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HCMP 2027/2013
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
MISCELLANEOUS PROCEEDINGS NO 2027 OF 2013
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IN THE MATTER of THE PRUDENTIAL ASSURANCE COMPANY LIMITED (英國保誠保險有限公司)
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and
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IN THE MATTER of Prudential Hong Kong Limited (保誠保險有限公司)
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and
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IN THE MATTER of an application under Section 24 and section 25 of the Insurance Companies Ordinance (Cap 41)
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| Before: Hon G Lam J in Court |
| Dates of Hearing: 26 November 2013 |
| Date of Judgment: 2 December 2013 |
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J U D G M E N T
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Introduction
1. The transfer of any insurance business that falls within the meaning of “long term business” is regulated in Hong Kong under Part IV of the Insurance Companies Ordinance (Cap 41) (“the Ordinance”) and requires the sanction of the Court of First Instance of the High Court of Hong Kong. “Long term business” includes, among others, life insurance, retirement scheme and certain kinds of health insurance (see s 2 of the Ordinance).
2. The Prudential Assurance Company Limited (“PAC”), which was incorporated in England and Wales in 1881, has operated a branch office in Hong Kong since 1964. The Hong Kong Branch has since 1977 carried on “long term business” in the territory within the meaning of the Ordinance. It is the last remaining Asian branch office of PAC and is now a very substantial business in its own right, having operated on a stand-alone basis for many years. New long term insurance business is distributed by the Hong Kong Branch’s sale force which includes direct employees and over 5,000 authorised agents and through its bank distribution partners.
3. The long term business carried on by PAC’s Hong Kong Branch in or from Hong Kong (“the Business”) has expanded rapidly in recent years and has been growing in size relative to PAC’s UK and Europe business. PAC has a total of 9.5 million policy holders of which around 800,000 have policies taken out in Hong Kong. The Business amounts to approximately 1.3 million policies, with liabilities as at 31 December 2012 of approximately HK$118 billion. This represented approximately 9% of PAC’s long term business as at the end of 2012.
4. The Prudential group, including PAC’s holding company Prudential plc and its subsidiaries, now wish to have the entire Business transferred from PAC’s Hong Kong Branch to a local company called Prudential Hong Kong Limited (“PHKL”), which was incorporated specifically for that purpose in 2008. PHKL is a subsidiary of PAC with an issued share capital of HK$200 million. The proposal would involve, using estimated values as at the end of 2012, the transfer of £13 billion in assets and the associated liabilities to PHKL, representing approximately 10% of PAC’s long-term fund at that date.
5. Under the law of Hong Kong, such a transfer can only lawfully take place pursuant to a scheme sanctioned by the Court of First Instance under s 24 of the Ordinance. This is to be contrasted with the transfer of general insurance business which may take place pursuant to s 25D of the Ordinance without the sanction of the court. PAC proposes to transfer the other insurance policies written by its Hong Kong Branch to another subsidiary incorporated in Hong Kong.
6. PAC and PHKL have now applied jointly by petition to this court for sanction of the scheme of transfer. For reasons I shall explain, the scheme has been split into two schemes, called the Main Scheme and the EEA Policies Scheme.
Reasons for there being two schemes
7. The petitioners also intend to seek the sanction of the High Court of England and Wales pursuant to s 105(4) of the Financial Services and Markets Act 2000 (“the 2000 Act”) in respect of the scheme as if it were an insurance business transfer scheme within the terms of s 105 of the 2000 Act. That decision was made following consultation with PAC’s regulators in the United Kingdom. The reasons for seeking the sanction of the English court are as follows:
(1) the Business comprises a number of policies which are governed by English law;
(2) the Business is a significant part of PAC and its transfer includes a significant part of the PAC Inherited Estate (a part of the with-profits fund which I shall describe below). As PAC is a company incorporated in England and Wales, it is considered appropriate that PAC apply to the English court for approval of the scheme;
(3) the use of an insurance business transfer process based only in Hong Kong would raise practical difficulties and cost implications for those policyholders who are based in the UK and Europe and who may wish to make representations.
8. The English court will only have jurisdiction to sanction the scheme if it falls within the scope of what is called a “Case 3 excluded scheme” in light of s 105(3) of the 2000 Act.
9. A crucial condition for qualifying as a “Case 3 excluded scheme” is that the business to be transferred under the scheme does not include policies of insurance against risks arising in an “EEA State”.
10. EEA State is defined in paragraph 8 of Part 1 of Schedule 3 to the 2000 Act, which in turn leads to Schedule 1 to the Interpretation Act 1978, and in essence means a State which is a member State of the European Union or a party to the agreement on the European Economic Area signed at Oporto on 2 May 1992 together with the Protocol signed at Brussels on 17 March 1993, as modified or supplemented from time to time.
11. In order to ensure that the scheme presented to the English court for sanction meets that requirement, the petitioners have split the scheme into two by reference to the location of the risks insured against, viz. a “EEA Policies Scheme” for the transfer of any policies of insurance against risks arising in an EEA State (including any such policies in respect of which an EEA State is the “State of the commitment”), and a “Main Scheme” for the transfer of the long term insurance business of PAC’s Hong Kong Branch with the exception of the policies falling within the EEA Policies Scheme.
12. The petitioners intend to apply to the English court for an order sanctioning the Main Scheme as if it were an insurance business transfer scheme under the 2000 Act. I am told that the application will be heard on 10 December 2013. No such application will be made in respect of the EEA Policies Scheme.
13. As explained above, the scheme has been split into two solely for the purpose of allowing an application to be made to the English court for sanction of the Main Scheme. The EEA Policies Scheme incorporates the relevant provisions of the Main Scheme. The effect of the EEA Policies Scheme on any policy transferring under it is identical to that of the Main Scheme. Accordingly no distinction between the two schemes is made in the evidence on the merits and effects of the proposed transfer. This also explains why a single petition has been presented to this court to apply for sanction of both schemes. The division of the transfer into two schemes is artificial from the perspective of Hong Kong law. Together the Main Scheme and EEA Scheme cover the entirety of the Business. Accordingly, I shall refer below to the two schemes collectively as a single scheme without distinction.
14. Under the 2000 Act, as a condition for the English court to give sanction of the Main Scheme, it is necessary for the petitioners to have obtained the approval of the Hong Kong court in respect of that scheme. The petitioners have also stated that the transfer will not proceed unless the English court sanctions the Main Scheme.
15. Subject to the sanction of the courts in both jurisdictions, the effective date of the transfer under the scheme is expected to be 00:01 am UK time on 1 January 2014.
The legal framework in Hong Kong
16. The application for sanction is made under s 24(1) of the Ordinance, which provides:
“Where it is proposed to carry out a scheme under which the whole or part of the long term business carried on in Hong Kong by an insurer ("the transferor company") is to be transferred to another insurer ("the transferee company") the transferor company or transferee company may apply to the Court of First Instance, by petition, for an order sanctioning the scheme.”
17. A number of mandatory conditions for such sanction are stipulated in s 24. In brief they include the following:
(1) that the petition is accompanied by a report on the terms of the scheme by an independent actuary;
(2) that a notice of the application has been published in the Gazette and in newspapers giving details for the inspection of the petition and the independent actuary’s report;
(3) that a statement setting out the terms of the scheme and containing a summary of the independent actuary’s report has been sent to the policy holders and to the members of the insurers concerned;
(4) that a copy of the petition, of the independent actuary’s report and of the explanatory statement to policy holders and members has been served on the Insurance Authority not less than 21 days before;
(5) that copies of the petition and of the independent actuary’s report have been open to inspection for a period of not less than 21 days; and
(6) that the transferee company is, or immediately after the making of the order will be, authorized to carry on any long term business to be transferred under the scheme.
18. If these conditions are satisfied, the court may in its discretion sanction the scheme. The principles that guide the exercise of this discretion have been explained by Hoffmann J in Re London Life Association Ltd (21 February 1989, unreported) and summarised by Evans-Lombe J in Re AXA Equity and Law Life Assurance Society plc [2001] 2 BCLC 447 at...
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