FEDERAL COURT OF AUSTRALIA Copenhagen Reinsurance Company Ltd, in the matter of the application of The Copenhagen Reinsurance Company Ltd [2011] FCA 23 Citation: Copenhagen Reinsurance Company Ltd, in the matter of the application of The Copenhagen Reinsurance Company Ltd [2011] FCA 23 Parties: IN THE MATTER OF THE APPLICATION OF THE COPENHAGEN REINSURANCE COMPANY LIMITED (ABN 99 070 671 948) FOR CONFIRMATION OF A SCHEME FOR THE TRANSFER OF INSURANCE BUSINESS TO GORDIAN RUNOFF LIMITED (ABN 11 052 179 647) PURSUANT TO DIVISION 3A OF PART III OF THE INSURANCE ACT 1973 (CTH) File number: NSD 1330 of 2010 Judge: EDMONDS J Date of judgment: 21 January 2011 Catchwords: INSURANCE – transfer of the general insurance business of an Australian branch of a foreign insurer to an Australian company within the same group of companies – application to Court for confirmation of scheme. Held: having regard to the considerations in s 17(1A) of the Insurance Act 1973 (Cth) the Court, in an exercise of its discretion, confirmed the scheme. Legislation: Insurance Act 1973 (Cth) s 17F Life Insurance Act 1995 (Cth) Cases cited: In the matter of Combined Insurance Co of America [2010] FCA 962 In the matter of GIO Personal Investment Services Ltd and AMP Life Ltd [2000] FCA 1871 In the matter of HDI-Gerling Australia Insurance Co Pty Ltd (No 2) [2010] FCA 669 In the matter of MDU Australian Insurance Co Pty Ltd [2008] FCA 490 In the matter of Reward Insurance Ltd [2004] FCA 151 In the matter of Westport Insurance Corporation (No 2) [2009] FCA 1598 Mercantile & General Reinsurance Co of Australia Ltd [2004] FCA 1773 Re Armstrong Jones Life Assurance Ltd (1997) 74 FCR 160 Re Insurance Australia Ltd (2004) 139 FCR 450 Re Royal & Sun Alliance Life Assurance Ltd (2000) 104 FCR 37 Date of hearing: 2 December 2010 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 54 Counsel for the Applicant: Mr NJ Owens Solicitor for the Applicant: HWL Ebsworth Lawyers Solicitor for the Australian Prudential Regulatory Authority: Mr D Sun IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1330 of 2010 IN THE MATTER OF: THE APPLICATION OF THE COPENHAGEN REINSURANCE COMPANY LIMITED (ABN 99 070 671 948) FOR CONFIRMATION OF A SCHEME FOR THE TRANSFER OF INSURANCE BUSINESS TO GORDIAN RUNOFF LIMITED (ABN 11 052 179 647) PURSUANT TO DIVISION 3A OF PART III OF THE INSURANCE ACT 1973 (CTH) JUDGE: EDMONDS J DATE OF ORDER: 2 DECEMBER 2010 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Pursuant to s 17F of the Insurance Act 1973 (Cth), the scheme for the transfer of the general insurance business of the Australian branch of The Copenhagen Reinsurance Company Limited (ABN 99 070 671 948) ('Cop Re') to Gordian RunOff Limited (ABN 11 052 179 647) ('Gordian') ('the Scheme'), a copy of which appears at pages 3 to 11 of Exhibit SMG referred to in Steven Moore Girvan's Affidavit sworn on 29 November 2010 ('Girvan's Affidavit') be confirmed. 2. The transfer date for the purposes of the Scheme and the Deed to Transfer Insurance Business which appears at pages 13 to 36 of Exhibit SMG referred to in Girvan's Affidavit be 6 December 2010. 3. Cop Re pay the costs of APRA as agreed, or if agreement cannot be reached, as taxed. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1330 of 2010 IN THE MATTER OF: THE APPLICATION OF THE COPENHAGEN REINSURANCE COMPANY LIMITED (ABN 99 070 671 948) FOR CONFIRMATION OF A SCHEME FOR THE TRANSFER OF INSURANCE BUSINESS TO GORDIAN RUNOFF LIMITED (ABN 11 052 179 647) PURSUANT TO DIVISION 3A OF PART III OF THE INSURANCE ACT 1973 (CTH) JUDGE: EDMONDS J DATE: 21 JANUARY 2011 PLACE: SYDNEY REASONS FOR JUDGMENT 1 This is an application for an order pursuant to s 17F of the Insurance Act 1973 (Cth) ('the Act') confirming a scheme involving the transfer of the general insurance business of the Australian branch of The Copenhagen Reinsurance Company Limited ('Cop Re') to Gordian RunOff Limited ('Gordian') ('the Scheme'). 2 On 2 December 2010, after hearing from counsel for Cop Re, at which hearing a solicitor representing the Australian Prudential Regulations Authority ('APRA') was in attendance, and having received written confirmation from APRA that, having reviewed the affidavits of Paul Thomas and Thomas Nichols both sworn 30 November 2010 (Exs 7 and 8 respectively), it had no objection to their contents or to the Scheme being confirmed, I made orders confirming the Scheme, fixing the transfer date for the purposes of the Scheme and the Deed to Transfer Insurance Business to be 6 December 2010 and requiring Cop Re to pay the costs of APRA as agreed or taxed. 3 I made these orders over an objection received by the solicitors for Cop Re from a person representing Suncorp Metway Insurance Limited and GIO General Limited (together 'Suncorp'). The relevant objection was contained in correspondence passing between the parties. 1. Letter dated 26 November 2010: Suncorp to Cop Re's solicitors: 'Objection to Scheme for the transfer of certain insurance business of The Copenhagen Reinsurance Company Limited to Gordian Run Off Limited Following David Mitchell's telephone call of 24 November 2010 advising of Suncorp's intention to be heard in respect to the above captioned scheme I detail our objections below. Background Suncorp Metway Insurance Limited (SMIL) and GIO General Limited (GIOG) are current policyholders of The Copenhagen Reinsurance Company Limited (Cop Re). SMIL and GIO together have reinsurance recoverable due from Cop Re in excess of $670,000, being approximately 15% of the scheme transfer sum. SMIL and GlO's objections to the scheme are in respect the absence of any treatment of particular conditions that attach to Cop Re's authorisation to conduct insurance business. Detail of Objections The notice varying conditions on authorisation to carry on insurance business issued to Cop Re by APRA dated 8 January 2010 contains certain conditions. Those conditions are not continued once the scheme is complete. We find that the loss of these conditions is to our detriment. The conditions that are of concern are: 2.a. the requirement for assets of Cop Re not to be removed from Australia; 2.b. the requirement that assets of Cop Re not be used to discharge liabilities outside of Australia; 2.c. the requirement that assets of Cop Re not be charged to persons outside of Australia; 3 the need for books of Cop Re to be kept at the usual place of business in Australia; and 6 the need for assets of Cop Re to be invested in deposits with an ADI. We observe no reference to the continuation of these conditions in the scheme document. We find that the scheme's failure to treat these leaves SMIL and GIOG in a detrimental state in that: The transfer of the Cop Re assets to Gordian RunOff Limited (Gordian) creates a situation where the Cop Re assets are pooled with existing Gordian assets without any continuation of the conditions 2a, 2b, 2c, 3 and 6 identified above Accordingly, SMIL and GIOG are deprived of the certainty that the conditions create. After the scheme transfer, SMIL and GIOG are not protected in respect of the location of the relevant assets or the location of the accounting records such that recovery from Gordian may be more complex than from Cop Re. After the scheme transfer, SMIL and GIOG's access to assets is exposed to possible contagion of obligations due by international associate companies of Cop Re. After the scheme transfer, SMIL and GIOG's access to assets is exposed to possible volatility of Gordian's investment value from an investments portfolio that is of higher risk than deposits with an ADI. SMIL and GIOG have no transparency of the existing obligations of Gordian. Such existing obligations could erode the assets transferred from Cop Re to the point where SMIL and GIOG's obligations are not resolved. This issue is not readily apparent from the scheme documentation in that actuarial conclusions as to adequacy of post scheme solvency operate around point-in-time observations of the obligations. To that end, Suncorp sees no benefit in trading Cop Re solvency coverage ratio of 3.02 at March 2010 for the lesser post scheme solvency coverage ratio of 2.64. Please don't hesitate to contact me if you would like to discuss anything.' 2. Letter dated 26 November 2010: Co Re's solicitors to Suncorp: 'Insurance Portfolio Transfer from The Copenhagen Reinsurance Company Limited to Gordian RunOff Limited Thank you for your letter dated 26 November 2010 which sets out Suncorp Metway Insurance Limited's (SMIL) and GIO General Limited's (GIOG) objection to the scheme of transfer of certain insurance business of The Copenhagen Reinsurance Company Limited (Cop Re) to Gordian Runoff Limited (Gordian), Your letter indicated that the basis of your objection is the variance or difference in the conditions of authorisation between Cop Re and Gordian. In particular, you indicate that the following conditions are of concern to you: • 2(a) - the requirement for assets of Cop Re not to be removed from Australia. • 2(b) - the requirement that assets of Cop Re not be used to discharged liabilities outside of Australia. • 2(c) - the requirement that assets of Cop Re not be charged to persons outside of Australia. • 3 - the need for books of Cop Re to [be] kept at the usual place of business in Australia. • 6 - the need for assets of Cop Re to be invested in deposit with an ADI. As you are aware, Cop Re operates in Australia as a branch of a Danish regulated insurer. APRA, in order to protect local shareholders, often places restrictions on the conditions of branch offices located in Australia to ensure that assets in Australia are available to protect Australian policy holders. The reason for these protections is that as a branch the Australian operations have no distinct legal identity separate from the Danish parent company and as such the local operations and assets are at risk of adverse events occurring in its home jurisdiction. APRA places these conditions on branches to create a framework that makes the branch office replicate the conditions of operation as much as possible of a locally registered insurer. Gordian is not a branch insurer but is a locally registered insurance authorised to conduct run off insurance. Therefore, all of the conditions that you have stated as grounds for your concern would not be applicable to Gordian as it has no parent or overseas operation which has the right, through its legal organisational structure, to request, demand or extract assets from Australia. Therefore, the claim made in your objection that SMIL or GIOG would be in a worse position by virtue of the application due to the loss of any benefit from the continuation of conditions 2(a), 2(b), 2(c) and 3 with all due respect is not valid as those conditions already exist by virtue of Gordian being a locally registered insurer. Therefore, we address your concerns as set out in your letter in the following manner: 1. The supporting actuarial report has opined that the transfer of Cop Re's assets and liabilities to Gordian does not create a situation where Cop Re's policy holders in Australia would be detrimentally affected. The assets of Cop Re will be pooled with existing Gordian assets upon completion of the transaction. These assets are held in Australia by an Australian insurer and are subject to regulation by APRA. As a local insurer its assets are not at risk of a foreign regulator or a foreign creditor extracting funds by virtue of any foreign regulatory right. 2. SMIL and GIOG, if they were forced or were required to seek a judgement or order to recover assets, would be in a more secure position if such action is brought in Australia against. an Australian insurance company. Furthermore, APRA requires that local insurers maintain their records in Australia so there would be no concern with records leaving the jurisdiction. 3. We do not understand the third ground as we do not understand how once the assets and liabilities have been transferred from Cop Re, how there is an increased exposure to contagion of obligations due to international associate companies of Cop Re. In actuality, once the transfer is completed, any associate companies of Cop Re will no longer have the ability to claim or draw against the assets. Therefore, the risk of a potential contagion or obligations to those companies is significantly reduced after the transaction. 4. With respect to your concern about the loss of condition 6, Gordian is obliged to invest its assets as, as are all Australian insurers, pursuant to the Prudential Standards set by APRA and the Insurance Act. Gordian, as a regulated entity is also required to maintain-sufficient capital to meet its obligations. Therefore; while Gordian is not required to keep its assets in an ADI it does hold sufficient assets, and the actuarial report confirms this, to meet its obligations and those assets not held in ADIs are subject to the APRA mandated risk charge to take into account any potential additional risk. 5. Finally, you note that SMIL and GIOG see no benefit in trading Cop Re's solvency coverage of 3.02 at March 2010 for the lesser post scheme solvency coverage of 2.64. Please note that an update of the actuarial report was conducted by Warrick Gard on 25 November 2010 in support of this application. Mr Gard has indicated that an amendment by APRA of the manner in which it determines Gordian's ongoing regulatory capital requirements will result in Gordian's solvency coverage being 3.69 after the transaction rather than 2.64. This revised amount means that Gordian's solvency coverage following the proposed transfer will be higher than Cop Re's currency solvency ratio of 3.02. Therefore, we do not believe that the grounds for your objections to the transfer are valid and it is Gordian's intention to proceed with the application [on] Thursday, 2 December 2010. We confirm that we will provide a copy of your letter to the Court as part of the affidavit evidence submitted by Gordian and Cop Re in support of the application. Please be advised that Cop Re reserves its right to also introduce as evidence additional email correspondence between the parties that has been exchanged with respect to commutation negotiations. At this stage if you still wish to pursue your objection, we invite you to brief Counsel and attend the application on Thursday, 2 December 2010. Neither Gordian nor Cop Re will oppose any application you may wish to make for leave to appear at the application. We look forward to hearing from you.' 3. Letter dated 2 December 2010: Suncorp to Cop Re's solicitors: 'Objection to Scheme for the transfer of certain insurance business of The Copenhagen Reinsurance Company Limited to Gordian Run Off Limited Thank you for your correspondence dated 26 November 2010. We find that we have had inadequate time to review information that first came to light on receipt of that correspondence. We refer specifically to Warwick Gard's updated actuarial report dated 25 November 2010. Suncorp first secured that updated actuarial report on 30 November 2010. Upon completing full consideration of the information, Suncorp will conclude as to whether it will continue its objection. Suncorp does not intend to appear in court in respect to your application of 2 December 2010, We believe that the court will look favourably at granting Suncorp a suitable period of time to consider its position. To that end, we appreciate your submission of this letter to the court.' 4 Towards the end of the hearing on 2 December 2010, I indicated to counsel for Cop Re that I thought it appropriate that I publish my reasons for making the orders I did on that date over Suncorp's objection. Background Cop Re 5 Cop Re is a Danish company. On 15 October 2009, Cop Re was acquired by Marlon Insurance Company Ltd, a wholly-owned subsidiary of Enstar Group Ltd. From that date Cop Re has been an indirectly, wholly-owned, subsidiary of Enstar Group Ltd. 6 Cop Re has operated an Australian 'branch' since 1961. 7 There is a general requirement under the Act (s 28) that insurers maintain 'in Australia' assets at least equal to the value of their liabilities 'in Australia'. Other provisions of the Act also refer to the ability of a general insurer to meet its liabilities in Australia from its assets in Australia: see ss 62M, 62ZZC, 62ZZE. The meaning of assets and liabilities in Australia is elaborated upon in s 116A of the Act. 8 Prudential Standards require foreign general insurers to maintain assets in Australia in excess of their liabilities in Australia in an amount at least equal to a variant of a certain Minimum Capital Requirement ('MCR') (see Prudential Standard GPS 110 Capital Adequacy, especially para 11). Foreign general insurers must therefore maintain a separate balance sheet in respect of their Australian operations. The accounts so prepared depict the financial condition not of a separate legal entity, but of a notional entity representing the insurance liabilities and Australian associated assets of that company in Australia: 'the Australian branch'. 9 This notional division between a foreign insurer's Australian operations and its other operations is reinforced by restrictions APRA places on their ability to deal with their Australian assets. That is to say, a foreign insurer may not reduce their Australian assets (save to the extent of current year profits) without APRA approval (see Prudential Standard GPS 110 Capital Adequacy, para 25). The result is that a foreign insurer's assets in Australia are segregated and preserved for the benefit of Australian policyholders. While the global assets of a foreign insurer may thus be applied for the benefit of Australian policyholders (subject to any contrary requirement of foreign law), the foreign insurer's assets in Australia may not be applied in satisfaction of non-Australian liabilities. 10 The business written by Cop Re's Australian branch was predominantly excess of loss reinsurance of casualty, property and marine risks. It also wrote significant amounts of proportional and facultative business. 11 In 2001, Cop Re (including its Australian branch) was placed into run-off (in other words, it ceased to write new or renewal business). The authorisation given to Cop Re to conduct a general insurance business in Australia was accordingly limited to an authority to conduct a business in run-off. 12 Cop Re's Australian branch does not have any employees. Its business is managed by employees of Enstar Australia Ltd (another subsidiary of Enstar Group Ltd) pursuant to contractual agreement. 13 Based on its most recent APRA return (30 September 2010), Cop Re's Australian branch has a solvency coverage ratio of 3.0992. Its minimum capital requirement, as determined by APRA, is $5,000,000, and it holds net assets in Australia for APRA purposes of $15,496,000. Gordian 14 Gordian is an Australian company, owned as to 70% (indirectly) by Enstar Group Ltd, and as to 30% by the J C Flowers II Limited Partnership. 15 Like Cop Re, Gordian is authorised by APRA only to conduct a run-off general insurance business. It has been in run-off since September 1999. The principal business of Gordian is the acquisition of insurance portfolios in run-off, and their management. 16 Also like Cop Re, Gordian does not employ any staff. Its business is also managed, pursuant to a contract agreement, by employees of Enstar Australia Ltd. 17 Based on its most recent APRA return (30 September 2010), Gordian has a solvency coverage ratio of 3.89. Its minimum capital requirement, as determined by APRA is $43,593,000, and its capital base, for APRA purposes, is $169,580,000. The Legislative Framework 18 Section 17B(1) of the Act provides that (subject to a presently irrelevant exception) one general insurer's business may not be transferred to another general insurer or amalgamated with the business of another general insurer except pursuant to a scheme confirmed by this Court. 19 Section 17E(1) (read in conjunction with s 17A) provides that any party to a scheme may apply to the Court for confirmation of the scheme. 20 Such an application cannot be made until the steps outlined in s 17C(2) have been taken, and must be made in accordance with the prudential standards: s 17E(2). 21 Section 17F(1) then provides that the Court may confirm the scheme (either as presented or as modified by the Court) or refuse to confirm the scheme. 22 Section 17F(1A) provides that, in deciding whether to confirm a scheme the Court must have regard to certain considerations (described below). The Discretion to Confirm the Scheme 23 A review of the authorities (including cases decided under similar provisions of the Life Insurance Act 1995 (Cth)) suggests that, in general terms, the Court has treated the critical factor governing the exercise of its discretion as being whether 'affected policyholders' will be materially detrimentally affected by the implementation of the scheme: Re Insurance Australia Ltd (2004) 137 FCR 450 at [76]; In the matter of GIO Personal Investment Services Ltd and AMP Life Ltd [2000] FCA 1871 at [27]. 24 The expression 'affected policyholder' is defined and used in s 17C of the Act. That section is concerned with steps to be taken before the application for confirmation is made. In Re Insurance Australia Ltd, Lindgren J held at [19] – [24] that an 'affected policyholder' within the meaning of s 17C is a holder of a policy being transferred under the scheme. Accordingly, in the present case it is the policyholders of Cop Re who are 'affected policyholders' for the purposes of s 17C of the Act. Lindgren J also held, however, that this does not necessarily mean that the effect that the scheme will have on other policyholders is irrelevant to the exercise of the Court's discretion: Re Insurance Australia Ltd at [25]. 25 The Court's discretion to confirm a scheme for the transfer of an insurance business is conferred by s 17F. In In the matter of Reward Insurance Ltd [2004] FCA 151, Heerey J observed (at [3]) that the discretion was a general one and that the Act did not specify any criteria that were to be considered. His Honour described as 'a prime consideration' the nature of the actual and potential claims to which the transferor insurer is subject and the financial viability of the transferee insurer. In In the matter of MDU Australian Insurance Co Pty Ltd [2008] FCA 490, Emmett J identified (at [7]) '[t]he critical consideration' as being whether the affected policyholders would be detrimentally affected. His Honour also said (at [9]) that the interests of the existing policyholders of the transferee insurer must be considered. Earlier, in Mercantile & General Reinsurance Co of Australia Ltd [2004] FCA 1773, his Honour had raised (at [23]) the question of the desirability of legislative amendment to make consideration of the interests of the latter mandatory. 26 The position must now be considered in the light of s 17F(1A) of the Act: see In the matter of Westport Insurance Corporation (No 2) [2009] FCA 1598 at [35]. That subsection provides: 'In deciding whether to confirm a scheme (with or without modifications), the Federal Court must have regard to: (a) the interests of the policyholders of a body corporate affected by the scheme; and (b) if a report relevant to all or part of the scheme has been filed with the Court under section 62ZI – that report; and (c) any other matter the Court considers relevant.' 27 Sub-section (b) is not applicable in the circumstances of this Scheme. 28 In line with Emmett J's suggestion, subs (a) now specifically requires the interests of the policyholders of the transferee company (i.e. Gordian) to be taken into account. 29 For the reasons outlined below, it was submitted that the Court should exercise its discretion to confirm the Scheme. The Transfer is an Intra-Group Transfer 30 Fundamentally, this scheme is part of the rationalisation or consolidation of the Enstar Group Ltd's Australian operations. In other words, the Australian policyholders of one subsidiary (Cop Re) will be transferred to another member of the same group (Gordian). 31 In circumstances where policyholders are simply being moved from one member of a group to another, there is less risk that they will thereby suffer any real disadvantage. That is particularly so where there are real and objective reasons for the rationalisation, and benefits to be gained therefrom. 32 As the Chief Financial Officer of Enstar Australia Ltd has observed in Ex 3, the transfer will reduce duplication in certain administrative functions (accounting, company secretarial and regulatory functions), and regulatory compliance costs (audit, taxation, actuarial services). The reduction in regulatory compliance costs achieved by the cancellation of Cop Re's separate authorisation as a general insurer by APRA is estimated to be about $430,000 per annum. 33 Consequently, the scheme can be seen to promote a legitimate objective for the Enstar group of companies consistent with the protection of policyholder interests. 34 Following the transfer, it is intended an application will be made to APRA to revoke Cop Re's authorisation, and surplus capital remaining in the Australian branch will be repatriated to Denmark. The Solvency Position of the Companies 35 Obviously, the central issue in determining whether policyholders are likely to be materially disadvantaged by the scheme is the adequacy of the capital position of the entity into which they are being transferred. 36 The capital adequacy of the two companies is conveniently set out in the actuarial report of Mr Gard (Ex 1). The most recent APRA returns considered in Mr Gard's report were those for the period ended 31 March 2010. It is apparent from the 30 September 2010 APRA returns in evidence that there has been no material adverse change. 37 The position described in the Gard report is as follows: (1) Cop Re had, as at 31 March 2010, a solvency ratio of 3.02. (2) Gordian had, as at 31 March 2010 (taking into account a proposed capital release, and the novation of certain claims), a solvency ratio of 2.66. (3) Following the transfer, Gordian is expected to have a solvency ratio of 2.64. (Following the change in APRA treatment of certain related-party loans, Mr Gard, in Ex 1, has calculated that the post-transfer solvency ratio will be 3.69). (4) It can thus be seen that: (a) Absent the change in APRA's treatment of certain of Gordian's related-party loans, the effect of the transfer on the solvency ratio enjoyed by Cop Re policyholders would have been a modest reduction (from 3.02 to 2.64). (b) Taking into account the APRA change, the effect of the transfer on the solvency ratio enjoyed by Cop Re policyholders will be an increase from 3.02 to 3.69. (c) The effect of the transfer on Gordian's policyholders is negligible (2.66 to 2.64, excluding the effect of the change in APRA policy). 38 Mr Gard also observed that: (1) The industry average solvency coverage ratio is 1.94, so policyholders will still enjoy above average security. (2) Even without the transfer, Cop Re could (with APRA approval) reduce its capital to a level that is sufficient to cover its insurance liabilities at a probability of sufficiency of 99.5%. Gordian holds sufficient assets to cover liabilities (including the Cop Re liabilities) at a probability of sufficiency of 99.5%, so the level of protection for policyholders following the transfer remains materially the same. Because Gordian is also an insurer in run-off, Cop Re's policyholders will continue to be protected by APRA rules precluding capital reductions that would leave assets equal to less than liabilities valued at a 99.5% probability of sufficiency. (3) There are benefits to Cop Re policyholders in moving from a small to a large insurer. The benefit arises because the occurrence of one unusually large claim prior to the transfer could have a material impact on the capital available to satisfy other claims, however, such a claim would have a negligible impact on the net assets of Gordian. 39 It was submitted that, from a policyholder security perspective, the scheme will not materially disadvantage the policyholders of either Cop Re or Gordian. 40 Mr Gard concluded that the scheme 'will not materially adversely impact the policyholders of either [Cop Re] or [Gordian]', and his conclusions were supported by the review of Mr Atkins (Ex 2), an independent actuary. Policy Terms 41 There will be no change to the policy terms and conditions of affected policyholders, apart from the substitution of Gordian as insurer. Claims Handling Procedures and Culture 42 At present, all claims and other activities of Cop Re and Gordian are managed by employees of Enstar Australia Ltd. Following the transfer, Enstar Australia staff will continue to manage Gordian's business. It is thus expected that claims will be managed in accordance with the same procedures, and in the context of the same culture, both pre- and post-transfer. Views of APRA and Affected Policyholders 43 The Court will place great weight, and reliance, on the attitude of APRA to the scheme. Given that APRA is the government regulator charged with ensuring that insurance businesses are conducted in such a way that the legitimate interests of policyholders are protected, the non-objection to the scheme by APRA will be a matter from which the Court can draw significant comfort. 44 Equally, the Court may take into account the extent to which affected policyholders, having been given notice of the scheme and an adequate opportunity to comment upon it, express or refrain from expressing a view in relation to the scheme. The lack of objection to the scheme by affected policyholders, in circumstances where they have been given an adequate opportunity to do so, is a matter speaking in favour of the confirmation of the scheme. Analysis 45 As noted in [3] above, one affected policyholder, Suncorp, has indicated that it objects to the Scheme. The detail of its objection is set out in its letter of 26 November 2010 (see [3(1)] above). Fundamentally, it appears to contend that there will be a reduction in policyholder security following the transfer. In my view, the contention has no substance. 46 The conditions attached to Cop Re's APRA authorisation are designed to impose restrictions on Cop Re (as the Australia branch of a foreign insurer) so as to provide security for policyholders equivalent to that enjoyed by policyholders of Australian incorporated insurers. Gordian, being an Australian incorporated insurer, is not subject to the additional restrictions customarily imposed on foreign insurers, but is subject to the full range of restrictions applicable to Australian insurers pursuant to the Act and Prudential Standards. 47 To the extent that Suncorp is concerned that it will suffer a reduction in solvency ratio as a result of the transfer, there are two answers to the objection. First, following APRA's change in policy regarding the treatment of certain related-party loans, Cop Re policyholders will be moving to an insurer with a higher solvency ratio. Secondly, the mere reduction in solvency ratio (especially one of a relatively minor order of magnitude) does not represent a material disadvantage to policyholders: Mercantile & General Reinsurance Co of Australia Limited [2004] FCA 1773; Re HDI-Gerling Australia Insurance Co Pty Ltd (No 2) [2010] FCA 669; In the matter of Combined Insurance Co of America [2010] FCA 962. 48 Suncorp was invited to attend the hearing on 2 December 2010 and to engage legal representation for that purpose. Moreover, it was indicated to Suncorp that neither Cop Re nor Gordian would oppose any application Suncorp may wish to make for leave to appear. Suncorp chose not to appear, but its letter of communication of that choice was produced to the Court (see [3(3)] above) (Ex 4). 49 As well as the matters referred to in [45] to [47] above, I also relied on the following two matters in making the orders I did on 2 December 2010 over Suncorp's objection: (1) The fact that APRA had no objection to the Scheme being confirmed as indicated in its letter to the Court following the hearing on 2 December 2010; and (2) the inference I drew from certain email communications that were in evidence as part of Ex 4 that Suncorp's objection to the Scheme had more to do with its inability to satisfactorily conclude commutation negotiations with the Enstar group than it did with a concern over policyholder security following the transfer. Of course, no evidence was led to rebut that inference. Preconditions to Making an Application 50 It is settled that steps required to be taken prior to the 'making' of an application need only be taken prior to the time at which the Court is moved for an order of confirmation of the scheme. They are not required to have been taken prior to the filing of the application in the Court registry: Re Armstrong Jones Life Assurance Ltd (1997) 74 FCR 160 at 163, per Emmet J; Re Royal & Sun Alliance Life Assurance Ltd (2000) 104 FCR 37 at 39, per Katz J; Re Insurance Australia Ltd at [30] – [37], per Lindgren J. 51 The fact that the required steps have not been taken has not been regarded as a matter precluding the Court from confirming a scheme. Rather, the failures are considered in the exercise of the Court's discretion to confirm the scheme: Re Armstrong Jones Life Assurance Ltd at 162; Re Royal & Sun Alliance Life Assurance Ltd at [16]. 52 A combined reading of s 17C(2) of the Act and Prudential Standard GPS 410 discloses that the following steps must be taken before an application for confirmation may be made: (1) The applicant must provide a copy of the scheme to APRA: s 17C(2)(a). That must be done before the steps outlined at points (5) and (6) below are taken: Prudential Standard GPS 410 para. 5. (2) The applicant must provide a copy of any actuarial report on which the scheme is based to APRA: s. 17C(2)(a). That must be done before the steps outlined at points (5) and (6) below are taken: Prudential Standard GPS 410 para 5. (3) The applicant must obtain APRA's approval of its summary of the scheme (the 'Scheme Summary'): Prudential Standard GPS 410 para 8. This approval must be obtained before the step outlined at point (5) below is taken: Prudential Standard GPS 410 para 8. (4) The applicant must obtain APRA's approval of its notice of intention: Prudential Standard GPS 410 para 9. (5) The applicant must publish a notice of intention to make the application: s 17C(2)(b). That notice must contain the information specified in Prudential Standard GPS 410 para 10. That notice must be published in (a) the Government Gazette and (b) one or more newspapers, approved by APRA, circulating in each State and Territory in which an affected policyholder resides: Prudential Standard GPS 410 para 9. This notice must be published before the step outlined at point (7) below is taken: Prudential Standard GPS 410 para 11. (6) The applicant must give to every affected policyholder the Scheme Summary described at point (3) above. In these proceedings, this requirement was waived pursuant to orders made on 26 October 2010. Those orders waived the requirement on the condition that certain other actions were taken. Those steps are outlined below. (7) The applicant must make a copy of the scheme available for public inspection from 9.00 a.m. until 5.00 p.m. every day (except weekends and public holidays) for a period of at least 15 days at an office of the applicant or some other location approved by APRA in each State and Territory in which an affected policyholder resides: Prudential Standard GPS 410 para 16. 53 The steps required to be taken in this case pursuant to the orders made on 26 October 2010 were as follows: (1) Cop Re was required, before the public inspection period commenced, to send a copy of the Scheme Summary to each policyholder identified by the searches identified in accordance with an affidavit of Vu Tran Pham, read on 26 October 2010. (2) Cop Re was required, before the public inspection period commenced, to publish an advertisement in certain specified publications. (3) Cop Re was required to display on the Enstar Australia Ltd website a link to the various scheme documents. (4) Cop Re was required to make the scheme documents available for public inspection, for a period of 15 business days, at Enstar Group Ltd's UK offices. (5) Cop Re was required to provide a copy of the scheme documents to any affected policyholder that requested them, free of charge. 54 Evidence was read at the hearing demonstrating that all of the above steps had been complied with. I certify that the preceding fifty-four (54) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds. Associate: Dated: 21 January 2011