RS Life Insurance - statutory fund of life insurance company used CATCHWORDS ' to purchase shares in holding company which has substantial shareholding 1n a company which carries on business of life insurance ~ whether constitutes investment of assets of statutory fund directly or indirectly in share or interest in company or undertaking carrying on life insurance business. Life Insurance Act (Cth.) 1945-1973, s. 39 (2). GALFRID LESLIE MELVILLE v. THE MUTUAL LIFE AND CITIZENS ASSURANCE COMPANY LIMITED NO. G49 OF 1980 LOCKHART J. AT SYDNEY FRIDAY 3 OCTOBER 1980 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION BETWEEN: ORDER JUDGE MAKING ORDER: WHERE MADE: DATE OF ORDER: THE COURT ORDERS THAT: / No. G49 of 1980 GALFRID LESLIE MELVILLE Applicant THE MUTUAL LIFE AND CITIZENS ASSURANCE COMPANY LIMITED Respondent LOCKHART J. AT SYDNEY 3 OCTOBER 1980 1. The application be dismissed. 2. The applicant pay the respondent's costs. IN THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY No. G49 of 1980 GENERAL DIVISION BETWEEN: GALFRID LESLIE MELVILLE Applicant AND: THE MUTUAL LIFE AND CITIZENS' ASSURANCE COMPANY LIMITED Respondent REASONS FOR JUDGMENT 3 OCTOBER 1980 LOCKHART J. This is an application by Galfrid Leslie Melville ("the applicant"), who is the Life Insurance Commissioner appointed under the Life Insurance Act 1945 ("the Act"), for a declaration that the purchase by The Mutual Life and Citizens' Assurance Company Limited ("the respondent") on or about 17 January 1980 of one hundred thousand shares in the capital of A.P.A. Holdings Limited ("A.P.A. Holdings"), without the sanction of this Court, caused the assets of the statutory fund maintained by the respondent to be invested, directly or indirectly, in "any share or interest" in a company or undertaking carrying on 1li® insurance business in Australia, and thus contravened s. 39 (2) of the Act. The facts are not in dispute and are in a short compass. A.P.A. Holdings holds about 98.5% of the issued share capital in A.P.A. Life Assurance Limited ("A.P.A. Life"). Both the respondent and A.P.A. Life are companies registered under the Act and carry on life insurance business in Australia. ..-/2 -2- The directors of A.P.A. Life are also directors of A.P.A, Holdings. There 1s only one person who is a director of A.P.A. Holdings who 1s not also a director of A.P.A. Life, namely a Mr. R. G. Glading; but he is the Actuary of A.P.A. Life. A.P.A .Holdings has three subsidiaries, including A.P.A. Life; and A.P.A. Life itself has three subsidiaries. I shall refer to all these companies together as "the A.P.A. Group". The assets, profits and shareholders! funds of A.P.A. Life account for substantially more than half of those of the A.P.A. Group. The holding by the respondent of one hundred thousand shares in the issued capital of A.P.A. Holdings ("the shares") represents about one percent of the issued capital of A.P.A. Holdings. The respondent was offered a further five hundred thousand shares 1n the capital of A.P.A. Holdings; but it did not purchase them; they have been sold to someone else. Section 39 of the Act provides:- "(4) Subject to this Act, the assets of every statutory fund maintained by a company may be invested (subject to any provisions in the instruments constituting the company or in the articles of association or other rules of the company which impose restrictions upon the manner in which the assets of the company may be anvested) in such manner as the company thinks fit. (2) The assets of a statutory fund shall not, without the sanction of the Court, be invested directly or indirectly in any share or interest in any company or undertaking carrying on life insurance business whether in Australia or elsewhere." It is agreed between the parties that this Court has jurisdiction to hear the application; but, quite apart from that .../f3 agreement, I am satisfied that jurisdiction exists on the ground that the relief sought is in relation to a matter in which this Court has original jurisdiction namely, its power to sanction the purchase of the shares, notwithstanding that no such sanction has in fact been sought: see s. 2I of the Federal Court of Australia Act 1976 and s. 39 (2) of the Act. The prohibition on investment imposed by s. 39 (2) is upon the investment of the assets of a statutory fund. The statutory fund comprises all amounts received by a company in respect of any class of life insurance business after the company has established the statutory fund: s. 38 (I) and the definition of "statutory fund" in s. 4 (I). Restrictions are imposed upon the use to which a company may put the assets of the statutory fund, not only by s. 39 (2) but by other provisions of the Act including s. 38. The Act does not restrict the company as to its use of other funds or other assets. A company carrying on the business of life insurance in Australia is not restricted to that business. Indeed, the Act expressly recognises that a company carrying on life insurance business may carry on other business: e.g. s. 44 (I) (b) and (c). Doubtless the purpose of the prohibition imposed by s. 39 (2) is to maintain competition in the life insurance industry between the companies that carry on life insurance business. It is intended that the risks be spread between the various companies with consequent benefit and diminution of detriment to policy holders. Counsel for the applicant advanced two contentions in the alternative, in support of the applicant's case that, in purchasing ..-/4 -4- the shares, the respondent contravened s. 39 (2) of the Act. The first contention was that the A.P.A. Group, comprising A.P.A. Holdings and its subsidiaries including A.P.A. Life, together constituted an "undertaking", within the meaning of s. 39 (2), carrying on life insurance business within Australia; and tht the purchase by the respondent of the shares was en investment, directly or indirectly, in "any share or interest" in an undertaking carrying on life insurance buisness in Australia. The second contention was that the purchase of the shares was an investment indirectly in shares in A.P.A. Life. The first contention Counsel for the applicant contended that the word "undertaking" was used in the sense of a business or enterprise in a broad commercial sense such that 1t is the A.P.A. Group that carries on life insurance business and not merely A.P.A. Life itself. I am unable to accept this contention. The word appears in a provision (s. 39 (2) ) which prohibits the assets of a statutory fund being invested in any share or interest 1n any company or undertaking carrying on life insurance business. It is true that the meaning of the word "undertaking" varies according to the context in which it appears. It appears not infrequently in legislation with special and defined meanings of no assistance in the present case. Sometimes it refers to the property of a corporation, usually in the sense of all or substantially all of 1ts property as a going concern: see Re Panama, New Zealand, and Australia Royal Mail Co. (1870) 5 Ch. App. 318 per Giffard L.J. at pp. 322 and 323. ./f5 -5- The reference in sub-s. (2) to "...any company or undertaking carrying on life insurance business..." plainly suggests that the word "undertaking" (and the word "company") 1s used with reference to the person or body who 1s carrying on the life insurance business rather than to the property of that person or body. It is the particular entity that carries on life insurance business to whom the prohibition in s. 39 (2) is directed. The fact that one sees little reference to an "undertaking" in the Act does not assist the applicant, as the prohibition imposed by s. 39 (2) is intended to ensure that whatever use of the assets of a statutory fund may be permissible, it is impermissible to invest them in any share or interest in any entity, be it a company or undertaking, that carries on life insurance business in Australia or elsewhere, without the sanction of the Court. The expression "company or undertaking" is intended to cover the field of the prohibited objects of investment of the assets of the statutory fund. It is a fundamental error to say that the A.P.A. Group carries on life insurance business. The A.P.A. Group carries on no business. It cannot do so. A.P.A. Life carries on life insurance business; A.P.A. Holdings does not. That is the short answer to the applicant's contention; but the matter need not rest there; for it 1s plain from the provisions of the Act itself that when 1t speaks of a company or undertaking carrying on life insurance business 1t 1s concerned with a particular company or undertaking which carries on the business. ./6 The Act regulates the activities of companies for the purposes of the Act. When it refers to companies it assumes thcy are companies according to the general law and the companies legislation of the States and Territories of Australia. It does not seek to alter their character or corporate status. It defines a "company" as a body corporate which carries on or proposes to carry on life insurance business in Australia (s. 4 (I) ). It requires every company at the expiration of each financial year of the company to prepare various documents, including a revenue account, in a prescribed form in respect of each class of life insurance business and a Separate revenue account in respect of any insurance business, other than life insurance business, carried on by the company; and a balance sheet in accordance with a prescribed form (s. 44 (I) ). It is plain, in the case of a company, that s. 39 (2) is concerned only with the company that itself carries on the life insurance business. A person other than a company is prohibited from carrying on any class of life insurance business in Australia except on behalf of a company registered under the Act: s. 14. A company is prohibited from carrying on any class of life insurance business in Australia unless it has been registered by the Commissioner: s.I5. A company is required, as at the date on which it commences to carry on life insurance business in Australia, to establish and maintain a statutory fund in respect of the life insurance business carried on by it: s. 37 (I). A company may establish and maintain a separate statutory fund in respect of the whole or part of the life insurance business carried on by the company outside Australia: oe e// s. 37 (1B). A company may establish and maintain a separate statutory fund in respect of such part of the superannuation business carried on by it as it determines: s. 37 (1A). It is noteworthy that the Act does not expand the conventional definition of a company so as to include, for example. a related company or a subsidiary, such as one finds in other legislation: see for example s. 6 of the Companies Act 1961 (N.S.W.) and comparable provisions in the companies legislation of other States and Territories; the Broadcasting and Television Act 1942 ss. 91A and 91B; the Banks (Shareholdings) Act 1972 ss. 8 anc 9. The Life Insurance Amendment Act 1977 has amended s. 39 of the Act by omitting sub-s. (2) and substituting sub-ss. (2) to (12) inclusive which, amongst other things, expand the scope of the existing sub-s. (2) so as to include within the prohibition, investments of the assets of a statutory fund by way of loan to or shares 1n or debentures of a company that carries on or is related to or is a substantial shareholder of a company that carries on life insurance business: see s. 10 (2) (b) and (d) of the Life Insurance Amendment Act 1977. The fact that Parliament has chosen to amend s. 39 (2) in this way is irrelevant for the purposes of the present case, save that 1t provides another example of the expansion by Parliament of the conventional definition and status of a company for the purposes of particular legislation. I do not rely on the amendments in any way to resolve the questions in this case. I might add that the amendments made to s. 39 are not yet in operation. ../8 -8- Counsel for the applicat sought to gain support for this first contention from the presence in s. 39 of the word "invested". He contended that the section uses "invested" in a broad commercial sense to connote the use of funds for some ultimate commercial objective. "Invest" is not defined by the Act. It is defined by the Shorter Oxford English Dictionary, so far as relevant, as meaning:- "to employ (money) 1n the purchase of anything from which interest or profit is expected...to make an investment.. colloq. to lay out money". In Wharton's Law Lexicon the relevant meaning given is:- "to lay out money". See also Commissioner of Taxes v. A.M.P. Society (1903) 22 N.Z.L.R. 445 per Stout C.J. at p. 450; and Re W111 of Sherriff 1971 2 N.S.W.L.R. 438 per Helsham J. at p. 442, No doubt Parliament chose to use the word "invested" in s. 39 (1) because the section 1s dealing with the use of the assets of a statutory fund of a company carrying on lie insurance business; and it 1s assumed that the company will use it prudently for the purpose of obtaining a return by way of income or some other pecuniary gain for the benefit of policy holders. It is in this sense that the word is used in s. 39 (1) and (2). It is not used 1n a broad commercial sense, whatever that may be; and, even if it were, I do not see how it assists the case for the applicant. Counsel for the applicant contended that the purpose or object of the use of the statutory fund by the respondent was in reality to acquire an investment in A.P.A. Life as its assets, ../f9 profits and shareholders' funds represented substantially more than fifty percent of those of the A.P.A. Group; and that the acquisition of the shares in A.P.A. Holdings was merely the vehicle to achieve that end. It 1s impermissible to characterise the investment made by the respondent by reference to the purpose or object of the investment. The respondent may have acquired the shares in A.P.A. Holdings to derive benefit from the principal asset of A.P.A. Holdings namely, its shares in A.P.A. Life; but, if it did so, it 1s not to the point. The respondent invested the assets of the statutory fund in the purchase of shares in A.P.A. Holdings; the respondent did not acquire any share or interest in the A.P.A. Group. That is an impossibility. "Interest", in the context of s. 39 (2), necessarily involves a proprietary interest of some kind. All the respondent did, so far as relevant, was to buy shares in A.P.A. Holdings. It 1s impermissible to determine the investment of the respondent by having regard to economic equivalence or the end result, except as a matter of contractual right. It 1s not the purpose or object of the investment or the economic results sought to be obtained by expending the statutory fund that is determinative of whether the respondent invested such fund in a share or interest 1n a company or undertaking carrying on life insurance business; it 1s the legal rights enforceable by the respondent that it acquired in return for the expenditure. There 1s no room for the doctrine of economic equivalence or end result in various fields of the law; e.g. income tax: .. 10 ~10-+ see Europa Oil (N.Z.) Limited (No. 2) v. I.R.C. 1976 1 W.L.R. 464 per Lord Diplock at pp. 471-472; Mullens v. F. C. of T. (1976) 135 C.L.R. 290 per Barwick C.J. at p. 301; F.C. of T. v. South Australian Battery Makers Pty. Limited (1978) 52 A.L.J.R. 640; Ransburg Australia Pty. Limited v. F. C. of T. 80 A.T.C. 4114; Hobart Bridge Co. Ltd. v. F, C. of T. (1951) 82 C.L.R. 372 per Kitto J. at pp. 384-386; and stamp duties: see Commissioner of Stamp Duties (N.S.W.) v._Millar (1932) 48 C.L.R. 618 per Rich, Dixon and McTiernan JJ. at p. 632 and Davis Investment Pty. Limited v. Commissioner of Stamp Duties (N.S.W.) (1958) 100 C.L.R. 392 per Taylor J. at p. 420. Nor 1s there room for the doctrine in characterising the employment of the assets of a statutory fund under s. 39 of the Act. Inherent in the applicant's contention is the fallacy that on acquiring shares in a company a shareholder acquires an interest in the assets of the company: see Macaura v. Northern Assurance Co. 1925 A.C. 619 especially per Lord Buckmaster at p. 626. The applicant seeks to elide the distinction between the two; this it cannot do, The second contention The second contention on behalf of the applicant was that the respondent invested the assets of the statutory fund indirectl: in shares in A.P.A. Life. It was submitted that, although the particular means selected for the investment was the purchase of shares in A.P.A. Holdings, the real purpose was to obtain access to the most valuable asset of A.P.A. Holdings namely, its shares an A.P.A. Life. ../11 -11- This submission fails. I rely on what I have said earlier as to the first contention. In addition, I cannot accept that the word "indirectly" where used in s. 39 (2) has the meaning inherent in this contention. The phrase "directly or indirectly" appears not infrequently in legislation: see for example s. 67 of the Companies Act 1961 (N.S.W.) in relation to financial assistance. In the context of s. 39 (2), 1t refers to, and is qualified by, the word "invested" that immediately precedes it and relates to the subject matter of the investment. It is intended to bring within the ambit of the prohibition investments, not only by the company itself directly in shaes or interests in a company or undertaking carrying on life insurance business, but investments made by the company through the medium of a nominee, agent, trustee or the like. In no sense could it be said in the present case, and it was not contended, that A.P.A. Holdings was a nominee, agent or trustee of or for the respondent. There is nothing to suggest that the respondent and A.P.A. Holdings were otherwise than at arms length. Both contentions of the applicant necessarily assume that the investment of the assets of the statutory fund in the purchase of shares in A.P.A. Holdings answers the description both of an investment in shares in A.P.A. Holdings on the one hand and an investment in a share or interest in the undertaking carrying on life insurance business in Australia (the first contention) or an investment indirectly in shares in A.P.A. Life, (the second contetion) on the other hand. This illustrates the fallacy of each contention. It is true that a complex of facts may fall ../12 -12- within the description of more than one limb of a section of an Act of Parliament; but in the case of s. 39 (2), when one is seeking to characterise the investment in question, as the facts readily answer the description of the investmt of the assets of a statutory fund directly in shares 1n A.P.A. Holdings, I see no warrant for characterising the relevant acts in any other way. Counsel for the respondent contended that, upon its proper construction, s. 39 (2) prohibits the investment of the assets of a statutory fund, directly or indirectly, in any share 1n any company carrying on life insurance business in Australia and in any interest in any undertakirgcarrying on life insurance business elsewhere. If this construction were correct it would, of course, answer the first contention of the applicant. Counsel for the respondent relied upon the definition of "company" in s. 4 of the Act which defines a company as meaning a body corporate which carries on or proposes to carry on life insurance business in Australia; and the fact that only a company is entitled under s. 14 to carry on any class of life insurance business in Australia, and, further, a company registered by the Commissioner (s. 15). He contended that, if the prohibition were intended to extend to a company carrying on business outside Australia, this would involve either the necessity of a special definition of "company" for thepirpose of s. 39 (2) extending to a corporation carrying on life insurance business outside Australia or reading a contrary 1ntention into the words of s. 39 (2). Although there 1s much force in the submission, its acceptance involves doing some violence to the ordinary and natural »/13 -13- meaning of the words of s. 39 (2). I do not find it necessary to decide this question. In the result, I order that the application be dim issed and that the applicant pay the respondent's costs. lceruly that tis and the dww2tue (12) preced.ny pages are a tru? copy cf the Reasons for dudomest here.n of 11s Honour far. Justce toc.Sart NL Leactn) Acsociata 1 Dated 3 Otuhss 1980