IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(MR JUSTICE NEUBERGER)
| Royal Courts of Justice Strand London WC2 |
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| 16 July 1999 |
LORD JUSTICE SIMON BROWN
LORD JUSTICE CHADWICK
MR JUSTICE RATTEE
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| In the matter of | ||
| FRIENDS PROVIDENT LIFE OFFICE | ||
| and | ||
| FRIENDS PROVIDENT LINKED LIFE ASSURANCE LIMITED |
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(Transcript of the handed down judgment of
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____________________MR R HOLLINGTON QC (Instructed by the Legal Department of Friends Provident) appeared on behalf of the Appellant
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HTML VERSION OF JUDGMENT (AS APPROVED BY THE COURT)
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The circumstances in which FPLO and FPLLA wish to enter into a scheme for the transfer of business appear from the affidavit of their director and secretary, Mr Brian Sweetland, sworn on 3 September 1998 in support of the petition. They may be stated shortly. In 1983 the Friends Provident Group, of which both FPLO and FPLLA are members, decided to market individual unit-linked life contacts; that is to say, contracts under which the value of the benefits would be linked to the performance of internal investment funds established for that purpose. For reasons which it is unnecessary to explain in detail, but which stemmed from the treatment for the purposes of taxation of life companies carrying on both unit-linked and non-linked (or conventional) business, it was thought advantageous for the unit linked policies to be issued by FPLO; but for the relevant premiums to be passed on to, and for the relevant funds to be held by, FPLLA as re-assurer. To that end, FPLLA issued a single policy of re-insurance in favour of FPLO. Under that policy FPLO passes to FPLLA so much of the premiums which it receives from individual policy holders in respect of the unit-linked life policies which it (FPLO) issues as is required (i) to purchase the required number of units in the investment funds held by FPLLA – that is to say, the number of units required to provide the benefits under the individual policies, (ii) to provide a minimum level of death cover, sufficient to ensure that FPLLA’s business can properly be treated as long term insurance business, and (iii) to enable FPLLA to meet its administrative expenses. All FPLLA’s business is re-assurance business, written in favour of FPLO under that single policy of re-insurance. FPLLA has, itself, entered into a further re-insurance arrangement with another company in the group, FP Life Assurance Limited (“FPLA”) under which FPLLA’s liabilities in respect of Property units are retroceded to FPLA.
In 1990 the tax treatment of life companies carrying on both unit-linked and conventional business altered. The linked and non-linked business is now segregated for tax purposes; with the result that the reason for the arrangements between FPLO and FPLLA which I have described no longer exists. With the object of eliminating the complexities to which the arrangements give rise and of saving certain administrative expenses, those managing the affairs of the Friends Provident Group wish to dissolve those arrangements. The objective is to determine the liabilities of FPLLA under the re-insurance policy and to transfer its assets and other liabilities (if any) to FPLO.
It is accepted that that objective could readily be achieved (without any need for the sanction of the court) by the surrender by FPLO of the single re-insurance policy in consideration for the transfer by FPLLA of the investments which it holds; but, it is said, a transaction in that form would or might give rise to substantial liability to tax on any gain accruing to FPLLA on the disposal of its assets. The amount of that potential tax charge is such that it would outweigh any benefits which would accrue from the elimination of complexities and the saving of administrative expenses. Accordingly, the surrender of the re-insurance policy in return for a transfer of assets is not acceptable on commercial grounds. If that were the only way in which the objective could be achieved, the objective would be abandoned on the grounds that the cost exceeded the benefit.
But, it is said, the objective can also be achieved by a transfer of the whole business of FPLLA to FPLO. If the transaction can take that form, there are benefits to be achieved. That is because there will be no charge to tax in respect of gains arising on a transfer of business in accordance with a scheme sanctioned under Part I of schedule 2C to the 1982 Act – see section 213(5) of the Taxation of Chargeable Gains Act 1992.
The scheme for which sanction is sought is annexed to the petition. The “Operative Date” is defined as the day, following an order of the High Court sanctioning the scheme, which shall be appointed as the operative date by a resolution of the board of directors of FPLO. “Transferred Business” means the long term business of FPLLA, including all liabilities whatsoever (whether present or future, certain or contingent) of FPLLA attributable to its long term business, including (without prejudice to the generality of the foregoing) all liability to taxation, duties and to other imposts attributable to its long term business or to the transfer thereof, whenever incurred. “Transferred Assets” means all property of FPLLA whatsoever as at the Operative Date properly attributable to its long term business. The definition of Transferred Assets expressly excludes all property, assets and liabilities (sic) of FPLLA properly attributable to its shareholders. Clause 1 of the scheme is in these terms:
FPLO shall with effect from the Operative Date acquire the Transferred Business and the Transferred Assets and amalgamate the assets and liabilities so acquired with those comprised in its existing long term business subject to the provisions of this Scheme.
Clause 2 requires FPLLA to make available to FPLO any allowable tax losses attaching to the Transferred Business at the Operative Date; and clause 3 requires both FPLLA and FPLO to use their best endeavours to procure that the reassurance arrangements with FPLA remain in force notwithstanding that the liabilities thereby reassured had ceased to be liabilities of FPLLA and had become liabilities of FPLO.
The purpose and intent of the scheme is that, upon transfer to FPLO of FPLLA’s business, the liability of FPLLA as re-insurer (under the single re-insurance contract) of the liabilities of FPLO under the unit-linked policies will merge with the right of FPLO as re-insured to enforce the re-insurance contract and will be extinguished by operation of law. That will leave FPLO with its liabilities under the unit-linked policies and with the investment funds, transferred from FPLLA, which it needs to cover those liabilities. The economic, or commercial, effect of the scheme will be indistinguishable from that which would result from a surrender of the re-insurance policy in consideration for a transfer of assets. But there will be no tax charge.
The scheme, if regarded as a scheme for the transfer of the long term business of FPLLA, cannot take effect without the sanction of the court. The reason is to be found in the provisions of section 49 of, and Part I of schedule 2C to, the Insurance Companies Act 1982. Sub-paragraphs 1(1) and 1(3) in Part I of schedule 2C are in these terms, so far as material:
1(1) Where it is proposed to carry out a scheme under which the whole or part of the long term business carried on by an insurance company . . . is to be transferred to another body . . . the transferor company or the transferee company may apply to the court, by petition, for an order sanctioning the scheme.
1(3) No such transfer as is mentioned in sub-paragraph (1) above shall be carried out unless the scheme relating to the transfer has been sanctioned by the court in accordance with this Part of this Schedule . . .
If, on a proper analysis, the scheme is not a scheme for the transfer of the long term business of FPLLA, no sanction is required. The prohibition in sub-paragraph 1(3) has no application. But, in those circumstances, the transfer would not fall within section 213(5) of the Taxation of Chargeable Gains Act 1992 and the beneficial tax treatment which that section allows would be lost. It is for that reason that FPLO and FPLLA are concerned to satisfy the court both that the scheme requires sanction and that sanction should be granted.
Mr Justice Neuberger identified three questions which, as he saw the matter, he needed to address. First, whether re-insurance business of the type entered into between FPLO and FPLLA fell within Part I of schedule 2C of the 1982 Act. Second, whether (on a proper analysis) the scheme which the court was asked to sanction was a scheme under which the whole or part of the long term business of FPLLA “is to be transferred” to FPLO within the meaning of sub-paragraph 1(1) of Part I of schedule 2C. Third, whether the court ought to refuse its sanction to the scheme in the circumstances that the same result could be achieved by a cancellation of the re-insurance policy without the need for the court’s involvement.
The judge answered the first of those questions in the affirmative. He was satisfied that the re-insurance of an insurer’s risk under contracts of insurance which had been entered into by the insurer in the course of carrying on (and as part of) its own long term business was, itself, also long term business. There is, of course, no appeal against that part of the judge’s reasoning.
The judge answered the second question in the negative. But he went on to consider whether, if he had reached a different conclusion, he would have thought it right to refuse sanction as a matter of discretion. He expressed his answer to that, the third, question in these terms (at pages 28 and 29 of his written judgment):
. . . were I wrong on the second issue, the fact that the sole purpose of the Scheme whereby the Re-insurance Policies are to be transferred rather than cancelled would be to avoid tax would not have prevented me from sanctioning the Scheme. There are real benefits in terms of administrative simplification and a saving of costs if the Scheme went ahead, and there would be some potential, albeit pretty slender, benefits to policy holders as a result. Accordingly, were I able to do so, I would have sanctioned the Scheme.
The judge was impressed (as he mentioned at page 24 of his judgment) by the fact that the taxation consequences which would follow a cancellation of the re-insurance policy would be so unattractive that, if it were necessary to choose between keeping the existing arrangements in force or cancelling the policy, “the choice would unhesitatingly be to take the former course”.
The question for this court, therefore, is whether the judge was correct in his view that, on a proper analysis, the scheme which he was asked to sanction was not a scheme under which the long term business of FPLLA was to be transferred to FPLO. His approach can, I think, be seen clearly in a passage at pages 14 and 15 of his judgment:
At any rate a first sight, the idea that a re-insurer can be said to “transfer” the policy of re-insurance to the re-insured appears to involve a conceptual difficulty, because the effect of the “transfer” is to put an end to the re-insurance policy altogether. In other words, however much one might call it a “transfer”, the proposed transaction is really a cancellation or surrender of the policy. Furthermore, the mere fact that the Funds are transferred by the re-insurer to the re-insured could not be said to make it any the less a cancellation: the transfer of the Funds merely represents the consideration moving from the re-insurer to the re-insured in consideration of the re-insured cancelling or surrendering the benefit of the re-insurance policy. Given that a policy of re-insurance can be characterised as a contract of insurance between the re-insured and the re-insurer, I think that some support for this first impression could be said to be found from considering whether it could really be said that one could sensibly talk about a “transfer” of an insurance contract or policy from the insurer to the insured, even if the funds representing the premium and/or backing the insurer’s liability were transferred to the insured.
It appears to me that the Court should not, indeed cannot, treat an arrangement which is in reality a surrender or cancellation of an insurance policy as if it were a transfer. In other words, I consider that it is not open to parties to “dress up” what is in reality a cancellation of a series of re-insurance policies as if it were a transfer of re-insurance business.
Mr Hollington QC, who appeared for FPLO on this appeal (as he had below), submitted that the judge had fallen into error in failing to distinguish between the “business” that was the subject of the transfer to be effected by the scheme and the re-insurance contract which was the foundation of that business. In my view there is force in that submission.
“Insurance business”, for the purposes of the Insurance Companies Act 1982, is or includes the business of “effecting and carrying out” contracts of insurance – see sections 1 and 3 of the Act, schedule 1 and Part I of schedule 2 to the Act, and sections 95 and 96(1). “Long term business” – to the transfer of which Part I of schedule 2C applies – is insurance business of any of the classes specified in schedule 1. For example, “life and annuity business” (class I) is the business of effecting and carrying out contracts of insurance on human life or contracts to pay annuities on human life (other than contacts within class III); “Linked long term business” (class III) is the business of effecting and carrying out contracts of insurance on human life or contracts to pay annuities on human life where the benefits are wholly or partly to be determined by reference to the value of, or the income from, property of any description (whether or not specified in the contracts) or by reference to fluctuations in, or in an index of, the value of property of any description (whether or not so specified). The transfer of long term business from one company to another may (and usually will) involve the transfer of the legal rights and obligations which have arisen, or which will arise, under existing contracts of insurance; but it will also involve a transfer of the functions which have to be performed by the insurer in “carrying out” those contracts and, usually, a transfer of the business of “effecting” future contracts of the same class. The transfer of long term business, in the sense in which that expression is used in paragraph 1 of schedule 2C is not confined to the assignment of benefits and the assumption of liabilities. Unless, therefore, it can be said that FPLLA has no functions to perform in relation to the carrying out of the re-insurance contract – and no expectation of future business under that contract – it is, I think, too narrow a view of the transfer of business which the scheme is intended to effect to hold that all that that involves is nothing more than a transfer of the liabilities under that contract.
The report of the independent actuary, required under paragraph 2 of Part I of schedule 2C to the 1982 Act and exhibited to Mr Sweetland’s affidavit, makes it clear that FPLLA does have functions to perform in relation to the carrying out of the re-insurance contract and that it has set up systems for that purpose, It is sufficient to refer to an extract from paragraph 3.7 of that report:
3.7 FPLLA has set up and maintained service agreements with other companies of the FP Group to provide the administrative, investment and unit trust management capabilities it required in order to operate (FPLLA has no employees of its own). It has also, in 1997, set up a reinsurance arrangement with another company in the FP Group, FP Life Assurance Ltd (FPLA), whereby FPLLA’s liabilities in respect of Property units are retroceded to FPLA.
Paragraph 4.3 of the report explains what is to happen on transfer:
4.3 Immediately following the transfer of business under the Scheme . . . those service agreements that have been between FPLLA and other companies in the FP Group will be dissolved and subsumed, with such amendments as are appropriate, with other existing agreements. The reinsurance agreement from FPLLA to FPLA will be altered, with the agreement of FPLA (which I understand will be forthcoming), such that FPLO will become the ceding party in place of FPLLA.
It is clear that the transfer of business from FPLLA to FPLO will involve the transfer of the benefit and burden of contracts other than the re-insurance contract; and that those other contracts are the means by which FPLLA performs its function of “carrying out” the re-insurance contract. If those other contracts are to be “dissolved and subsumed, with such amendments as are appropriate, within other existing contracts”, that will be as a result of negotiation between FPLO, as transferee of the benefit and burden of those contracts, and the other companies within the FP Group who are parties to those agreements. The contracts do not fall away, without more, as a result of the transfer.
Further, it is important to keep in mind that if, as paragraph 4.3 of the independent actuary’s report makes clear is the intention, the re-insurance contract “will be dissolved as FPLO takes to itself FPLLA’s benefits and responsibilities under this policy” that will occur by operation of law; not as a result of any surrender by FPLO to FPLLA. The principle is expressed in Chitty on Contracts (27th Edition, 1994), volume 1, page 1182, at paragraph 25-004:
Merger of rights and liabilities. A contract may also be discharged where the rights and liabilities under it become vested, by assignment or otherwise, in the same person in the same right, for a man cannot maintain an action against himself.
Liabilities under a contract cannot, as a general rule, pass by assignment – see Chitty at paragraphs 19-043 to 19-045 (volume 1, pages 985-987) – but can be transferred with the agreement of the person to whom they are owed. Where the person to whom the liabilities are owed is the transferee, his agreement may be assumed; but the question whether or not those liabilities merge with the rights so as to discharge or extinguish the contract will depend on the position as it is in the hands of the transferee after transfer. There will be no merger if there are others interested in the benefit of the contract. Merger is distinct from surrender. The former occurs (if at all) by operation of law following A’s assumption of B’s liabilities; the latter occurs because A (having the right to enforce obligations against B) releases B from liability to satisfy those obligations.
The distinction may be illustrated by an example. Suppose that A, who holds a policy issued by B, declares himself trustee of that policy for C in circumstances in which the trust is unknown to B. Thereafter, without obtaining the consent of C, A surrenders the policy to B. The policy will be discharged by the surrender. C’s rights may be enforceable against the proceeds of the policy in A’s hands or, perhaps, against A personally in respect of a breach of trust; but C will have no claim under the policy. If, on the other hand, B transfers his liability under the policy to A – so that A assumes the obligations of the insurer – there will be no merger. The policy will not be discharged by operation of law notwithstanding that the rights and liabilities under it will have become vested in the same person, A. That is because the benefit of the policy will not be held by A in his own right. A will remain liable to satisfy claims under the policy for the benefit of C.
For the reasons which I have sought to explain, I am satisfied that the judge was wrong to hold that the transfer of the policy of insurance to the insured gave rise to some conceptual difficulty because the transfer necessarily put an end to the policy. It is not the transfer itself which discharges the policy; rather, the policy is discharged by operation of law if, following the transfer, there is a merger of rights and liabilities in the same person in the same right. There is, in my view, a real distinction – as a matter of legal analysis – between a transfer of the insurer’s liabilities and a surrender of the insured’s rights. Further, there is a real distinction between a transfer of an insurer’s long term insurance business and a transfer of his liabilities incurred in the course of that business – notwithstanding that a transfer of business may include a transfer of liabilities.
It follows that the judge reached the wrong conclusion in answer to the second of the three questions which he identified. In my view the court had jurisdiction to sanction the scheme under paragraph 1 of schedule 2C to the 1982 Act. In the circumstances that the judge has held that, but for his conclusion that he was without jurisdiction to do so, he would have sanctioned the scheme, it is unnecessary for this Court to form its own view on that, third, question.
I would allow this appeal.
MR JUSTICE RATTEE: I agree.
LORD JUSTICE SIMON BROWN: I also agree.
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