporated either in Australia or a foreign country. [Schedule 1, item 7, subsection 5(1) of the Banking Act; Schedule 2, item 4, subsection 3(1) of the Insurance Act; Schedule 3, item 113, Schedule Dictionary of the Life Insurance Act]

2.64 This amendment is intended to address a risk that can materialise whether or not the holding company is a regulated entity, so it is appropriate to extend this new ground for appointing a statutory manager to the ADI (or insurer, in the corresponding Insurance and Life Insurance Act provisions) in circumstances where the holding company is not a regulated entity.

2.65 Note that this additional trigger extends to procedures that are similar to external administration that have been made in a foreign country. For example, this could include circumstances where a foreign creditor obtains an order to wind-up the holding company in another jurisdiction, or where a foreign resolution authority uses its powers to implement a resolution of the holding company in its jurisdiction and this involves the appointment of a manager, conservator or similar person to take control of all or part of the holding company.

2.66 Consistent with these changes to the Banking Act (see 2.61 and 2.61), the Bill adds an equivalent new trigger for an appointment of a judicial manager under the Insurance Act and Life Insurance Act. Section 62M of the Insurance Act and section 159 of the Life Insurance Act currently provide that a judicial manager may be appointed to an insurer if one of a number of grounds of a prudential nature is satisfied (for example, the insurer has failed to comply with a prudential standard) and the time needed to make or complete an investigation of the insurer would be likely to prejudice the interests of policyholders. The new trigger for appointment of a judicial manager under these sections requires that the Court must be satisfied that an external administrator has been appointed to a holding company of the insurer (or similar appointment has been made in a foreign country in respect of such a holding company) and that APRA considers that this poses a significant threat to the operation or soundness of the insurer, the interests of policyholders or the stability of the financial system in Australia. [Schedule 2, item 30, paragraph 62M(a)(iva) of the Insurance Act; Schedule 3, item 26, paragraph 159(a)(iiia) of the Life Insurance Act]

2.67 The Bill also provides additional triggers for the appointment of a statutory manager to a foreign ADI. The additional triggers are that if the ADI is a foreign ADI:

•

an application for the appointment of an external administrator of the foreign ADI, or for a similar procedure in respect of the foreign ADI, has been made in a foreign country; or

•

an external administrator has been appointed to the foreign ADI, or a similar appointment has been made in respect of the foreign ADI, in a foreign country [Schedule 1, item 64, paragraph 13A(1)(e) of the Banking Act]

2.68 The equivalent of these triggers (see 2.66) has been added to the new statutory management provisions in the Insurance Act for foreign general insurers and in the Life Insurance Act for foreign life insurers. [Schedule 2, item 58, paragraph 62ZOA(2)(e) of the Insurance Act; Schedule 3, item 52, paragraph 179AA(2)(e) of the Life Insurance Act]

2.69 The Bill adds equivalents of the new paragraph 13A(1)(e) in the Banking Act as new triggers for the appointment of a judicial manager to foreign insurers under the Insurance Act and the Life Insurance Act. Namely, the Court must be satisfied that there has been an application for, or appointment of, an external administrator to the foreign insurer, or for a similar procedure, in a foreign country. [Schedule 2, item 30, paragraphs 62M(a)(ivb) and 62M(a)(ivc) of the Insurance Act; Schedule 3, item 26, paragraphs 159(a)(iiib) and 159(a)(iiic) of the Life Insurance Act]

Widening the moratorium provisions applicable where a statutory or judicial manager is appointed

2.70 When a statutory manager is appointed to an ADI or insurer, or a judicial manager is appointed to an insurer, it is important that the statutory or judicial manager not be subjected to a multiplicity of time-consuming and costly litigious and enforcement actions that have the potential to distract from or hamper the stabilisation or orderly resolution of the entity or group. The statutory or judicial manager will also need time to assess the financial and operational position of the institution, and need to have access to, and be able to utilise, the institution's resources for the purposes of the administration and any resolution action.

2.71 The Bill amends the Industry Acts to expand the moratorium provisions applicable upon the appointment of a statutory or judicial manager to a regulated entity or (in the case of statutory management) a target body corporate. The enhancements assist with one of the primary aims of statutory or judicial management, which is to stabilise the relevant entity and prepare for implementation of the resolution, by ensuring this can be done without the constraints of creditor or other third party actions that could otherwise impede the orderly nature of a resolution.

2.72 The Bill replaces existing section 15B of the Banking Act with enhanced moratorium provisions. These enhanced moratorium provisions are consistent throughout the Industry Acts. The new moratorium provisions are broadly based on provisions in Division 6 of Part 5.3A, and section 600F of the Corporations Act (with appropriate amendment). [Schedule 1, item 190, sections 15B to 15BE of the Banking Act; Schedule 2, items 33 and 58 , sections 62PA to 62PE and 62ZOR to 62ZOW of the Insurance Act; Schedule 3, items 28 and 52 , sections 161 to 161E and 179AR to 179AW of the Life Insurance Act]

2.73 The enhanced moratorium provisions in the Industry Acts provide that a person cannot begin or continue a proceeding in a court or a tribunal against a body corporate while a statutory or judicial manager is in control of the body corporate's business. The exception from this prohibition is if it is a proceeding in respect of an offence or a contravention of a provision of a law for which a pecuniary penalty (however described) may be imposed. A proceeding is covered by the new moratorium provision in respect of court and tribunal proceedings if: the proceeding is against the body corporate; or, it relates to property of the body corporate; or, it is to enforce any security granted by either the body corporate or a related body corporate, over property owned, used, possessed or occupied by the body corporate, or in which the body corporate has an interest. The reference to a tribunal means a body that has characteristics similar to those of a court of law, and includes an industrial tribunal and an arbitral tribunal. [Schedule 1, item 190, section 15B of the Banking Act; Schedule 2, items 33 and 58, sections 62ZOR and 62P of the Insurance Act; Schedule 3, items 52 and 28, sections 179AR and 161 of the Life Insurance Act]

2.74 The amendments to existing sections 15B of the Banking Act, 62P of the Insurance Act and 161 of the Life Insurance Act do not change the status quo in the respect of criminal and civil penalty proceedings. So, as is currently the position, the stays against proceedings beginning or commencing will not apply to a proceeding in respect of an offence or a contravention of a provision of a law for which a pecuniary penalty may be imposed.

2.75 The enhanced moratorium provisions in the Industry Acts also ensure that no enforcement process in relation to the property of a body corporate can be begun or proceeded with if a statutory manager or judicial manager is in control of that body corporate's business. [Schedule 1, item 190, section 15BA of the Banking Act; Schedule 2, items 33 and 58, sections 62ZOS and 62PA of the Insurance Act; Schedule 3, items 52 and 28, sections 179AS and 161A of the Life Insurance Act]

2.76 In the case of the statutory management regime, APRA or the statutory manager could consent to such proceedings beginning or continuing, or the court or tribunal could grant leave for the proceedings or enforcement process to begin or continue on the ground that the person would be caused hardship if leave was not granted. If consent is given, APRA or the statutory manager cannot revoke the consent. Neither APRA nor the statutory manager is liable to an action or other proceedings for damages in respect of a refusal to give consent.

2.77 A person intending to apply for leave of the court or tribunal must give APRA at least 10 days' notice of the intention to apply (or a shorter period, if the court or tribunal considers that exceptional circumstances make this necessary). APRA may apply to the court or tribunal to be joined as a party to the proceedings for leave. If APRA is joined as a party, the court or tribunal must have regard to APRA's views in deciding whether to grant leave, and if so, whether to impose terms and the nature of those terms. [Schedule 1, item 190, sections 15B and 15BA of the Banking Act; Schedule 2, item 58, sections 62ZOR and 62ZOS of the Insurance Act; Schedule 3, item 52, sections 179AR and 179AS of the Life Insurance Act]

2.78 In the case of the judicial management regime, the judicial manager could consent to such proceedings or enforcement processes regarding property to begin or commence, or the court or tribunal would be able to permit such proceedings or enforcement processes regarding property to commence or continue on the ground that the person would be caused hardship if leave was not granted. If consent is given, the judicial manager cannot revoke the consent. The judicial manager is also not liable to an action or other proceedings for damages in respect of a refusal to give consent.

2.79 A person intending to apply for leave of the court or tribunal must give APRA and the judicial manager at least 10 days' notice of the intention to apply (or a shorter period, if the court or tribunal considers that exceptional circumstances make this necessary). APRA or the judicial manager may apply to the court or tribunal to be joined as a party to the proceedings for leave. If APRA or the judicial manager is joined as a party, the court or tribunal must have regard to APRA or the judicial manager's (as applicable) views in deciding whether to grant leave, and if so, whether to impose terms and the nature of those terms. [Schedule 2, item 33, sections 62P and 62PA of the Insurance Act; Schedule 3, item 28, sections 161 and 161A of the Life Insurance Act]

2.80 The amendments to the Industry Acts also ensure that a person must not dispose of property if the property is owned by a body corporate that has a statutory or judicial manager in control of its business. Disposal is allowed if APRA or the statutory manager consents under the statutory management regime, or if the judicial manager consents under the judicial management regime. If consent is not given, APRA and the statutory manager or the judicial manager (as applicable) are not liable to an action or other proceeding for damages in respect of a refusal to give consent. [Schedule 1, item 190, section 15BB of the Banking Act; Schedule 2, items 33 and 58, sections 62PB and 62ZOT of the Insurance Act; Schedule 3, items 28 and 52, sections 161B and 179AT of the Life Insurance Act]

2.81 The amendments ensure that existing section 440B ('Restrictions on exercise of third party property rights') of the Corporations Act applies during a period in which a statutory or judicial manager is in control in the same way it applies during the administration of a company. The reference in paragraph 440B(2)(a) of the Corporations Act to the administrator's written consent is to be treated as a reference to the statutory or judicial manager's written consent (whichever is relevant) or APRA's written consent. Paragraph 440B(2)(b) of the Corporations Act also applies, which means that the Court can also provide leave to proceed. This means that the restrictions on exercise of third party property rights set out in section 440B of the Corporations Act do not apply in relation to the exercise of a third party's rights in property if the rights are exercised with the statutory or judicial manager's or, in the case of statutory management, APRA's, written consent, or (in accordance with section 440B of the Corporations Act) with the leave of the Court. Neither APRA, the statutory manager nor the judicial manager (as applicable) are liable to an action or other proceeding for damages in respect of a refusal to give consent. The applied section 440B protections are intended to operate independently of, and without limitation from, the other moratorium provisions dealing with court and tribunal proceedings, enforcement processes regarding property and on the disposal of property. [Schedule 1, item 190, section 15BC of the Banking Act; Schedule 2, items 33 and 58, sections 62PC and 62ZOU of the Insurance Act; Schedule 3, items 28 and 52, sections 161C and 179AU of the Life Insurance Act]

2.82 The amendments also ensure that suppliers of essential services to a body corporate that is under statutory or judicial management cannot refuse services to the body corporate solely on the basis of an amount owing to them for services provided before the statutory or judicial management. The supplier must also not make it a condition of the supply of the essential service that the amount be paid first. An 'essential service' for these purposes has the same meaning as in section 600F of the Corporations Act, namely electricity, gas, water or a carriage services within the meaning of the Telecommunications Act 1997. [Schedule 1, item 190, section 15BD of the Banking Act; Schedule 2, items 33 and 58, sections 62PD and 62ZOV of the Insurance Act; Schedule 3, items 28 and 52, sections 161D and 179AV of the Life Insurance Act]

2.83 The amendments to the Industry Acts clarify that whilst a statutory or judicial manager is in control of a body corporate, the body corporate is not required to hold an annual general meeting in accordance with the requirements under sections 250N or 601BR of the Corporations Act. [Schedule 1, item 190, section 15BE of the Banking Act; Schedule 2, items 58 and 33, sections 62ZOW and 62PE of the Insurance Act; Schedule 3, items 28 and 52, sections 161E and 179AW of the Life Insurance Act]

2.84 In the case of the Life Insurance Act, where it is possible to appoint a judicial manager to only part of the business of the life insurer, the amendments provides that if only part of the business of the life company is under judicial management, then existing sections 250N or 601BR of the Corporations Act will apply, in which case the life insurer must continue to hold an annual general meeting. This is because, when a judicial manager is appointed to only part of the business of a life insurer, the appointment will in most cases be made to a particular statutory fund, or particular statutory funds, of the life insurer, leaving other business of the company to be managed by the board, who will be accountable to the company's shareholders. [Schedule 3, item 28, subsection 161E(3) of the Life Insurance Act]

2.85 The Bill clarifies that the new moratorium provisions relating to property rights do not prevent the exercise of a contractual right in relation to an asset that secures liabilities to holders of covered bonds, or their representatives if payments under the covered bonds to the holders or representatives are not made. [Schedule 1, items 190 and 231, subsections 15BA(8), 15BB(4), 15BC(5), 31B(2) of the Banking Act]

2.86 Further details on how the new moratorium provisions interact with the PSN Act is outlined at Chapter 6.

Clarifying that a Banking Act statutory manager is not constrained by subsection 13A(3) of the Banking Act

2.87 The Bill amends the Banking Act to clarify that a statutory manager is able to manage an ADI's business in accordance with the provisions of the Banking Act, without being constrained by the operation of existing subsection13A(3) of the Banking Act.

2.88 Subsection 13A(3) provides that if an ADI becomes unable to meet its obligations or suspends payment, the assets in Australia of the ADI are to be available to meet the ADI's liabilities in a particular order of priority. The first two priority liabilities are APRA's costs and expenses of the financial claims scheme (if relevant), followed by the ADI's liabilities in Australia in relation to protected accounts, followed by certain other debts.

2.89 The wording of subsection 13A(3) could be interpreted to apply to a statutory manager appointed after the ADI has become unable to meet its obligations or has become insolvent. This interpretation would place the statutory manager under an obligation to refrain from paying liabilities other than in the order of priority set out in this section. The amendment puts it beyond doubt that this is not the intention by providing that a statutory manager is not constrained by subsection 13A(3). [Schedule 1, item 68, subsection 13A(3AA) of the Banking Act]

Immunity for statutory managers and judicial managers

2.90 The Bill amends the existing provisions in the Industry Acts to enhance the statutory immunity of statutory and judicial managers under those Acts.

2.91 Robust immunity provisions are important elements of the statutory and judicial management frameworks. In taking actions considered necessary by APRA to protect depositor and policyholder interests and promote financial system stability, statutory and judicial managers could be required to take actions that have the potential to adversely affect others, including directors, shareholders and certain classes of creditors of the relevant entity. They may also be concerned about the risk of liability arising from the management of a large and complex organisation that is undergoing financial stress.

2.92 It is conceivable that adversely affected stakeholders may subsequently seek to recover any loss suffered via legal action against the statutory or judicial manager personally. Moreover, the circumstances of a statutory or judicial manager's appointment are such that they may be required to take actions of a higher-than-usual level of risk or in situations of considerable uncertainty.

2.93 Therefore, it is necessary that a statutory or judicial manager has confidence that they can take action required to manage and stabilise a distressed entity within the limits of their powers, without the risk of incurring personal liability. If there is significant uncertainty on this matter, there is a high risk that suitable persons will not be willing to assume an appointment as statutory or judicial managers.

2.94 The amendments increase the level of protection afforded to statutory and judicial managers to a level similar to that afforded to APRA, its members, staff or agents under existing section 58 of the APRA Act. The amendments also signpost APRA's secrecy provision in section 56, Part 6, of the APRA Act as it applies to statutory and judicial managers in the same way as it does to APRA staff, as a statutory or judicial manager will fall within the definition of "officer" in subsection 56(1) of the APRA Act. [Schedule 1, item 149, section 14C of the Banking Act; Schedule 2, items 56 and 58, sections 62ZM and 62ZOK and of the Insurance Act; Schedule 3, items 51 and 52, sections 179 and 179AK of the Life Insurance Act]

2.95 Each of those sections has been amended to include provisions equivalent to section 58 of the APRA Act, including a limitation on the statutory immunity for 'bad faith'.

2.96 It is not intended that these provisions affect the ability of a statutory or judicial manager to incur personal contractual liability. For example, these provisions do not cover contractual arrangements entered into by the statutory or judicial manager when retaining advisors or acquiring goods and services on their own account. Nor do the provisions affect the liability of the entity under statutory management itself.

2.97 Subject to the above, these enhanced immunity provisions are intended to provide that statutory or judicial managers are protected from any breaches of directors' duties under the Corporations Act, any other Commonwealth legislation or common law. For the avoidance of doubt, the Bill clarifies that a statutory manager cannot be liable for insolvent trading under section 588G of the Corporations Act. The existing subsection 14C(4) of the Banking Act provides similar protection. However, the Bill repeals the existing subsection 14C(4) and the new provision is located within the new general immunity provision for the purposes of clarifying its relationship with the general immunity provision. This protection is replicated in the Insurance Act and Life Insurance Acts. [Schedule 1, item 149, subsection 14C(3); Schedule 2, items 56 and 58, subsection 62ZM(3) and 62ZOK(3) of the Insurance Act; Schedule 3, items 51 and 52, subsections 179(3) and 179AK(3) and of the Life Insurance Act]

2.98 These enhanced immunity provisions operate independently of the other immunity sections within each respective Industry Act and section 58 of the APRA Act. The immunity provisions are not intended to limit each other. [Schedule 1, items 252, section 70AB of the Banking Act; Schedule 2, item 137, section 127D of the Insurance Act; Schedule 3, item 107, section 246C of the Life Insurance Act]

Transactions under statutory management not voidable

2.99 The Bill amends the Banking Act to prevent the transactions of a Banking Act statutory manager from being voidable under existing section 588FE of the Corporations Act (This applies to uncommercial transactions, insolvent transactions and unfair preferences, and is similar to protection given by section 588FE where an administrator has been appointed under Part 5.3A of the Corporations Act (voluntary administration). Equivalent provisions are inserted into the Insurance Act and the Life Insurance Act). [Schedule 1, item 151, section 14CA of the Banking Act; Schedule 2, item 58, section 62ZOL of the Insurance Act; Schedule 3, item 52, section 179AL of the Life Insurance Act]

2.100 These amendments are intended to help ensure that service providers and other counterparties can be confident in any dealings with the statutory manager regardless of the financial position of the entity under statutory management.

Terminating control of a regulated entity

2.101 The Bill amends section 13C of the Banking Act, which empowers APRA to terminate its control of an ADI, or the statutory management of the ADI, where APRA has achieved its resolution objectives with respect to the ADI. Such a termination is defined in the section as an 'ultimate termination of control' and it brings the statutory management process to an end.

2.102 This amendment removes the previous requirement that, in order to end the statutory management of an ADI, its deposit liabilities in Australia need to have been repaid, or APRA needs to be satisfied that suitable provision has been made for their repayment. [Schedule 1, item 79, section 13C of the Banking Act]

2.103 Given that the resolution of an ADI may not always involve the winding up of the ADI or the repayment of deposit liabilities (for example, where a transfer or recapitalisation is undertaken), this amendment is necessary to give APRA the ability to end the statutory management of an ADI at the point where it considers that statutory management is no longer necessary.

2.104 Further, because the statutory management regime has been extended in scope to cover entities that may not have deposit liabilities (such as authorised NOHCs or subsidiaries that are not ADIs), the Banking Act has been amended to ensure that APRA can end the statutory management of such entities when it deems it necessary to do so.

2.105 For example, APRA may appoint a statutory manager to a service company within a relevant group of bodies corporate to ensure that it continues to provide essential services to a relevant ADI. As the service company itself has no deposit liabilities, this amendment will ensure APRA is able to end the statutory management when it deems it appropriate.

2.106 An example of circumstances where APRA may deem it necessary to end the statutory management of a target body corporate would be where appropriate arrangements have been made for the continued provision of the essential services provided by the target body corporate as part of the resolution of the relevant ADI.

2.107 As explained at 2.41 to 2.43, these amendments to the Banking Act are replicated in the Insurance and Life Insurance Acts with respect to the statutory management of insurers. [Schedule 2, item 58, section 62ZOC of the Insurance Act; Schedule 3, item 52, section 179AC of the Life Insurance Act]

Replacement of a statutory manager

2.108 The Bill amends section 14E of the Banking Act to allow APRA to terminate the appointment of an administrator of a body corporate's business and to appoint another person as administrator or itself take control. This is important to ensure APRA maintains confidence in the ability of the statutory manager to carry out APRA's instructions and meet APRA's objectives for the orderly resolution of the relevant ADI. The statutory management itself will continue, as this process does not involve an 'ultimate termination of control' of the kind described at 2.101.

2.109 APRA may only exercise this power if the administrator contravenes a requirement of Division 2 of Part II of the Banking Act (regarding statutory management and protection of depositors), or if APRA considers that this is necessary to;

•

facilitate the resolution of the entity, a relevant group of bodies corporate of which the entity is a member, or another member of such a group; or

•

if the body corporate is an ADI - protect the interests of depositors of the ADI; or

•

promote financial system stability in Australia. [Schedule 1, item 162, section 14E of the Banking Act; Schedule 2, item 58, section 62ZOO of the Insurance Act; Schedule 3, item 52, section 179AO of the Life Insurance Act]

2.110 The exercise of this power does not cancel the statutory management of the body corporate. Rather, it cancels the appointment of a particular person as Banking Act statutory manager of the body corporate.

2.111 Where APRA is the statutory manager of a body corporate, and a condition listed at 2.109 is satisfied, APRA can replace itself as statutory manager by appointing a person (or one or more persons) as administrator(s).

2.112 The Bill also inserts an adapted form of this provision into the Insurance and Life Insurance Acts, referring to policyholders rather than depositors, with respect to statutory management of insurers. [Schedule 2, item 58, section 62ZOO of the Insurance Act; Schedule 3, item 52, section 179AO of the Life Insurance Act]

Statutory manager not subject to PGPA Act

2.113 The Bill ensures that the PGPA Act does not apply to a statutory manager under any of the Industry Acts, avoiding an unintended outcome that might otherwise arise where an entity is placed into statutory management. This amendment addresses the concern that APRA's influence or control in relation to the statutory management process may result in the entity falling with the definition of Commonwealth company in the PGPA Act. The PGPA Act imposes a variety of corporate governance and financial reporting obligations on Commonwealth companies, having regard to their public sector ownership or control. It is not intended that these requirements apply in relation to a body under statutory management. [Schedule 1, item 192, subsection 15D(3) of the Banking Act; Schedule 2, item 58, subsection 62ZOY(3) of the Insurance Act; Schedule 3, item 52, subsection 179AY(3) the Life Insurance Act]

Clarifying amendments to judicial management

2.114 The Bill repeals sections 62Q of the Insurance Act and 162 of the Life Insurance Act, as these sections, which provide that an insurer is not to be judicially managed except under the Insurance Act or Life Insurance Act as the case may be, are unnecessary. This is because judicial management of a life insurer, as defined in the Life Insurance Act, can only occur under that Act, and judicial management of a general insurer can only occur under the Insurance Act. [Schedule 2, item 34, section 62Q of the Insurance Act; Schedule 3, item 29, section 162 of the Life Insurance Act]

Effect of judicial management on existing directors and officers

2.115 The Bill amends sections 62T of the Insurance Act and 165 of the Life Insurance Act to clarify the effect of judicial management on the powers of directors and officers of the insurer.

2.116 The new law replaces the existing terminology regarding the 'vesting' and 'divesting' of the 'management' of the insurer, as these terms do not precisely define the effect of judicial management on the existing directors and officers of the insurer. [Schedule 2, items 39 to 42 and 55, subsections 62U(1) to 62U(4), and 62ZK(2) of the Insurance Act; Schedule 3, items 34 to 37 and 50, and subsections 165A(1) to 165A(4) and 177(2) of the Life Insurance Act]

2.117 For example, it is uncertain whether the appointment of a judicial manager under the current law removes directors and officers (and other persons exercising management functions) from their positions or whether it merely deprives them of their powers and functions. Further, the current law is expressed to divest any person vested with the 'management' of an insurer of that management, without distinguishing between strategic and middle or lower level functions. In many cases it will be appropriate for the latter to continue exercising their functions immediately following the appointment of a judicial manager, subject to the judicial manager's discretion and oversight. .

2.118 The new law provides that a person who had the powers and functions of an 'officer' ceases to have those powers and functions once a judicial manager has been appointed. The new law also includes provisions that invalidate any actions taken after the commencement of the judicial management by a person who had the powers and functions of an officer before the appointment of a judicial manager. These purported acts have no effect to the extent that they are performed after the appointment of a judicial manager to the insurer. [Schedule 2, item 38, section 62T of the Insurance Act; Schedule 3, item 33, section 165 of the Life Insurance Act]

2.119 These amendments also include provisions that explain the effect of judicial management on a foreign general insurer's agent in Australia, as well as the members of a foreign life insurer's Compliance Committee (see 7.32).

2.120 The Bill defines the term 'officer' as having the same meaning as it has in the Corporations Act. Section 9 of that Act defines 'officer' to include directors and any person who makes, or participates in the making of, decisions that affect the whole or a substantial part of the business of the entity, or who has the capacity to affect significantly the entity's financial standing. [Schedule 2, item 38, subsection 62T(4) of the Insurance Act; Schedule 3, item 33, subsection 165(6) of the Life Insurance Act]

2.121 Consequential amendments have been made to the provisions for judicial management in the Insurance and Life Insurance Acts to update the judicial management regimes of both Acts as a consequence of this change.

Effect on directors of cancelling judicial management

2.122 The Bill amends sections 62ZF of the Insurance Act and 172 of the Life Insurance Act to clarify the effect of cancelling judicial management on the board of directors of the insurer. [Schedule 2, item 50 subsection 62ZF(5) of the Insurance Act; Schedule 3, item 45, subsection 172(5) of the Life Insurance Act]

2.123 The amendments ensure that, on the cancellation of judicial management of an insurer, the judicial manager ceases to have the powers and functions of an officer of the insurer, and the board of directors resumes the powers and functions of officers of the general insurer.

2.124 In the event that all the directors of the insurer have either resigned or for some other reason no longer hold their appointment, the judicial manager may seek to appoint new directors before the cancellation takes effect. Alternatively, APRA can apply to the Court for an order that directs the judicial manager to appoint directors to the insurer.

Powers and functions of multiple statutory or judicial managers

2.125 The Bill amends the Industry Acts, to clarify that one or more persons may be appointed as statutory manager. The amendments also clarify the powers and functions of each statutory manager where more than one person has been appointed as a statutory manager of an entity. [Schedule 1, item 65, subsection 13A(2A) of the Banking Act; Schedule 2, item 58, subsection 62ZOA(9) of the Insurance Act; Schedule 3, item 52, subsection 179AA(9) of the Life Insurance Act]

2.126 In particular, the amendments define the default arrangements where multiple statutory managers have been appointed to an entity, being that each of the statutory managers may exercise all of the powers and functions under the relevant Act either jointly or individually.

2.127 The amendments also provide that APRA may place limits or conditions on the ability of any or all statutory managers to perform powers and exercise functions jointly or individually. APRA may do so by giving a notice to the statutory managers that specifies these limits and conditions.

2.128 The amendments also clarify that a reference in each of the Industry Acts to a statutory manager is a reference to one or more of those statutory managers in the relevant Act, as the case requires.

2.129 The Bill also amends sections 62R of the Insurance Act and 163 of the Life Insurance Act to reflect the above amendments in relation to judicial managers. Some minor adaptations were required in order to apply these changes to the judicial management provisions. For example, it is the Court (and not APRA) that has the power to specify the limits or conditions on the ability of any or all judicial managers to perform powers and exercise functions jointly or individually. In addition to conferring jurisdiction to the Court in this instance, the Bill confers jurisdiction to the Court in various provisions throughout the Industry Acts because that is the most appropriate court of jurisdiction due to the complex nature of the matters. [Schedule 2, item 35, section 62R of the Insurance Act; Schedule 3, item 30, section 163of the Life Insurance Act]

2.130 The amendments clarify that the Court may make an initial appointment of two or more judicial managers, and may subsequently appoint one or more additional judicial managers. Where multiple or additional appointments are made, the default position is that the functions and powers of a judicial manager may be performed or exercised by all of the judicial managers acting jointly, or each of them acting individually. However at the time of making the appointment the Court may specify limits or conditions on the ability of judicial managers to perform functions or exercise powers jointly or individually.

2.131 These provisions are broadly based on similar provisions in the Corporations Act providing for multiple appointments of liquidators, provisional liquidators and other external administrators under that Act.

2.132 The amendments also provide that if, subsequent to the appointment of a judicial manager, a situation arises or is likely to arise where there may be no judicial manager the Court may appoint another judicial manager of the general insurer. [Schedule 2, item 35, subsection 62R(1A) of the Insurance Act; Schedule 3, item 30, subsection 163(1A) of the Life Insurance Act]

2.133 This will ensure that casual vacancies can be filled but does not limit the more general power under the Insurance Act and the Life Insurance Acts to appoint an additional judicial manager in other situations.

Cancelling the appointment of a judicial manager

2.134 The amendments provide that the Federal Court may also cancel the appointment of a judicial manager and appoint another judicial manager on application by APRA or of its own motion. These provisions are concerned with the removal and replacement of a particular judicial manager (or particular judicial managers) rather than the termination of the judicial management process as such (sections 62ZF of the Insurance Act and 172 of the Life Insurance Act, on the other hand, are concerned with the cancellation of the judicial management itself). [Schedule 2, item 36, subsection 62R(2) of the Insurance Act; Schedule 3, item 31, subsection 163(2) of the Life Insurance Act]

2.135 The power to apply to the Court for the cancellation of a judicial manager's appointment is intended to be flexible and might be used in a range of situations. For example, APRA may apply where the judicial manager is unable, for unforeseen reasons, to continue to act, or where the judicial manager does not have the skills or resources to continue the judicial management or has otherwise lost the confidence of the court or APRA.

Appointing a statutory or judicial manager in absence of external support

2.136 The Bill amends the Insurance and Life Insurance Acts to expressly allow the Court to disregard external support for the entity when it is making an order to place the entity under judicial management. [Schedule 2, items 28 and 29, subparagraphs 62M(1)(a)(i) and 62M(1)(ii) of the Insurance Act; Schedule 3, item 25, subparagraph 159(1)(a)(i) of the Life Insurance Act]

2.137 Equivalent provisions are also inserted into the Insurance and Life Insurance Acts to expressly allow APRA to disregard external support for the entity when exercising its discretion to appoint a statutory manager to an entity. This is intended to ensure that the provision of external support to a stressed entity, for example some form of temporary public support, would not fetter the ability of APRA to determine that the preconditions are met for appointing a statutory manager or placing the entity under judicial management. [Schedule 2, item 58, subsection 62ZOA(7) of the Insurance Act; Schedule 3, item 52, subsection 179AA(7)of the Life Insurance Act]

2.138 In effect, these amendments harmonise the Insurance and Life Insurance Acts with related provisions in the Banking Act.

2.139 The existing Banking Act provisions also include the power to establish regulations that define things that may not be considered external support for this purpose, and an equivalent of this regulations-making power is included in the equivalent provisions in the Insurance and Life Insurance Acts [Schedule 2, item 32, subsection 62M(3) of the Insurance Act; Schedule 3, item 27, subsection 159(3) of the Life Insurance Act)]

Statutory manager recommending directions from APRA

2.140 Upon the appointment of an administrator to take control of an entity under statutory management, the administrator may decide that a possible course of action will have strategic implications, and should therefore be determined by APRA. While it is expected that processes for addressing these situations would be provided for in the contractual or other arrangements agreed between APRA and the administrator, there is currently no provision that provides a means by which the administrator can request APRA to formally direct it as to the appropriate course of action to take.

2.141 The current law in paragraph 14B(1)(a) of the Banking Act provides formal means by which an administrator may recommend that APRA issue a formal direction under Division 1BA or section 29 to the ADI under its control. The amendments provide that an administrator may also recommend that APRA issues a formal direction under existing subsection 14D(3) in respect of the administrator's control of the ADI. Subsection 14D(3) provides that APRA may give an administrator of an ADI's business a direction relating to the control of the ADI's business. The administrator must act in accordance with the direction. The expansion of the statutory management regime to group entities means that provision is further enhanced so that an administrator may also recommend that APRA issues a formal direction under subsection 14D(3) in respect of a related bodies corporate to the ADI.

2.142 Equivalent provisions have been added to the Insurance and Life Insurance Acts. [Schedule 1, items 146 and 153, subsections 14B(1) and 14D(3) of the Banking Act; Schedule 2, item 58, subsections 62ZOJ(1) and 62ZOM(3) of the Insurance Act; Schedule 3, item 52, subsections 179AJ(1) and 179AM(3) of the Life Insurance Act ]

Appointing a statutory manager over a foreign regulated entity

2.143 The Bill implements provisions allowing for the appointment of a statutory manager over the Australian business assets and liabilities of a foreign regulated entity.

2.144 The term 'Australian business assets and liabilities' refers to the scope of business of a foreign regulated entity that APRA's crisis management powers are to extend to under the amendments in this Bill - see Chapter 7 for more information about the amendments to APRA's crisis management powers regarding foreign regulated entities.

2.145 It is intended that such a statutory manager would be able to exercise any powers and functions necessary to manage the Australian business assets and liabilities of the entity in order to achieve the objectives of the statutory management in Australia. To that end, the Bill provides that the statutory manager have the powers and functions of the board of the foreign regulated entity in so far as they relate to the Australian business assets and liabilities of the entity. This would include the powers and functions of a foreign general insurer's agent in Australia and Compliance Committee members of a foreign life insurer.

Continued application of the Insurance and Life Insurance Acts during judicial management

2.146 The Bill makes minor amendments to existing provisions in the Insurance and Life Insurance Acts that provide that the appointment of a judicial manager does not affect the continued operation of those Acts or FSCODA in relation to the insurer's obligations under those Acts.

2.147 These amendments ensure that there is no doubt that these Acts continue to operate during the period of time (if any) between the Court making an order for the judicial management of an insurer and the commencement of judicial management by providing that neither:

•

the making of an order by the Court that the insurer be placed into judicial management; nor

•

the commencement of judicial management

affects the continued operation of those Acts in relation to the obligations of an insurer under those Acts. [Schedule 2, items 44 to 46, section 62W of the Insurance Act; Schedule 3, items 39 to 41, section 166 of the Life Insurance Act]

Amending the definition of 'subsidiary' under the Insurance Act to align with the Banking Act and Life Insurance Act

2.148 Under the existing definition of 'subsidiary' in the Insurance Act, a company will be a 'subsidiary' of another company if the other company is in a position to cast, or control the casting of, more than 25 per cent (the threshold percentage) of the maximum number of votes that might be cast at a general meeting of the company, or holds more than 25 per cent of the issued share capital of the company. In contrast, under the Banking Act and Life Insurance Act, the threshold percentage is the usual 50 per cent. The definition in the Banking and Life Insurance Acts follows the definition of 'subsidiary' in the Corporations Act.

2.149 The reason for the different definition of 'subsidiary' in the Insurance Act appears to be historical. The 25 per cent threshold percentage was originally employed in a test defining when two companies were related to each other for the purpose of certain provisions of the Insurance Act. Most of the provisions the 25 per cent test' was used in, with the exception of the investigation provisions discussed at 2.148 to 2.151, were repealed in 2002, or prior to that.

2.150 However, despite the repeal of those provisions, the definition of 'subsidiary' has remained unchanged and continues to apply to newer provisions of the Insurance Act, although the definition is not intended to apply as a matter of policy. For example, under prudential standards made by APRA in relation to general insurers, 'subsidiary' is defined according to the 50 per cent percentage threshold, in harmony with the definition of 'subsidiary' in the Banking Act, Life Insurance Act and the prudential standards applicable to ADIs and life companies.

2.151 In light of this, the Bill amends the definition of 'subsidiary' in section 4 of the Insurance Act to be consistent with the definition used in the Banking Act and Life Insurance Acts. [Schedule 2, item 8, section 4 of the Insurance Act]

2.152 Section 16 of the Life Insurance Act determines how bodies corporate are related to each other for the purposes of the Life Insurance Act, except for the purposes of Part 7 of the Life Insurance Act relating to monitoring and investigation powers. In existing Part 7 of the Life Insurance Act, which relates to investigations, APRA is given power to investigate not only a life company but also an 'associated body corporate' of a life company. Section 128 provides that two bodies are 'associated' with each other if they are 'related to each other' and certain other conditions are satisfied. Section 129 provides that the question of whether two bodies are 'related' to each other for these purposes is to be determined applying the Corporations Act tests but on the basis of a 'more than a quarter' control test instead of the usual 'more than half' control test. This operates, as noted, for the purposes of the investigation provisions.

2.153 The equivalent of Part 7 of the Life Insurance Act is the existing Part V of the Insurance Act. Subsection 52(3) in Part V provides for the investigation of an 'associated body corporate' of an insurer. Subsection 50(2) of the Insurance Act, like section 128 of the Life Insurance Act, provides that two bodies are associated with each other where they are 'related to each other' and certain other conditions are satisfied. The Bill inserts a new provision in existing section 50 in similar terms to section 129 of the Life Insurance Act (and in similar terms to a provision that was incorrectly repealed by the General Insurance Reform Act 2001). This will restore consistency between the scope of monitoring and investigation powers under the Insurance Act and Life Insurance Act. It should be emphasised that this amended provision in section 50 is only relevant in the context of investigations and not more generally. As discussed above, a '50 per cent test' will apply elsewhere in defining 'subsidiary', as will the usual Corporations Act definition of 'related body corporate'. [Schedule 2, items 7, 8 and 24, subsection 3(1), section 4B and subsection 50(3) of the Insurance Act]

Insurance and Life Insurance Acts to have effect despite the Corporations Act

2.154 The Bill amends the Insurance and Life Insurance Acts to clearly indicate that those Acts have effect despite any provisions in the Corporations Act. The Banking Act already includes a provision for that Act to have effect despite provisions of the Corporations Act. [Schedule 2, item 137, section 127E of the Insurance Act; Schedule 3, item 108, section 251AA of the Life Insurance Act]

2.155 Further consequential amendments have been made to the Industry Acts, for the avoidance of doubt, regarding the way that these Acts interact with the Corporations Act. These amendments are included because certain provisions are expressed to apply despite the Corporations Act, even though there is a general override in existing section 70B of the Banking Act,( and the new corresponding provisions in the Insurance Act Life Insurance Act as discussed above). These amendments will ensure that the mentions of the Corporations Act in the specific provisions do not limit the general scope of section 70B of the Banking Act and the counterpart provisions in the Insurance and Life Insurance Acts so that the relevant Industry Acts have effect despite the Corporations Act. [Schedule 1, items 98, 127 and 138, paragraphs 13G(3)(a), 14A(5B)(a), and 14AA(4)(a) of the Banking Act; Schedule 2, items 47, 53 and 106, paragraphs 62Z(4)(a), 62ZJ(3)(b)(i), and 103D(3)(a) of the Insurance Act; Schedule 3, items 42, 48 and 76, paragraphs 168A(4)(a), 176(3)(b)(i), and 230AD(3)(a) of the Life Insurance Act]

Consequential and minor amendments

2.156 As a consequence of introducing a statutory management regime into the Insurance and Life Insurance Acts, the Bill inserts an equivalent to section 13BA of the Banking Act into the those Acts. This requires APRA to issue a written notice to the body corporate to which APRA is appointing a statutory manager. It also specifies that a statutory manager takes control of a body corporate's business at the time specified in a notice (which cannot be earlier than the notice is given) or if the notice does not specify a time, then at the time the notice is given. In line with the existing section 13BA of the Banking Act, the Bill provides that the notice made by APRA is not a legislative instrument. The provision is included to assist readers, as such a determination is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003 [Schedule 2, item 58, section 62ZOB of the Insurance Act; Schedule 3, item 52, section 179AB of the Life Insurance Act]

2.157 As a consequence of introducing a statutory management regime into the Insurance and Life Insurance Acts, an equivalent section to section 14AA (as amended by the Bill) of the Banking Act was inserted into each of the Insurance and Life Insurance Acts (that is, sections 62ZOF of the Insurance Act and 179AF of the Life Insurance Act). Consistent with the treatment of section 14AAA of the Banking Act (see 2.40), the new sections 62ZOE of the Insurance Act and 179AE of the Life Insurance Act also do not prevent a statutory manager of an authorised NOHC from using funds of the authorised NOHC to increase the level of capital of the relevant insurer, where those funds were raised following the exercise of the statutory manager's power to facilitate a recapitalisation under sections 62ZOF of the Insurance Act or 179AF of the Life Insurance Act. [Schedule 2, item 58, section 62ZOF of the Insurance Act; Schedule 3, item 52, section 179AF of the Life Insurance Act]

2.158 As a consequence of introducing a statutory management regime into the Insurance and Life Insurance Acts, the Bill inserts an equivalent to section 14AB of the Banking Act into those Acts (as amended by the Bill to cover group entities). This provides that before a statutory manager exercises a power to facilitate recapitalisation, the statutory manager must consider a report on the fair value of shares or rights from an expert unless APRA determines that this is not required because the delay to act would detrimentally affect policyholders and the financial system stability in Australia. In line with the existing section 14AB of the Banking Act, the determination is not a legislative instrument. The Bill also provides that the written notice from the Minister to the expert of the assumptions for the valuation of the company or rights is not a legislative instrument. These provisions were included to assist readers, as such a determination from APRA or written notice from the Minister are not legislative instruments within the meaning of subsection 8(1) of the Legislation Act 2003. [Schedule 2, item 58, section 62ZOG of the Insurance Act; Schedule 3, item 52, section 179AG of the Life Insurance Act]

2.159 Also as a consequence of introducing a statutory management regime for the Insurance and Life Insurance, the Bill inserts an equivalent to section 14AD of the Banking Act into those Acts. This allows APRA to require a person to give information relating to the business of the body corporate that is under statutory management in certain circumstances. If a person refuses or fails to give the information or documents as required by APRA, they commit an offence with a penalty of 12 months imprisonment or 50 penalty units, or both. A person is not excused from complying with APRA's requirement on the ground that doing so would tend to incriminate the individual or make the individual liable to a penalty.

2.160 It is critical that APRA has the power to obtain information from officers of the failed entity in order to assist with the management and resolution of the entity or to help understand the cause of the failure. Although the existing section 14AD of the Banking Act does not excuse a person from providing information on self-incrimination grounds, both it and the new provisions under the Bill provide a safeguard where the information is sought from an individual. Neither the information or document given, the giving of the information or document, nor any information, document or thing obtained as a direct or indirect consequence of giving the information or document, is admissible in evidence against the individual in a criminal proceeding or a proceeding for the imposition of a penalty. The only exception to this safeguard is in a proceeding in respect of the falsity of the information or document. This exception is appropriate to discourage the production of false information or document. The new provisions based on the existing section 14AD of the Banking Act strikes an appropriate balance between the rights of the individual and the desirability of the regulator having power to obtain relevant information about a failed entity. [Schedule 2, item 58, section 62ZOI of the Insurance Act; Schedule 3, item 52, section 179AI of the Life Insurance Act]

2.161 To facilitate the extension of the Banking Act statutory management regime to group entities, the term 'ADI statutory manager' has been replaced with the term 'Banking Act statutory manager' in the Banking Act. This is to ensure that no confusion arises as to the scope of entities that a statutory manager may take control of under the Banking Act. As a consequence of introducing the statutory management regime to the Insurance and Life Insurance Acts, the terms 'Insurance Act statutory manager' and 'Life Insurance Act statutory manager' are introduced into the Insurance and Life Insurance Acts. [Schedule 1, items 4 and 65, subsections 5(1) and 13A(2) of the Banking Act; Schedule 2, item 58, subsection 62ZOA(8) of the Insurance Act; Schedule 3, item 52, subsection 179AA(8) of the Life Insurance Act ]

2.162 To facilitate the extension of the Banking Act statutory management regime to group entities, the definition of 'administrator' is widened from being an administrator appointed under subsection 13A(1) to take control of an ADI's business, to cover an administrator appointed under subsection 13A(1) to take control of the body corporate's business. Equivalent amendments are made to the Insurance and Life Insurance Acts. [Schedule 1, item 2, section 5(1) of the Banking Act; Schedule 2, item 1, section 3(1) of the Insurance Act; Schedule 3, item 110, Schedule Dictionary of the Life Insurance Act]

2.163 As a consequence of introducing a statutory management regime for the Insurance and Life Insurance Acts, the definition of 'relevant group of bodies corporate' from the Banking Act is inserted (with relevant modifications) into the Insurance and Life Insurance Acts. [Schedule 2, items 7 and 8, subsection 3(1) and section 4A of the Insurance Act; Schedule 3, items 4 and 117, section 15A and the Schedule Dictionary of the Life Insurance Act]

2.164 Further minor amendments have been made to the Transfer Act and PSN Act to reflect the changes in terminology and structure in the Industry Acts. For example, the amendments will include references to 'Banking Act statutory manager', 'Insurance Act statutory manager' and 'Life Insurance Act statutory manager' in section 25 of the Transfer Act in the relevant pre-condition for the making of a transfer determination under that section.

2.165 Further amendments have been made to adapt the existing provisions of the Banking Act to replace the term 'ADI' with 'body corporate' as appropriate. This is to ensure that each provision in the Banking Act that relates to statutory management can be applied with respect to target bodies corporate where appropriate.

2.166 As the statutory management regimes in the Insurance and Life Insurance Acts are closely adapted from the provisions of the Banking Act, equivalent changes have been carried over to those Acts.

2.167 A number of minor changes have been made to the Banking and Insurance Acts to clarify and distinguish between the use of the term 'related body corporate' for the purposes of the statutory management regime and the use of 'related body corporate' for the whistleblower protection provisions of those Acts [Schedule 1, items 235 to 238, subsections 52A(2) and 52A(3) and paragraphs 52E(1)(b) and 52E(1)(c)of the Banking Act; Schedule 2, items 18 to 22, subsections 38A(2) and 38A(3), paragraphs 38E(1)(b)(i) and 38E(1)(b)(ii) and 38E(1)(c) of the Insurance Act].

2.168 As a consequence of inserting a new definition for determining whether bodies corporate are related to each other (see 2.152), a cosmetic change was made so that the existing phrase 'related company' in the Insurance Act is amended to 'a body corporate that is related to' to be consistent with the new wording. [Schedule 2, items 7 and 8, subsection 3(1) and section 4B of the Insurance Act]

2.169 As a consequence of introducing the statutory management regime for the Insurance and Life Insurance Acts, the existing definition of 'external administration' in the PSN Act is expanded to include a Banking Act statutory manager, an Insurance Act statutory manager, or a Life Insurance Act statutory manager taking control of a person's business. [Schedule 5, item 6, section 5 of the PSN Act]

2.170 Under the existing section 48 of the APRA Act, APRA has power to appoint people to perform particular roles (for example, investigators and administrators under Division 2 of Part II of the Banking Act). As a consequence of inserting a statutory management regime into the Insurance and Life Insurance Acts, the Bill adds investigators and administrators appointed under Division 1A of Part VB of the Insurance Act or Division 1AA of Part 8 of the Life Insurance Act as additional examples in the Note. [Schedule 6, item 2, section 48 of the APRA Act]

Application and transitional provisions

2.171 The provisions of this Bill will apply from the date of Royal Assent.