RE SUN LIFE FINANCIAL (HONG KONG) LTD

HCMP 1416/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1416 OF 2006

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REASONS  FOR  JUDGMENT

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1.  This is an amended petition presently jointly by Sun Life Financial (Hong Kong) Limited (“Original SLHK”) and Sun Life Hong Kong Limited (“New SLHK”) pursuant to section 24 of the Insurance Companies Ordinance, Cap. 41.  The petitioners seek the sanction of the court to an amended scheme (“the Scheme”) for the transfer to New SLHK of the long term business, as defined in section 2(1) of Cap. 41, carried on by Original SLHK in Hong Kong, and to seek ancillary relief regarding the Scheme under section 25.

The background of Original SLHK

2.  Original SLHK was incorporated in Bermuda on 29 March 1999, under the name of Sun Life of Canada (International) Limited, with its principal activity being to carry on life insurance business.  It was registered as oversea company under Part XI of the Companies Ordinance, Cap. 32 on 28 May 1999, with a principal place of business in Hong Kong.  Its name was changed name to its present name on 23 August 2001.

3.  The authorised share capital of Original SLHK is US$2.5 million, divided into 2.5 million shares of US$1.00 each, all of which are issued.  It is authorised by the Insurance Authority of Hong Kong to carry on, and does carry on, as insurer, long term business in Hong Kong of classes A and C in Part 2 of the First Schedule to Cap. 41.

4.  Original SLHK is also registered under the Insurance Act 1978 of Bermuda (“the Bermuda Act”) as a long term insurer authorised to carry on long term business and is regulated by the Bermuda Monetary Authority.  The Bermuda Act renders void any scheme for transfer of long term business to which it applies unless sanctioned by the Supreme Court of Bermuda.  So Original SLHK and New SLHK have also brought proceedings in Bermuda seeking sanction for a scheme (“the Bermuda Scheme”) on terms substantially the same as the Scheme in Hong Kong.  It is intended that the order in Hong Kong shall become effective upon, inter alia, the Bermuda Scheme receiving sanction by the Supreme Court of Bermuda.

5.  Original SLHK is a wholly owned subsidiary of Sun Life Assurance Company of Canada, all of the common shares of which are owned by Sun Life Financial Inc..  The Sun Life Financial Inc. group of companies (“Sun Life Financial Group”) has its head office in Toronto, Canada.

The background of New SLHK

6.  New SLHK was incorporated in Bermuda on 15 October 1985 under the name of Lombard Life Assurance Limited, with its principal activity being to carry on long term insurance business and retirement business.  It has changed its name several times and its name was changed to its present name on 24 February 2006.  It was registered as an oversea company under Part XI of Cap. 32 on 4 December 1986, with a principal place of business in Hong Kong, being the same place of business as Original SLHK.

7.  The authorised share capital of New SLHK is (i) US$500 million divided into 500 million shares of US$1.00 each, of which 242,636,516 are issued; and (ii) HK$200 million divided into 200 million shares of HK$1.00 each, all of which are issued.  It is authorised by the Insurance Authority of Hong Kong to carry on, and does carry on, as insurer, long term business in Hong Kong of classes A, C, D, G, H and I.

8.  New SLHK is also an insurance company registered under the Bermuda Act as long term insurer authorised to carry on long term business, and is regulated by the Bermuda Monetary Authority.

9.  On 18 October 2005, Sun Life Assurance Company of Canada acquired 100% of the shares in New SLHK and BestServe Financial Limited, the Hong Kong insurance and pension operations of the Commonwealth Bank of Australia (“the Acquisition”).  Following the Acquisition, New SLHK became a wholly owned subsidiary of Sun Life Assurance Company of Canada and a member of the Sun Life Financial Group.

The long term business of Original SLHK and New SLHK

10.  As at 31 December 2005, the long term business carried on by Original SLHK in Hong Kong comprised 98,699 in force individual life insurance policies.  The long term business had gross annualised premium of HK$972 million and a gross sum assured of HK$55,631 million.

11.  As at 31 December 2005, the long term business carried on by New SLHK in Hong Kong comprised 220,108 in force individual life insurance policies; 14,536 mandatory provident fund schemes provided under the Mandatory Provident Fund Schemes Ordinance, Cap. 485, of which 73,481 individuals are members; 177 voluntary occupational retirement schemes provided under the Occupational Retirement Schemes Ordinance, Cap. 426, of which 6,749 individuals are members; and 595 group life or medical insurance policies, under which 82,169 individuals are insured.  The long term business had gross annualised premium of HK$2,422 million and a gross sum assured of HK$123,516 million (HK$128,354 million including fund balances).

The transfer of Original SLHK’s business, assets and liabilities to New SLHK

12.  Following the Acquisition, Sun Life Financial Inc. determined that it wished to consolidate within a single entity its long term business and retirement business in Hong Kong, to simplify business processes and operations, and to reduce operating costs and integration risks.

13.  The combination of the two businesses is expected to have positive effects, including the positive impact of potential operating efficiencies expected to result from the transfer, and the benefits to policy holders from the spreading of insurance and investment risk over a larger pool of policies and assets.

14.  The Scheme provides for the transfer by Original SLHK to New SLHK of the policies comprising Original SLHK’s long term business carried on in Hong Kong and all liabilities and assets attributable to such business as at the effective date of the Scheme.  Both companies have discussed the Scheme in draft with the Insurance Authority of Hong Kong, and the document in its final form takes into account the comments made by the Insurance Authority.

15.  Pursuant to section 24(2) of Cap. 41, an independent actuary has prepared a report on the terms of the Scheme.  He has concluded that the Scheme will have no adverse effect on the reasonable benefit expectations of the transferring policy holders of Original SLHK or the existing policy holders of New SLHK, it will have no adverse effect on the financial security of the transferring policy holders of Original SLHK, the security of the existing policy holders of New SLHK will not be adversely impacted by the inclusion of the transferring policy holders, and he is satisfied that the Scheme provides sufficient safeguards to ensure that it operates as presented.

16.  Under the Scheme, none of the assets and liabilities of the schemes provided under the Mandatory Provident Fund Schemes Ordinance or the Occupational Retirement Schemes Ordinance will be transferred, since these schemes were issued by New SLHK.  All material aspects of the relevant schemes provided under these ordinances will remain unchanged, and the independent actuary has stated in his report that the policy holders and members of schemes in these classes of business will be unaffected by the Scheme.

17.  For group life and medical business, New SLHK has committed that it will continue to pay all guaranteed benefits offered under this business based on the existing policy documents.  It is stated in the report of the independent actuary that policy holders will be treated the same before and after the effective date of the Scheme and will not be affected by the transfer of the long term business to New SLHK.

Procedural requirements prior to sanction

18.  Other than the independent actuary’s report, the requirements in section 24(3) have been complied with.  Pursuant to the order made on the summons for directions on 1 August 2006, the approved notice relating to the petition was gazetted and advertised; the statutory statement in the approved circular was sent to policy holders by post, with an accompanying letter and a “Questions & Answers” document; the circular, the amended petition, the Scheme and a summary of the independent actuary’s report were posted on the website of the two companies until the hearing of the petition; the amended petition and the independent actuary’s report were made available for inspection at the offices of the two companies from 11 August 2006 to 8 September 2006.

Substantive requirement prior to sanction

19.  Under section 24(6), the court must also be satisfied that the transferee insurer is, or immediately after the making of the order will be, authorised to carry on any long term business to be transferred under the scheme.  This requirement is satisfied as New SLHK is authorised to underwrite the transferring business in classes A and C.

20.  The Securities and Futures Commission has required fresh authorisation to be obtained for two products, “Fortune” and “Annuity 100”, notwithstanding New SLHK has the necessary licence to issue and administer these products.  Both are investment-linked assurance schemes authorised under the Securities and Futures Ordinance, Cap. 571.  Fortune is currently issued and administered by Original SLHK.  Annuity 100 is now closed to new business, but there are a number of in-force policy holders.  The necessary authorisation was granted to New SLHK on 28 September 2006 on a number of conditions.  New SLHK has confirmed it will meet the conditions and pay the necessary fees.

The enquiries received

21.  The two companies received a total of 400 enquiries, of which 394 were general enquiries about the Scheme and were answered over the telephone by the information hotline staff and, where appropriate, in writing.  There has been no further correspondence following responses to these general enquiries.

22.  The other six enquiries received were complaints and objections of policy holders.  In respect of four of them, the companies have not received any further enquiry or correspondence after they have responded to the initial complaint.  A fifth policy holder has made a complaint with the office of the Commissioner of Insurance about the Scheme, on the basis that there may be a change in the level of dividends in his policies with Original SLHK, notwithstanding the explanation given to him that the terms and conditions of his policies will remain unchanged as a result of the Scheme.

23.  The remaining complaint is a letter dated 25 August 2006 from Anthony Lau, a policy holder of Original SLHK.  Mr. Lau queried whether the Scheme would prejudice policy holders as a whole, on the basis that New SLHK is involved in “material litigation/arbitration proceedings”.  The proceedings relate to a dispute arising out of a Co-operation Agreement and other General Agency Agreements between New SLHK and its agent.  Original SLHK replied by letter dated 30 August 2006 that as the dispute is independent of and unrelated to the Scheme, the rights of Mr. Lau and other parties to the agreements would not be affected.  In his response dated 8 September 2006, Mr. Lau repeated his concern whether the interests of Original SLHK policy holders as a whole would be adversely affected.  He mentioned that apart from the proceedings involving him, there is “more than one material arbitration/litigation proceedings of similar kinds remaining unsettled”.

24.  Mr. Lau has not filed any affirmation in these proceedings.  No policy holder or other interested person attended the hearing of the petition to raise objections.

The disputes involving New SLHK

25.  The proceedings referred to in Mr. Lau’s letters relate to two separate contractual disputes between New SLHK and its former corporate agent.  In the first dispute, which is not related to Mr. Lau, arbitration proceedings have been commenced.  In the second dispute, in which Mr. Lau and companies related to him are potential parties, no arbitration or other proceedings have been commenced.

26.  In the arbitration proceedings in respect of the first dispute, the amount claimed against New SLHK has not been precisely quantified by the claimant but it would appear that the claim is approximately HK$4 million, plus general damages.  New SLHK has a counterclaim of approximately HK$10 million.  The amount claimed by Mr. Lau and companies related to him in the second dispute is approximately HK$1 million to HK$1.5 million, and New SLHK has a counterclaim of approximately HK$1.9 million.

27.  According to the audited accounts of Original SLHK and New SLHK as at 31 December 2005, the net assets for Original SLHK amounted to HK$818 million translating into 268% of the required minimum solvency margin, the net assets for New SLHK amounted to HK$1,184 million translating into 266% of the required minimum solvency margin.  Had the Scheme taken effect on 31 December 2005, the total assets would have amounted to HK$2,002 million and this would have been 267% of the required minimum solvency margin.  All percentages exceed the 100% minimum solvency margin requirement in Hong Kong.

28.  When compared to the net assets value and the solvency margin percentages, the amounts in dispute are immaterial.  The independent actuary has confirmed that in view of the small aggregate potential liability of New SLHK in the two disputes, no changes would need to be made to his report.  I do not think the matters raised by Mr. Lau would have any material adverse impact on any interested person.

The exercise of discretion for sanction

29.  The court has an unfettered discretion under section 24 whether to give sanction to a scheme of this nature.  Its discretion would be exercised according to principles which give due recognition to the commercial judgment entrusted by the company’s constitution to its board of directors.  The court is concerned whether a policy holder or other interested person would be affected adversely by the scheme.  The statutory mechanism assigns important roles to the independent actuary and the Insurance Authority and the court will pay close attention to their views, as the question of whether policy holders would be adversely affected is largely actuarial, and the Insurance Authority can be expected to have the necessary material to form an informed opinion.  The question in the end is whether the scheme as a whole is fair as between the interests of the different classes of persons who are affected (Re AXA Equity and Law Life Assurance Society plc [2001] 2 BCLC 447 at 468e to 469b).

30.  I am satisfied it is appropriate to sanction the Scheme, having regard to the independent actuary’s report and the views of the Insurance Authority.  I have therefore made an order in terms of the draft submitted.