Update of the court’s role in sanctioning a transfer of insurance business

by Publications Officer

Introduction
The December 2012 Update examined the role of the court in sanctioning a transfer of insurance business in Hong Kong. Subsequent to the October 2012 Judgement of the Court of First Instance in Re AXA (Hong Kong) Life Insurance Co. Ltd. [2012] HKCU 2197 , the transfer of insurance business from one insurer to another has once again fallen under the spotlight in the Judgement in Re Transamerica Life Insurance Co. [2013] HKCU 709. In exercising its discretion to sanction the transfer, the court reaffirmed the principles laid down in the leading English authority of Re London Life Association Ltd. which has been applied in a series of similar petitions in Hong Kong (e.g. Re AXA). The court also discussed several concerns of the policyholders which the court did not address in Re AXA, with particular significance for cases which transfer long-term business from one jurisdiction to another.

 

Facts
The facts of the case are similar to the Re AXA case. It concerns a joint petition presented by Transamerica Life Insurance Company (“TLIC”) and Transamerica Life (Bermuda) Limited (“TLB”), seeking sanction of a scheme to transfer the whole of TLIC’s long-term business under section 24 of the Insurance Companies Ordinance (Cap. 41). As both TLIC and TLB are insurers authorised to carry on the same classes of long-term business in Hong Kong, the object of the scheme was to provide greater efficiencies for the business by transferring from TLIC to TLB all of the long-term business then carried on by TLIC in or from Hong Kong, which included around 13 million ordinary life insurance policies and contracts of insurance.

Under the scheme, there was no provision of any right or option for the policyholders to opt out of the policies, and the insurance companies had agreed to ensure that the policyholders would not be adversely affected by the transfer. Despite the protection that TLIC and TLB seemingly offered to the policyholders, (discussed below), two policyholders lodged their written objections with the court.
Legal Principles
Similar to the Re AXA case, the court followed the principles set out in Re Winterthur Life [2005] 3 HKC 34, which were established by the English authority of Re London Life Association Ltd (21 February 1989, unreported) and which (as summarised in the December 2012 Update) by reference to the same authorities, are as follows:-

  • the court has an absolute discretion whether or not to sanction a scheme, but it must exercise such discretion by giving due recognition to the commercial judgment entrusted by the company’s constitution to its directors;
  • the court is concerned whether a policyholder, employee, other interested person or any group of them will be adversely affected by the scheme;
  • the court will pay close attention to the views of the independent actuary and the Hong Kong Insurance Authority on the likely impact of the scheme on policyholders;
  •  the fact that individual policyholders or groups of policyholders may be adversely affected does not mean that the scheme has to be rejected by the court. The fundamental question is whether the scheme as a whole is fair as between the interests of the different classes of persons affected;
  • it is not the function of the court to produce what, in its view, is the best possible scheme;
  • the details of the scheme are not a matter for the court provided that the scheme as a whole is found to be fair; and
  • in arriving at its conclusion, the court should first determine what the contractual rights and reasonable expectations of policyholders were before the scheme was promulgated and then compare those with the likely result on the rights and expectations of policyholders if the scheme is put into effect.

Once the scheme has been sanctioned by the court, it will become binding on the transferor, the transferee and the policyholders.

Issues and Decision
The policyholders challenged the scheme under a few heads. Some of them were not been discussed in Re AXA including, among others, the financial security of policyholders, expectation on the discretionary dividends and charges, and the tax payable by policyholders due to a change in issuer’s place of incorporation.

Firstly, the policyholders were concerned that TLB’s financial position was not as strong as TLIC’s financial position and hence, that their financial security may be adversely affected by the transfer. Under the scheme, TLIC would issue a claims payment guarantee to each policyholder whereby TLIC would pay directly to the holder if TLB failed to pay a valid claim solely by reason of becoming insolvent. The
court was of the view that such undertaking provided sufficient safeguard to the policyholders’ financial security.

Secondly, although TLB undertook under the scheme that it would, for 10 years afterthe sanction of the scheme, exercise the same level and extent of discretion as TLIC in relation to all dividends, credited rates, premium rates or charges under the policies, the policyholders were concerned about any adverse effect that they may potentially face after 10 years. The court was satisfied that the future benefits and charges of the policies would not be adversely affected as TLB would be under an obligation to use similar setting practices and methodologies after the initial 10 years.

Thirdly, as a result of the transfer, the policyholders and TLB would become jointly and severally liable for a US exercise tax at 1% per annum. Although TLB agreed to pay the tax at no cost for the policyholders, the policyholders remained concerned about the risk of future tax, charge or levy imposed on them by the US tax authorities and suggested that the insurance companies should provide a “blanket
indemnification” to the policyholders. Although the court rejected this notion, it did impose a condition on the sanctioning of the scheme that the insurance companies must agree to provide a limited tax indemnity for any additional tax liability should the policies be issued by a non-US issuer.

Comment
Re Transamerica Life involved a transfer of insurance business from the US to Bermuda. Unlike Re AXA, the issue of a potential tax, charge or levy liability was raised by the dissenting shareholder and addressed by the court. Although the court ordered a limited indemnity to be provided, the case serves to reinforce the view that the court is reluctant to interfere with or perfect a scheme to give better protection to the policyholders. Critics challenge the court’s view on fairness, as it requires the policyholders to show nothing less than an obvious and material detriment in order for the court to refuse to sanction the scheme, which is illustrated by the court’s ready acceptance of the insurance companies’ submission that the future financial position of the policyholders would not change materially, or adversely. The policyholders bear a heavy burden of proof in respect of their potential detriment in order for the court to refuse such a sanction.

 

(1) The editor would like to thank Mr. Kevin Bowers of Howse Wiliams Bowers who contributed this article. The view expressed therein does not represent the view of any of the Executive Committee Member of the Hong Kong Insurance Law Association Limited (HILA).