Norwich Union Linked Life Assurance Ltd & Ors, Re

On the 17^th and 18^th November I had before me an application made under section 107 and section 111 of the Financial Services and Markets Act (“FSMA”) seeking that the sanction of the Court should be given to the Insurance Business Transfer Scheme described in the application (“the Scheme”). Whilst such schemes (“IBTS”) are nowadays rarely simple, the Scheme before me was of unusual size and complexity involving, as it did, 10 applicant companies; some rough grasp of the size of the undertakings involved in the Scheme may be derived from the fact that 4.27 million mailings were required in ensuring that adequate notice was given to those concerned or affected.

What was called an “Overview” of the Scheme formed part of the “Summary of the Scheme” sent to policyholders. It stated:-

“Overview

Aviva plc (Aviva) previously known as CGNU plc, is the ultimate holding company for the ten UK companies transacting long term business that are affected by this scheme. The trading name for Aviva’s UK life insurance business is “Norwich Union Life”.

Aviva was formed on 30 May 2000 following the merger of CGU plc and Norwich Union plc. CGU was formed on 2 June 1998 following the merger of General Accident plc and Commercial Union plc.

Aviva is engaged in a major programme to reorganise and simplify its world-wide corporate structures resulting from these mergers. As part of this re-structuring it is proposed that the UK long term insurance business currently carried on by Aviva be rationalised so that instead of being carried on by ten companies it is carried on by just four, through several transfers of insurance business. This will considerably simplify the corporate structure of the Norwich Union Life group and result in improved operational efficience and reduced solvency margin requirements.”

The transfers intended to be effected by the Scheme are, in outline, as are shown diagrammatically (and using the abbreviations used in the Scheme) in the Appendix to this judgment.

I was carefully taken through the provisions of the Scheme by Mr Robert Hildyard Q.C. and Mr Malcolm Davis-White Q.C., appearing together for all 10 applicant companies; they also put before me comprehensive written outline submissions. The Financial Services Authority (“the FSA”), which has an entitlement to be heard – section 110 (a) of FSMA – had indicated on the 2^nd November that, on the evidence before it, it did not intend to be represented at the hearing. There was no substantial change in the evidence after the 2^nd November. I had the benefit of “The Report of the Independent Expert”, Mr N.J. Dumbreck, Fellow of the Institute of Actuaries and a partner in Watson Wyatt LLP, that being the Scheme Report required by section 109 of FSMA. I also heard Mr J.V.C. Butcher, Chartered Accountant, the one objector who chose to attend and raise objections orally. At the end of Mr Hildyard’s concluding address I indicated that I sanctioned the Scheme but I indicated also that there were some aspects of matters said to be incidental, consequential or supplementary to it within section 112 (1) (d) of FSMA and as to the many objections raised in correspondence received from policyholders which merited a reserved judgment. That I now deliver.

Section 111 (1) and 111 (3) FSMA respectively provide:-

(1)

This section sets out the conditions which must be satisfied before the court may make an order under this section sanctioning an insurance business transfer scheme or a banking business transfer scheme.

(2)

……. …………

(3)

The Court must consider that, in all the circumstances of the case, it is appropriate to sanction the scheme.”

I shall later return to the question of appropriateness, conveniently referred to as one as to the Court’s discretion, but, as for all other substantive and procedural requirements of FSMA in relation to IBTSs, I was taken through them by Mr Hildyard and, leaving aside one respect – the jurisdiction to make supplemental provisions, i.e. provisions other than those consisting only of a transfer of insurance business - no questions arose such that I now need to deal with them. But I shall need to deal with what I have called “supplemental provisions” and with the discretion.

As for supplemental provisions the draft Order put before me includes a number of detailed provisions which, by the draft, are to be made the subject of order under section 112 of FSMA. They are proposals expressly or impliedly dealt with in the scheme itself; for example, item 14 in the draft provides:-

“The CULAC sterling policies shall be amended as provided for by paragraph 2.8.11 of the Scheme.”

Paragraph 2.8.11 of the Scheme provides for the amendment in complete detail. Doubts thus arise, including as to whether, upon the Scheme being approved, any separate order is required under section 112. In this connection Mr Hildyard has taken me to the debate arising out of a difference between the observations of Rattee J. in re: Lincoln Assurance (unreported 6^th December 1996) and those of Knox J. in re: Hill Samuel Life Assurance (unreported 10^th July 1995), Harman LJ in Consolidated Life Assurance Co. Ltd. (unreported 11^th December 1996) and Neuberger J in Sun Life of Canada Assurance Co. (unreported 21^st September 1999). The debate has been as to the range of the word “necessary” in section 112 (1) (d) or that section’s forebears. Section 112 (1) provides:-

“(1)

If the Court makes an order under section 111 (1), it may by that or any subsequent order make such provision (if any) as it thinks fit –

(a)

….

(b)

….

(c)

….

(d)

…. With respect to such incidental, consequential and supplementary matters as are, in its opinion, necessary to secure that the scheme is fully and effectively carried out.”

Thus section 112 (1) (d) seems to distinguish between the order so far as it sanctions the Scheme itself and some other part of the order or a further order (made at the same time or later) which is supplemental to the Scheme. In Inre: Lincoln above, although, by reason of a late amendment to the scheme before him, Rattee J. was not ultimately required to rule upon the point, the Judge formed a provisional view that proposals, although in a scheme, which do not themselves provide for any transfer of business from one company to another, (the provisions which he called and which I am calling “supplemental provisions”) could only be sanctioned if they were “indeed necessary to secure that the Scheme of Transfer should be fully and effectively carried out”. That approach suggested that an IBTS could itself do nothing but effect transfers of the relevant kind.

Knox J.’s earlier and more liberal construction of the word “necessary” had been cited to Rattee J. but had failed to dispel the latter’s doubts. Knox J., dealing with an amalgamation scheme which included a provision of which he said:-

“There is no direct connection with the scheme and it is not a consequence of the scheme that that change should be brought into operation …”

then said of the then-equivalent of section 112 (1) (d):-

“Equally, it might be said that the word in the paragraph is “necessary” rather than “desirable”. “Necessary” does not stand by itself in that paragraph. The phrase is:-

“….. necessary to secure that the scheme shall be fully and effectively carried out”.

Although “necessary” is somewhere in the middle between “vital” on the one hand and “desirable” on the other, if it used in the phrase “necessary to secure that the scheme shall be fully and effectively carried out” and it extends to consequential and supplementary matters, it would seem to me legitimate for the Court to conclude within the ambit of a scheme which it approves something which will give the full benefit of the scheme to one or other of the two units that are being amalgamated. In that sense it seems to me that although this is certainly not a matter which is vital to the approval of the scheme – and, indeed, there is specific evidence to that effect – it nevertheless is something which is within the jurisdiction of the Court to approve and on that basis I do approve it.”

The later cases have preferred that construction to any stricter view as to what is “necessary” and it may be added, albeit from an entirely different context, that it has been held, of the word “necessary” in another statute that:-

“I doubt if it is possible to go further than to say that “necessary” has a meaning that lies somewhere between “indispensable” on the one hand and “useful” or “expedient” on the other …. ”

see re: An Inquiry [1988] 1 AC 660 at 704 HL per Lord Griffiths.

Whilst I gratefully adopt the reasoning of Knox J and of those later cases adopting his approach as to section 112 (1) (d) I believe there is another route by which supplemental provisions can achieve force. It is this. Part VII of FSMA is concerned with business transfers, of which IBTSs are a species. It is of the essence of an IBTS that it “results in” a transfer – section 105 (1) (b). But so long as a scheme does so result (and otherwise fulfils the conditions of section 105 and applicable regulations) there is no statutory requirement that it should do nothing but effect a transfer. The contents of a scheme are to that extent left at large and another provision of FSMA suggests that it is no bar to a scheme being an IBTS that it does other than merely effect one or more transfers. Thus section 112 (5) provides (with my emphasis):-

“(5)

Property transferred as the result of an order under sub-section (1) may, if the Court so directs, vest in the transferee free from any charge which is (as a result of the scheme) to cease to have effect.”

The legislature could have provided but did not provide that that sub-section should apply only where the property transferred under the scheme was transferred to the chargee and that that had been the reason why, as a result of the Scheme, the charge should cease to have effect. In the absence of the sub-section being limited in that way it contemplates an IBTS doing something other than merely effecting a transfer, namely its paying off or otherwise discharging a charge.

For my part, I would thus start from a position in which it is no necessary requirement of an IBTS that, whilst effecting a transfer of the kind provided for in section 105, it should do nothing else. Indeed, I see the line (if there is one) between that which, incidental or supplementary to or consequential upon the transfer in the Scheme, may be within the scheme itself and what, at the time of the scheme or later, can only be authorised under section112, as being unclear. This is not to say that the contents of an IBTS are boundless; its predominant purpose must be to result in one or more transfers of the described kind. Moreover, it may be (though I do not need to decide and do not decide this issue) that only such supplemental provisions can be within an IBTS as could be authorised under the more liberal view taken of what is “necessary” under section 112 (2) (d). However, there are good reasons, if the proponents of a scheme from the outset see the need for a given supplemental provision, that it should be included within the scheme itself. That is what has been done in the case at hand. In that way policyholders have a four-fold protection; the supplemental provision comes within the purview of the FSA, it is reported on by the appointed Independent Expert, is explained to members and is required to obtain the sanction of the Court as being “appropriate”. By contrast, a subject dealt with only outside the scheme under section 112 (1) (d) (but at the same time as the scheme or later), as it requires only the sanction of the Court under section 112, leaves those who might be affected by it unprotected in the other three ways. If the proponents of the Scheme are in doubt as to which jurisdiction, section111 (1) or section 112 (1) (d), is relevant they can, again as was done here, in effect invoke both.

In the result I see myself as having jurisdiction in relation to the supplemental provisions in the draft Order by one or both of two routes; either they are in the Scheme and will stand or fall (and hence stand) with the rest of it or they are matters which, upon the Scheme being sanctioned, properly fall within the more liberal view of what is “necessary” within section 112 (1) (d). As the draft order contemplates their approval under section 112 (1) (d), I left the Order in that form.

As to section 111 (3) and whether it is “appropriate” to give the Court’s sanction, of the elements of the discretion identified by Hoffmann J. in re London Life Association Ltd (unreported 21^st February 1989), the one I have been most concerned with is that of fairness. Fairness here is required to be found not only as between policyholders themselves but as between them and the shareholders in the Claimant companies. But the question has to be approached with it firmly in mind that it does not follow that a scheme is unfair and hence to be rejected merely because one or more persons or classes of persons are adversely affected by it. It is notable that whilst section 110 (b) gives a right to be heard to any person who alleges that he would be adversely affected by a scheme, the FSMA does not go on to forbid sanction to a scheme if any person proves that he is adversely effected. Even more so is it clear that a scheme does not fail merely by reason of it conferring no benefit on one or more persons or classes of persons. As Hoffmann J. put it in London Life supra:-

“In the end the question is whether the scheme as a whole is fair as between the interests of the different classes of persons affected.”

With that in mind I shall deal first with the objections raised by Mr Butcher. Chief amongst them was a complaint as to changes effected by the Scheme as to the excess over the “required minimum margin” of solvency or “RMM” available to several classes of policyholders. It is a fact that by reason of different funds having, for example, different origins, different investment records, different administrative costs and by reason of their being open or closed, they have ended up with different amounts by which their assets exceed their liabilities and, in turn, different extents to which their RMM is covered. Under the Scheme in some cases the RMM is improved, in some diminished. Accordingly there is a double complaint; one part is that the Scheme is unfair as between policyholders, some having their position improved, some having it weakened, and, as to the other part of the complaint, it is that the Claimant companies and the shareholders standing behind them gain from the Scheme whereas, policyholders or at any rate those with diminished RMMs, only suffer from it.

As to the first part of that double complaint, firstly as an insurance company is in general free in the course of its business to annihilate or diminish the excess over the RMM, to that extent there is no entitlement of a policyholder to cover beyond the RMM itself or to the maintenance of an existing RMM. Secondly, the RMM, determined according to EU rules and based on calculations of assets and liabilities following FSA Regulations, is intended to represent a practical level of policyholder safety. One can thus reduce the excess over the RMM without materially endangering security. Thirdly, whether any particular reduction in an excess over RMM represents a material disadvantage to any policyholder is a matter for expert actuarial and accounting assessment. Here the Independent Expert whilst, as one might expect, using slightly different language as to different funds and as to guaranteed benefits or benefit expectations, has concluded that no-one sufferers by the Scheme to a material extent; there would be no discernible impact, he says, on security; there was no reason to believe that there would be any adverse affect.

There is no reason whatsoever to mistrust the Independent Expert’s conclusions. No evidence put before me queries his conclusions in an informed way. Thus, as between policyholders, it is hard to see why the Scheme should be categorised as unfair where the consequent (but possibly impermanent) improvement in respect of the RMM excess available to some policyholders is procured without there being any material disadvantage to the other policyholders.

As between policyholders and the Claimant companies’ shareholders, if, as the Independent Expert reports, the intended benefits looked for to be achieved by way of the Scheme - a simplified capital structure and an improved capital-raising ability in the Claimant companies - are conferred by the Scheme without material disadvantage to any policyholder, it would be hard to describe the Scheme as unfair even if totally discounting the advantages which the Scheme, by way of the improvement as to the capital structure, may ultimately confer upon the policyholders. I cannot, on such grounds as these, voiced by Mr Butcher but espoused by many other complainants in correspondence, describe the Scheme as unfair.

Another complaint raised by Mr Butcher was that the Independent Expert had been appointed by and was to be paid by the proponents of the Scheme and had himself done work in other AVIVA Schemes such that he could not truly be described as “independent”. Section 109 of FSMA provides:-

“109 (1) An application under section 107 in respect of an insurance business transfer scheme must be accompanied by a report on the terms of the scheme (“a scheme report”).

(2)

A scheme report may be made only by a person –

(a)

appearing to the Authority to have the skills necessary to enable him to make a proper report; and

(b)

nominated or approved for the purpose of the Authority.

(3)

A scheme report must be made in a form approved by the Authority.”

Mr Dumbreck’s rôle in the Scheme was approved under section 109 (2) (b). In paragraph 1.13 of his Report he states:-

“In reporting on the proposed schemes in accordance with Part VII of the FSMA I owe a duty to the Courts to help the Courts on matters within my expertise. This duty overrides any obligation to any person from whom I have received instructions or by whom I am paid.”

In paragraphs 7.29 and 7.30 he continues:-

“As required by Part 35 of the Civil Procedure Rules, I hereby confirm that I understand my duty to the Court and have complied with that duty.

Statement of Truth

I believe that the facts I have stated in this Report are true and that the opinion that I have expressed are correct.”

Given the declarations which the Expert makes in his Report, I would not feel able to conclude in any way adverse to his independence without chapter and verse being given to me but no complainant has identified any instance of bias or of a want of independence in Mr Dumbreck. Accordingly I hold this complaint to be unfounded.

Another complaint which Mr Butcher raises is that the Independent Expert has relied upon figures supplied to him by the proponent companies. That is so; in his paragraph 1.16 the Independent Expert says:-

“In carrying out my review and producing this Report I have relied without independent verification upon the accuracy and completeness of the data and information provided to me, in both written and oral form, by AVIVA. Where possible, I have reviewed some of the information provided for reasonableness and consistency with my knowledge of the insurance industry.”

Such reliance, as it seems to me, is, in practical terms, inescapable. If an Independent Expert were required, in a scheme as complex as this, to verify every company figure he was intending to rely upon such reports would be a work of literally years not months. However, two matters need to be borne in mind; firstly, many of the company figures which the Independent Expert has relied upon are figures which have been audited, and thus professionally scrutinised, or they have been in returns to the FSA as regulator and yet have survived its attentions. Secondly, no complainant has drawn my attention to any particular figure relied upon which is said not to be capable of reliance. I cannot attach any real weight to this complaint.

Next Mr Butcher states that the FSA’s reaction to the proposed scheme is hardly one of resounding approval. I agree. The FSA’s letter of the 2^nd November says merely that it did not intend to be represented at the hearing. However, the FSA, as regulator, had been kept informed throughout the drafting processes of the intended components of the Scheme. Its letter refers to “the evidence currently before it”. In the circumstances I believe I may infer that the FSA has seen no shortcomings of any real significance in the proposals contained in the Scheme itself or in the draft Order. Again, neither Mr Butcher nor any other complainant has identified any particular subject which he or they say should have been spotted by the FSA as a demerit of some significance in the Scheme.

As for the Group’s capital structure, says Mr Butcher, it is wrong, he urges, that its improvement should be at the expense of policyholders. It is shareholders, he says, who should see to the companies having sufficient capital and any improvement in the capital structure to make capital-raising easier should be at the shareholders’ expense and not at that of policyholders. I have already touched on part of the answer to such a complaint; there is no significant or material disadvantage to any policyholder in the Scheme and hence that which the Scheme effects is done without disadvantage to the policyholders. But, beyond that, whilst it is, of course, for shareholders and the companies themselves to see to the raising of adequate capital, there is nothing inherently wrong in a scheme having as one of its objects the attainment of a structure which is more conducive to the raising of capital than the somewhat ramshackle arrangements which, largely for historical reasons, are currently found in the Group.

Mr Butcher complained that in his particular case he had received answers to the questions which he had raised in earlier writings only so late that he had not had sufficient time adequately to study the very many papers involved. However it is plain that the companies and their advisers made real efforts to answer Mr Butcher’s questions. I have no reason whatsoever to believe that there was any wilful or deliberate withholding of information from him. He asked me either to reject the scheme or, failing that, to adjourn it so that he had sufficient time to study all papers. I make no criticism of Mr Butcher, to whom other policyholders can be grateful for the trouble he had taken, but it would, in my view, be wrong to adjourn consideration on the off-chance that Mr Butcher, he having by then had a greater opportunity to raise complaints both in correspondence and orally, should be able later to identify some other ones that had so far eluded him. It would be wrong to postpone implementation of a scheme otherwise acceptable on so speculative a basis.

Mr Butcher also touched on insolvency but provided no reason for it to be thought that the AVIVA Group or any component of it was threatened by insolvency or that the Scheme, if implemented, increased any such threat.

Many of the complaints raised Mr Butcher are mirrored in correspondence from other policyholders which, to that extent, require no further answer but there are, in the correspondence, some complaints beyond those which Mr Butcher raised. Thus there are policyholder fears that by way of the Scheme premiums will increase. The Independent Expert at his paragraph 6.10 concludes:-

“In my opinion there is no reason to believe that any increases in reviewable premiums will be attributable to the implementation of the proposed Scheme.”

Another complaint is that the Scheme provides no means by which a policyholder can opt out of the arrangements as they will become if the Scheme is sanctioned. That, in general terms, some such an opt-out provision can be provided can now be seen from section 112 (8) (a) FSMA. But, and this is a consideration that affects several of the complaints, it is for the Boards of the proponent companies to formulate the Schemes which they wish to have considered by the Court. The Scheme so proposed does not make provision for any opt-out. It is no part of the Court’s duty when considering whether or not to sanction a scheme to consider whether in this particular or that its provisions might be improved. Unless failure to provide an opt-out goes to the basic question of fairness, which in my view it does not, then the complaint that no opt-out is provided is not such as to jeopardise the sanctioning of the Scheme. In any event, one can readily see the massive disadvantages which would arise were any given company to be required to continue with some of its business (where an opt-out had been exercised) as it had been before the Scheme and some of it (where there was no such exercise) as it should be after the Scheme had received sanction. So far from simplifying the structures in the companies, they would be made even worse.

There are complaints in the correspondence about the companies’ investment record but that, as it seems to me, is nothing to do with the Scheme.

Another complaint is that the Scheme should (but does not) contain guarantees that it will have no ill-effect on any policyholder and that, if, as is the case, a purpose of the Scheme is to facilitate the raising of capital, there should be (but is not) a guarantee that further capital will be sought. As for ill-effects, if the evidence is, as it is, that there is none of any materiality, I cannot, as I have said, describe the Scheme as unfair on the ground of its having ill-effects. Once I arrive at the conclusion that, in relation to that ground of complaint, the Scheme is fair, then I cannot refuse sanction or require an enhancement of the Scheme on that ground. It is, as I have said, for the Boards of the proponent companies to devise and propose the Scheme. No doubt guarantees of the kind I have mentioned would make the Scheme more attractive or less unattractive to these complainants but, as the Scheme is fair, I have no power to require the Board to add to it, still less to do so in a way not required by the FSA or Independent Expert.

As for raising capital, I add that the evidence includes both reference to the issue by one of the transferee companies, NULAP, of £200m subordinated debt prior to 31^st December 2004 or in 2005 and that the Independent Expert’s conclusions were arrived at without taking into account any beneficial impact that might have.

Another complaint is that, surely, contracts cannot be changed without the consent of all contracting parties. The answer, of course, is here that within the bounds set by FSMA Parliament has said that they can be changed without such consents.

I shall not attempt to dealt with every complaint that has been raised but I believe I have dealt with all such as are substantial enough to require an answer. Despite the objections, in my discretion I have, as I have already mentioned, sanctioned the Scheme; it was and is in my judgment one which is fair as that requirement was explained in London Life supra. It was and is, in my view, appropropriate to sanction it within the meaning of section 111 (3) of FSMA.

I add only this. By a separate application by NULLA, i.e. Norwich Union Linked Life Assurance Limited – that company by Petition sought confirmation and approval of a very substantial reduction in its capital and cancellation of its Share Premium Account. NULLA is a transferror company under the Scheme and the object of the Petition was to restore sense to its balance sheet in the situation obtaining after the Scheme had been sanctioned. Without such a reduction NULLA would have been left with a very large capital indeed but, as Mr Hildyard put it, “No assets to speak of to represent” it. An inquiry as to creditors had, on an undertaking as to the interim until the Scheme took effect, previously been dispensed with. This is a judgment directed to the Scheme but I add that on the Petition I held that on the facts of this case it was not only possible but prudent to give effect to the reduction and cancellation which the Petition sought.