On May 24 2012 the Supreme Court dismissed (with costs) the application for leave to appeal a 2011 Ontario Court of Appeal decision, which involved the complicated issue of dealings with the participating accounts of two large life insurance companies. The two class actions arose from an acquisition and an alleged breach of the Insurance Companies Act.

In 1997 Great-West Life Assurance Company acquired London Life Insurance Company for C$2.9 billion. Of the sum, C$220 million of the purchase price was paid by contributions from the participating accounts of both Great-West Life and London Life, on the theory that the participating policyholders should help to pay for the planned synergies, which was expected to reduce operating costs for all concerned – including these accounts.

Class actions were commenced and in late 2010 the trial judge found, on a technical argument, that the Insurance Companies Act had been breached and ordered that:

  • the C$220 million plus a reasonable rate of return be repaid to the participating accounts; and
  • the companies be enjoined from changing the allocation for expenses between shareholders and participating policyholders.


In a unanimous decision rendered at the end of 2011, the Ontario Court of Appeal agreed with the trial judge's assessment that the act had been breached, but disagreed with the trial judge's remedies in a decision that – for the first time in Canada – sets out limits to the discretion that a trial judge has in dealing with the statutory compliance provisions contained in Section 1031 of the act.

The court also made some interesting findings on the weight to be given in actions such as this to regulatory approvals received in connection with the transactions. The court also held that breaches of Section 166(2) of the act – which requires directors, officers and employees to comply with the act – cannot be found when such directors, officers or employees are not named as parties in the suit.

There are a limited number of technical provisions in the act that circumscribe the operations of participating accounts. The relevant provisions are found in Sections 331 and 456 to 464. These can be summarised as:

  • the requirement to apply generally accepted accounting principles in preparation of financial statements (Section 331);
  • defining what amounts may be transferred from participating funds (Section 462); and
  • determining the allocation of expenses to participating funds (Section 458).

In essence, the companies – in exchange for the C$220 million withdrawn from the par accounts – deposited pre-paid expense assets into the participating accounts representing the anticipated expense savings to be realised by those accounts over a 25-year period. The pre-paid expense assets were to be amortised each year for 25 years as the annual expense savings were realised. Furthermore, an adjustment mechanism was put in place to check the estimates of expense savings after five years of actual experience which, in 2002, indicated that the London Life pre-paid expense asset should be increased by C$68.2 million to reflect additional expense savings over that originally contemplated. While no further adjustments were provided for, London Life maintained that in 2008, an additional C$27.1 million in expense savings was identified. Due to the pre-paid expense assets, the expense allocations that applied between shareholders and participating policyholders before the acquisition were not modified under Section 458.

The trial judge found that the class representative, a former actuary of London Life, and the chief executive officer of London Life had both agreed that no person or group, including par policyholders, should benefit from reduced costs without making a contribution to those benefits. The court repeatedly returned to this as a guiding principle for its decision and, thus, the ultimate disposition of the appeal hinged on this crucial fact.

On a technical argument presented by experts on generally accepted accounting principles (GAAP), the trial judge found that the GAAP requirements for treating something (the pre-paid expense assets, in this case) as an asset had not been satisfied because the procedures required to change the allocation of expenses had not occurred and, consequently, the pre-paid expense assets provided no incremental benefit. The court of appeal agreed. Since the pre-paid expense assets were held not to be an asset, the court of appeal agreed with the trial judge that the provisions transferring moneys from participating policy accounts in exchange for the pre-paid expense assets violated Section 462. The court of appeal, however, made a significant finding that the enumerated exceptions to the prohibition against transferring assets under Section 462 are not exhaustive, as there are instances in normal insurance practice (eg, involving investments) that are permitted under Section 462, even though not expressly enumerated in the exceptions to the prohibition.

As mentioned earlier, since the directors, officers or employees of the companies were not sued (only the corporate entities were named as defendants), the court of appeal held that there could not have been a breach of Section 166(2) (which prohibits directors, officers and employees from breaching the act).

Significantly, the court held that for a number of reasons, the Office of the Superintendent of Financial Institutions' (OSFI) approval of the transaction was not determinative of the issues. The following reasons were given by the court of appeal for this conclusion:

  • This was not a judicial review;
  • The record was not clear that OSFI, in making its decision to approve, had the significant expert evidence on the treatment of pre-paid expense assets under the meaning of GAAP that was put before the court;
  • The courts ultimately have jurisdiction to determine matters of statutory interpretation; and
  • OSFI successfully argued that its deliberative secrecy should be respected; therefore, the OSFI representatives who acted as witnesses at the trial could be asked only certain limited questions and, therefore, the OSFI decision was opaque to the court.

The most significant part of the decision rested on the court's view as to the remedies that were available to the trial judge.

Section 1031 of the act, being the operative section for the remedy in this case, permits a court on a finding that an insurer has not complied with the act or the regulations, in addition to ordering compliance or restraining breach, to "make any further order it thinks fit". It was this provision that the trial judge applied in the remedies that she ordered.

Starting from the seminal 19th-century English decision in Foss v Harbottle, the court of appeal traced the reluctance of courts to override the internal management of companies and the revisions that modern corporate statutes, such as the Canada Business Corporations Act, introduced to deal with challenges to management decisions.

The court examined the three categories contained in the modern corporate statutes:

  • derivative actions;
  • compliance provisions; and
  • oppression remedies.

While the Insurance Companies Act is modelled on the Canada Business Corporations Act, the court pointed out that it was significant that it contained only derivative actions and compliance provisions, but not the oppression remedy found in the Canada Business Corporations Act. The court held that it was inappropriate to apply the remedies available in the case of oppression, as the Insurance Companies Act did not contain those provisions. The court held that the remedies available under the three provisions are different, and that the purpose of Section 1031 of the Insurance Companies Act is remedial rather than compensatory or punitive.

The court held that while the companies' action not to change the expense allocation methods between shareholders and participating accounts could form the basis for a determination that the pre-paid expense asset was not an asset under GAAP, it could not realistically form the foundation for a finding that the reasonable expectation of the policyholders was that, even without the pre-paid expense assets, the expense allocations would have remained the same. The court kept returning to the 'no contributions/no benefit' expectation that the policyholder's representative, the company and the trial judge had all accepted.

The court of appeal looked at three alternatives for fashioning a remedy and settled on:

  • cancelling the pre-paid expense assets in the par accounts as of a date to be determined;
  • as of that date, cancelling the annual amortisation charges in respect of the pre-paid expense assets; and
  • providing for a return of a portion of the C$220 million adjusted upwards for certain matters, including forgone investment income, and adjusted downwards for certain matters, including expense savings received.


The Ontario Court of Appeal's decision is important as there are few, if any, cases addressing the complexities, mechanics and treatment of participating policyholder accounts. Significant in this case was that:

  • the court held that the Section 462 of the Insurance Companies Act regarding the transfer of assets from a participating account is not quite as narrow as the wording might initially suggest;
  • the court held that the latitude of judges for fashioning remedies for breach of the compliance provisions of the Insurance Companies Act is considerably narrower than the remedies available in the case of oppression remedies; and
  • the evidence and the trial judge's holding that the expectation was that the participating policyholder accounts would not receive the benefit of reduced expenses without somehow paying for them was the linchpin that the court of appeal used to fashion a remedy that responded to this expectation.

As the Supreme Court has refused leave to appeal, the Ontario Court of Appeal decision is the final authority on these matters.

For further information on this topic please contact Frank Palmay at McMillan LLP by telephone (+1 416 865 7000), fax (+1 416 865 7048) or email ([email protected]).