THE PACIFIC INSURANCE CO. LTD. v. THE INSURANCE AUTHORITY

1991, No. MP3547

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

------------------

-----------------

------------------------

J U D G M E N T

-------------------------

1. Mr. Grifffiths, counsel for the Insurance Authority (the Authority) conceded at the beginning of the third day of the hearing that the application by the Pacific Insurance Company Limited (the company) for judicial review must succeed on the ground advanced that there has been no change of controller within the meaning of s.26(4) of the Insurance Companies Ordinance (the Ordinance) following an amendment to s.9(1)(c)(ii) that came into effect on the 16th March 1989. Accordingly, he agrees that orders of certiorari should issue to quash the two notices issued by the Authority both dated the 20th August 1991.

2. The Court cannot, of course, deal with judicial review proceedings by consent so that it is necessary to consider the submissions made by counsel on the issue that has been conceded and upon the matter of costs which is in issue. The application was heard in chambers pursuant to an order made by Leonard J. on the 27th November 1991 but as matters of public-interest are involved, I am handing down my judgment in court.

3. The company started business as an insurer in 1960 and is now the largest insurer of motor vehicles in Hong Kong. Mr Thomas Cheung became chairman of the company in 1973. Mr Cheung holds 67.33% of the shares in the company and the remaining 32.67% are held by Mutual Underwriters Limited in which company Mr Thomas Cheung holds 95% of the shares, the other 5% being held by Pacific Life Limited, a subsidiary of the company. Mr S.S. Tan became the executive director of the company in 1978 and managing director in 1981. Mr Tan is also a director of Mutual Underwriters Limited. This was the factual situation both before the 30th June 1983, the date when the Insurance Companies Ordinance came into force and after that date and has remained so until the present time.

4. During 1991, the Authority, pursuant to its regulatory powers under the Ordinance, carried out an inspection of the books and records of the company. As a result of this investigation, a meeting was held on the 19th August 1991 between representatives of the Authority and representatives of the company when the company was informed that it was required to comply with certain matters under the Ordinance. On the following day, the 20th August 1991, two notices were served by the Authority upon the company that set out the requirements to be complied with. The first notice was issued under s.35 of the Ordinance and was exercised under s.26(4) and required the company to appoint an independent firm of accountants approved by the Authority to carry out a special investigation of the company's provisions for claims outstanding and unexpired risks and to submit a report to the Authority. The second notice was issued in accordance with s.35 and s.35A of the Ordinance, again under s.26(4) in which the company was required to make a fixed deposit of $50m with a bank in Hong Kong in the name of the Authority to be held in trust for the company. Restrictions were also made on the company's right to use its funds in certain circumstances including the making of investments without first obtaining the written consent of the Authority. The notices were issued on the grounds that there had been a change in the control of the company as a result of the amendment to s.9(1)(c)(ii) of the Ordinance on the 16th March 1989 when the voting power of one third was reduced to 15%. No complaint, however, has been made at any time by the Authority with regard to the solvency of the company. Section 35 reads :-

"35. Subject to section 26(5), the Insurance Authority may require an insurer to take such action as appears to him to be appropriate for the purpose of protecting policy holders or potential policy holders of the insurer against the risk that the insurer may be unable to meet its liabilities or to fulfil the reasonable expectations of policy holders or potential policy holders."

Section 35A provides a requirement for an insurer to make a deposit under s.35. Section 26(5) provides :-

"26. (5) The power conferred on the Insurance Authority by section 35 shall not be exercisable except in a case in which he considers that the purpose mentioned in that section cannot be appropriately achieved by the exercise of the powers conferred by sections 27 to 34 or by the exercise of those powers alone."

5. Leave for judicial review was granted to the company by Keith J. on the 14th November 1991.

6. The ground upon which Mr Griffiths made his concession is that upon the facts, there had been no change of control of the company since the amendment of s.9(1)(c)(ii). Notices, as I have said, were issued by the Authority under s.26(.4) of the ordinance which where relevant reads :-

"26.(4) Any power conferred on the Insurance Authority by sections 27 to 32, 34(1) or 35 shall also be exercisable, whether or not any of the grounds specified in subsections (1), (2) and (3) exists, in relation to-

(a)....

(b)    any insurer in the case of which a person has, after the commencement of this Ordinance, become a controller within the meaning of section 9(1)(c),

if that power is exercised before the expiration of the period of 5 years ('the relevant period') beginning on the latest date on which the insurer was so authorized or the date on which that person became such a controller, as the case may be; ..."

Section 8(2) provides that the Authority shall not authorise a company to carry on insurance business if any director or controller of the company is not a fit and proper person. The meaning of "controller" and "associate" are set out in s.9 of the Ordinance which where relevant before the 1989 amendment read as follows :-

"(1)     In section 8(2) 'controller', in relation to a company ('the applicant') means-

(a)     a managing director of the applicant or of a body corporate of which it is a subsidiary;

(b)     a chief executive of the applicant or of a body corporate, being an insurer, of which it is a subsidiary;

(c)     a person-

(i) in accordance with whose directions or instructions the directors of the applicant or of a body corporate of which it is a subsidiary (or any of them) are accustomed to act; or

(ii) who, alone or with any associate or through a nominee, is entitled to exercise, or control the exercise of, one third or more of the voting power at any general' meeting of the applicant or of a body corporate of which it is a subsidiary.

(4)     In this section 'associate', in relation to any person, means-

(d)     if that person is a body corporate-

(i) any director of that body corporate;",

7. On the 16th March 1989, as I have said the figure of one third referred to in s.9(1)(c)(ii) was amended to 15%.

8. Following the amendment, the company, at the request of the Authority, submitted a Form B on the 31st July 1989 that requires particulars of "directors" or "controllers" to be given of the company. The form set out details of the directors and controllers as at the 16th March 1989 when the amendment became effective. The document refers to Mutual Underwriters Limited being a body corporate which became a director or controller of the company on the 16th March 1989 but only lists on an attached sheet the names of Mr Cheung and Mr Tan as directors and controllers. No Form B had been filed with the Authority before the change to the law. It was therefore contended by the Authority that by virtue of the reduction in voting power from one third to 15%, Mutual Underwriters Limited had become a controller of the company within the meaning of s.9(1)(c). Although it was submitted that Form B had caused some confusion to the Authority, I consider that this contention was unfounded. There could be no doubt upon the facts that there had been no change in controller at the date of the amendment. Mr Cheung, as I have said, owned 67.33% and Mutual Underwriters Limited 32.67% of the company since before and after the ordinance came into operation whilst Mr Cheung owns 95% of Mutual Underwriters Limited and Pacific Life Limited, a wholly owned subsidiary of the company, 5% whilst Mr Tan has been the Chief Executive since 1981. In any event, if there had been any confusion which, as I say, I do not accept the Authority could have easily resolved the matter by an appropriate enquiry.

9. Having regard to s.9(1)(c)(i), it is clear that Mr Thomas Cheung has been a controller at all material times whilst Mutual Underwriters Limited was a controller within the meaning of s.9(1)(c)(ii). Mr Thomas Cheung and Mr Tan have been directors of Mutual Underwriters Limited within the definition of associate under s.9(4)(d)(i).

10. The concession by Mr Griffiths was limited to the factual situation and not to the argument that was also put forward by Mr Thomas, counsel for the company, that there could not be a change of controller by way of operation of law. There is no necessity in view of the concession to come to any decision on this matter, but having regard to s.13A, s.13B and s.14(1)-, (2) and (3) of the Ordinance that require prior notice to be given to the Authority of particulars with regard to directors and controllers which contain penal . sanctions for non-compliance, I believe, on a provisional view, that a change of controller cannot be effected by operation of law.

11. However, upon the facts of this case I accept that there was no change of controller when the law was changed in 1989.

12. In view of the concession which disposes of the matter, it is unnecessary to consider the other grounds that were raised by the company with regard to procedural unfairness and the use by the Authority of the powers conferred by s.26(5) and s.35 of the Ordinance. Mr Thomas, for the company, had already addressed me in some detail upon these grounds although his submission had not been completed when Mr Griffiths made his concession.

13. As I have not heard from Mr Griffiths in reply, I am not in a position to come to any conclusion on these submissions. Nevertheless, I believe it will be of assistance to the Authority to indicate that I have formed a provisional view upon the evidence that the matter should have been handled with a greater degree of circumspection for Mr Thomas advanced a very strong argument that the Authority did not give the company a proper opportunity to present its case before issuing the notices bearing in mind the uncontradicted evidence with regard to the sound financial standing of the company and that there was no evidence of any risk to its policy holders.

14. Mr Griffiths submitted that in view of the confusion to the Authority arising from Form B, each side should bear its own costs. However, as I have said, if the issue had been properly addressed by the Authority, it would have become apparent that the company was entitled to succeed on this ground. In any event, it was necessary for the company to bring these proceedings whether or not it succeeded on a technicality. As a result, I am quite satisfied that the company is entitled to the costs of these proceedings including the costs of the application for leave and those which were previously reserved.

15. There will therefore be an order of certiorari to quash the two notices with costs to the company and as the proceedings have been in chambers, I shall certify fit for two counsel. May I conclude by expressing my gratitude to both counsel for their assistance.