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The
Court did not have jurisdiction to sanction a Solvent Scheme of Arrangement
as the appropriate classes of creditors were not correctly identified
and the single Scheme meeting was not properly constituted. Even if
the Court had jurisdiction it would not as a matter of discretion have
sanctioned the Scheme as it was unfair to certain policyholders.
The British
Aviation Insurance Company Limited ("BAIC") applied for sanction
of a Scheme of Arrangement pursuant to section 425 of the Companies
Act 1985 ("the Scheme"). The Financial Services Authority
raised no objection to the Scheme which the BAIC submitted had been
approved at a creditors' meeting, convened in accordance with the Court's
directions, by the required majority of Scheme creditors by number and
value. Sanction was opposed by a number of creditors. The judgment deals
with objections in chronological procedural order.
Was adequate notice of the application for directions given?
The directions application was purely procedural and regulated the manner
in which the Scheme was to be presented to creditors for approval. Any
deficiencies in notification went neither to the jurisdiction of the
Court nor would they be critical to the exercise of the Court's discretion
to sanction the Scheme. Various criticisms were considered, including
that only 14 working days notice was given. Lewison J did not regard
any of the criticisms as carrying any real weight.
Were the classes of creditors correctly identified?
In deciding whether all policyholders formed a single class the starting
point was to identify the appropriate comparator. The only realistic
alternative to the BAIC's Scheme was a continuing solvent run-off. That
was the appropriate comparator.
In a solvent run-off policyholders with unsettled paid claims would
be entitled to have their claims paid in full. They would have exactly
the same right under the Scheme. Policyholders with outstanding losses
would, in a solvent run-off, have to wait until the quantum of their
claims had been determined and then claim indemnity from insurers. Under
the Scheme, although they would have to accept an estimate of that quantum,
they would not have to accept any estimate of the likelihood of a claim
being made at all. This removed one of the greatest uncertainties from
the process of estimation. Policyholders with IBNR claims had, in a
solvent run-off, to wait and see whether a claim materialised and if
it did, claim an indemnity. Under the Scheme they would receive a payment
upfront based on an estimation of the likelihood of a claim arising
together with an estimation of the quantum of such a claim. The Scheme
payment, although in advance, may be greater or smaller than liabilities
eventually materialising. The risk of inadequate resources to meet such
liabilities was transferred from insurers back to policyholders even
though policyholders, having paid for insurance cover, would not otherwise
be at risk of any further expenditure in relation to a valid claim.
A Scheme may well disadvantage such policyholders.
In a Solvent Scheme those with accrued claims and those with IBNR claims
had interests which were sufficiently different as not to make it possible
for them sensibly to consult together in their common interests. However,
although the Judge indicated he found it a difficult question, he was
persuaded that a separate class for reinsurers could not be justified.
They were essentially in the same position as direct insureds. Accordingly
Lewison J held that the single Scheme meeting was not properly constituted
and that the Court had no jurisdiction to sanction the Scheme. In case
he was wrong he went on to consider other grounds of objection.
Was adequate notice of the creditors' meeting given?
The requirements of the Act were that the meeting be summoned in such
manner as a Court directed. Lewison J held that the meeting had been
convened in accordance with the directions order and it followed that
no criticism of the steps taken to publicise the meeting could therefore
deprive the Court of jurisdiction to sanction the Scheme.
Was the creditors' meeting properly and fairly conducted?
Lewison J said there was nothing inherently objectionable about a company
promoting a Scheme from reaching agreement with some of its creditors
in return for which they undertake to vote in favour of the Scheme.
However, the objection was that opposing creditors were not treated
fairly by the process adopted. The Chairman was required by the terms
of the directions order to place a value on claims. This meant he was
required to ascribe a genuine value to the claim and was not given the
luxury of saying that he did not know what its value was and therefore
ascribing it an arbitrary nominal value. To disallow IBNR claims on
the basis that they were uncertain or unreliable was not valuing them.
The votes of policyholders with IBNR claims had to be estimated using
sophisticated and controversial actuarial techniques and the Court must
be especially wary of simply waiving through a vote in which so many
objectors had a nominal value placed on their claims. For these reasons
the court was not satisfied that the manner in which the IBNR claims
of opposing creditors had been treated was truly representative of their
interests.
Did the votes cast adequately represent the views of the creditors?
The votes of two subsidiaries of Royal and Sun Alliance Insurance Group
plc, the majority shareholder of the BAIC, should be discounted. The
parent company stood to receive a substantial return of capital in the
event of the outcome of the Scheme conforming to expectations and accordingly
the special interest of the subsidiary companies was something that
the Court should take into account.
The Court was not persuaded that low turnout, in itself, was a valid
reason for refusing to endorse the majority vote. However, the size
of the turnout would be relevant in considering whether the result of
the vote could have been affected by collateral factors affecting some
members of the class, such as special interests.
One such group were reinsureds who were also reinsurers of the BAIC.
They had the same legal rights as direct insureds but very different
economic interests because they would be keen to see the BAIC's liabilities,
and thereby their own liabilities as reinsurers, capped. Accordingly
the Court did not regard such reinsureds as representative of the class
of policyholders as a whole.
Given his misgivings about the devaluation of opposing creditors' IBNR
claims, Lewison J said he was not satisfied that votes cast adequately
represented the views of the creditors.
Were the terms of the Scheme fair?
Lewison J gave guidance in relation to a number of terms. In particular
he indicated that were he to sanction the Scheme he would have extended
the bar date for submission of claims from 120 days to 1 year and would
have directed more extensive advertising than proposed.
In conclusion Lewison J held that even if he had jurisdiction he would
not have sanctioned the Scheme. The most powerful consideration was
that it seemed to be unfair to require manufacturers who had bought
cover designed to cast the risk of exposure to asbestos claims on insurers,
have that risk compulsorily retransferred to them.
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