A Scottish court has given an opinion that appears to have the effect that Schemes of Arrangement, whereby solvent but run-off UK insurers can crystallise their liabilities and wind up a company, should not be sanctioned unless creditors unanimously vote in favour of the proposal.
The Scottish Lion Insurance Company Limited, which is in run-off, applied to the court to sanction a Scheme of Arrangement with its creditors. The Scheme was opposed by 5 of the company's creditors. The Court of Session considered the circumstances in which a court should sanction a solvent scheme in the face of opposition from dissenting creditors. The court delivered its opinion that, where a company is solvent, a majority of creditors should not always be able to compel a dissenting minority to be bound by a Scheme of Arrangement. Where an application is made for a solvent Scheme to be sanctioned, the petitioner should be able to justify why, in the circumstances of the particular case, the minority should be bound by the decision of the majority.
- Schemes of Arrangement have been an increasingly popular UK court-approved mechanism to enable solvent but run-off reinsurers to finalise their liabilities and wind up the company.
- The Court of Session's Opinion suggests that where there are unwilling participants and a solvent company, a scheme of arrangement cannot generally be forced upon them.
- An Opinion of the Court of Sessions has the same effect as a Judgment in that it will stand until it is appealed. Unless the Opinion is overturned on appeal, it may affect the future success of a number of other schemes currently in the pipeline.
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A Scottish court has given an opinion that appears to have the effect that Schemes of Arrangements, whereby solvent but run-off UK insurers can crystallise their liabilities and wind up a company, should not generally be sanctioned unless creditors unanimously vote in favour of the proposal.
Background
Scottish Lion ceased writing new business in 1994 and since then has been in run-off. Its remaining portfolios contained business with exposure to asbestos, pollution and health hazard losses which all could give rise to future claims. Scottish Lion proposed a Scheme of Arrangement with all of its creditors in relation to its underwriting business, which would bring the run off and its associated uncertainties to an end. Five creditors objected to the Scheme on the grounds that it amounted to a "confiscation of their valuable rights, for which they have paid substantial premiums, for no or wholly inadequate compensation." Scottish Lion filed a petition for the sanction of the Scheme.
Under section 899 of the Companies Act 2006, if a majority of creditors support a Scheme of Arrangement, "the majority" being a representation of 75% in value of the creditors of the relevant class, the court may sanction the Scheme of Arrangement. Scottish Lion had followed the three-stage procedure under the Act for the approval of a Scheme (which is as follows: 1) the order that a meeting or meetings be summoned; 2) the creditors' meetings; and 3) application for sanction of the scheme).
Issues
The two issues of principle identified by the parties were:
- Were the creditors entitled to challenge the decision by the chairman of the creditors' meetings that the statutory majorities, both by number and value, were attained at the meetings of both classes of creditors? And
- Can it ever be fair to sanction a "solvent" scheme of arrangement in the face of continuing creditor opposition to having their occurrence cover compulsorily terminated?
Scottish Court of Session's Opinion
The court held that there was no difficulty in determining that at the meetings of each class of creditors there was a majority in the number of creditors who supported the scheme. The difficulty lay in ascertaining whether the majority in number represented 75% in value of the creditors of the relevant class, particularly so in the field of occurrence-based insurance and IBNR claims where the extent of the potential liability is not known. Lord Glennie said that when it is queried whether or not a majority in number representing 75% in value of the creditors voting at the meeting were in favour of the scheme, the court may (understandably) decide that there should only be a restricted right of challenge to the chairman's decision. He added that it was also well established that the court is not bound to sanction a scheme that has achieved the statutory majorities at the creditors' meetings.
In this case, Lord Glennie said that he was satisfied that the grounds advanced by the creditors in opposition to the application being granted were grounds that they were entitled to advance. If necessary, further evidence could be adduced to evaluate the system of valuing the votes at the meetings; however since the petitioner's submission was directed only at the exclusion of such a challenge, he preferred to leave this point open.
Accordingly, Lord Glennie stated that the real question in issue was the second point: in what circumstances might the court sanction a solvent scheme such as this in face of opposition from dissenting creditors? Scottish Lion was financially sound; the importance of this was that each of its creditors could confidently expect to be paid as and when it made a valid claim on its insurance. It was not the case that the company was facing financial difficulties whereby it might be in the interests of its creditors to seek to make some compromise or arrangement with it.
In this case, there was no reason, apart from the wishes of its shareholders, why Scottish Lion should not continue with run-off. Unless the Scheme was sanctioned, the creditors could reasonably anticipate that as and when claims were made against them they would be able to seek an indemnity from Scottish Lion under their reinsurance. If any of them wished to enter into a commutation with Scottish Lion, they could do so without the participation of the other creditors. But Lord Glennie pointed out, that if they did not want to, why shouldn't they be able to remain in their current position? He asked why, where the company is solvent, should one group of creditors who wanted to enter into a commutation agreement be entitled to force other creditors to participate against their will?
Lord Glennie did not dismiss the petition but put the case out By Order to allow the parties to consider their positions in light of his Opinion.
Impact for the Insurance Market
- Schemes of Arrangement have been an increasingly popular UK court-approved mechanism to enable solvent but run-off reinsurers to finalise their liabilities and wind up the company.
- Although the Judge did not directly deal with whether over 75% of the creditors had voted for the Scheme, his Opinion does appear to have the impact that where there are unwilling participants and a solvent company, a scheme of arrangement cannot generally be forced upon them.
- An Opinion has the same effect as a Judgment in that it will stand until it is appealed. Unless the Opinion is overturned on appeal, it may affect the future success of a number of other schemes currently in the pipeline.
Further reading: Opinion of Lord Glennie in the Petition of The Scottish Lion Insurance Company Limited [2009] CSOH 127
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 18/09/2009.
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