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Upon
hearing the applications of sixteen insurance companies for leave to
convene creditors' meetings to consider and if thought fit to approve
Schemes of Arrangement ("Scheme(s)"), the Court determined
that it had jurisdiction to sanction schemes of both foreign companies
and EC/EEA companies providing there was a sufficient connection with
England and that in relation to thirteen applicants, single class meetings
were not appropriate, each case being heavily fact dependant.
Applications were made by sixteen insurance companies for Orders convening
meetings of creditors to consider and, if thought fit, approve Schemes
pursuant to S.425 of the Companies Act 1985 ("CA 85"). One
applicant was insolvent and subject to a Scheme already. Two others
were wholly owned subsidiaries of the insolvent company. Twelve of the
applicants were incorporated and regulated in the UK, the remaining
four being incorporated and regulated in France, Ireland, New York and
Bermuda respectively. Until 1991, all applicants underwrote insurance
and reinsurance business in pooling arrangements ("the WFUM Pools").
The Schemes proposed for the insolvent applicant and its subsidiaries
deal with all of their liabilities. The Schemes proposed for the other
thirteen solvent applicants only relate to WFUM Pool liabilities of
those companies.
Applications by the insolvent company and its two subsidiaries to each
convene a single meeting of creditors were unopposed. However, applications
of the remaining thirteen solvent companies to each convene a single
class meeting were opposed by thirteen insureds, all of whom had purchased
"occurrence" policies giving rise to long tail claims. There
were two main areas of objection; jurisdictional in relation to two
applicants and that a single class meeting for each of the solvent applicants
would not be proper for thirteen of the applicants.
Jurisdiction
S.425 of CA 85 makes provision for Schemes in respect of a "company",
defined in S.425 (6) (a) as being "any company liable to be wound
up under this Act". S.735A (1) of CA 85 extends the meaning of
the words "this Act" to S.220 and 221 of the Insolvency Act
1986 ("IA 86") and thereby extends the ambit of S.425 to include
unregistered companies, including those incorporated in a foreign state.
Warren J analysed the decision of Lawrence Collins J in Re Drax Holdings
Ltd [2004] 1 WLR 1049, and in turn the three requirements to be
fulfilled before a foreign company could be wound up in England, as
set out by the Court of Appeal in Stocznia Gdanska SA v Latreefers
Inc (No.2) [2001] 2 BCLC 116. These were (1) that there must be
a sufficient connection with England which may, but does not have to,
consist of assets within the jurisdiction, (2) there must be a reasonable
possibility, if a winding up order is made, of benefit to those applying
for the Order and (3), one or more persons interested in the distribution
of assets of the company must be persons over whom the Court can exercise
jurisdiction. However, it was recognised in Drax that in the context
of a Scheme the second and third conditions may not be relevant, leaving
the first condition as the basis of the discretion to sanction a Scheme.
Warren J concluded that being "liable to be wound up" meant
whether the company was the sort of company which is capable of being
wound up under IA 86 and not to whether it could be subject to the winding
up process on the facts as they stand. Accordingly, it was not necessary
to show that any of the "grounds" for winding up in S.221
(5) of the CA 85 were in fact fulfilled. A foreign company is a company
which is capable of being wound up in the sense that if any of the circumstances
set out in S.221(5) were to arise, then the Court has the power, subject
to its discretion and therefore the three conditions considered in Drax,
to wind it up. Whilst it is proper to take account of each of the circumstances
set out in S.221(5) under which a company could be wound up in considering
whether it is "liable to be wound up", it is company not necessary
to focus only on those circumstances in which a solvent company could
be wound up. Accordingly, the Court had jurisdiction to sanction solvent
Schemes for foreign companies incorporated and regulated in New York
and Bermuda.
Warren J then considered the effect of EU legislation on the jurisdiction
to wind up an EU/EEA company. The Insolvency Regulation and Directive
2001/24/EC ("the Directive") applied, it was agreed, to the
applicants incorporated in France and Ireland. It applies to both solvent
and insolvent insurance undertakings and provides that matters relating
to winding up and reorganisation should be dealt with exclusively by
the home regulating state. The Directive was implemented by the Insurers
(Reorganisation and Winding Up) Regulations 2004 ("the Insurers
Regulations"). However, Regulation 5(1) expressly excludes S.425
Schemes from the home state rule provided for in the Directive and Regulation
4(1) in relation to winding up, liquidations and administrations of
EEA insurers. Warren J concluded that the part of the insurers' regulations
which related to reorganisation measures was not in sufficiently wide
terms as to cover Schemes and that the Rule 5(1) exclusion resulted
in the same test to be applied in determining whether an EEA insurer
is "liable to be wound up" as applies to a non-EU/EEA company.
Accordingly, the English Court has jurisdiction to sanction Schemes
in relation to EEA insurers provided they have sufficient connection
with England.
Single Class Meetings
Warren J observed that the law on proper constitution of classes for
the purposes of S.425 was not a matter of significant dispute. However,
its application to the facts of a particular case could give rise to
considerable difficulties and was hotly disputed in this case. The focus
was to a large extent on what was decided as a matter of law and what
merely turned on the application of the law to the facts in Re British
Aviation Ins Co Ltd [2006] BCC 14 ("BAIC"). There was
also a dispute as to whether the facts were materially distinguishable
from those in BAIC given that some of the policies were the same as
the ones in BAIC, as was some of the expert evidence. However, in this
instance Warren J was only concerned with the proper constitution of
voting classes. Although the function of the Court was not at this stage
to consider the merits or fairness of the schemes (Re Telewest Communications
Plc [2004] BCC 342), some of the same factors which result in a
scheme being "unfair" so that sanction is refused, may also
be relevant to deciding whether separate classes are appropriate in
the first place. Warren J analysed the authorities in relation to the
factors to be taken into account.
A "class" for the purposes of S.425 is defined, by reference
to the Judgment of Bowen LJ in Sovereign Life Ass Co v Dodd [1892]
2KB 573, as being "those persons whose rights are not so dissimilar
as to make it impossible for them to consult together with a view to
their common interest". The test is formulated by reference to
"rights" rather than "interests". Policyholders
with the same rights might have different interests. The Sovereign decision
was also considered in detail in Re Hawk Ins Co Ltd [2002] BCC 300
("Hawk"), Warren J concluding that the Bowen LJ test had to
be directed to the underlying question "Are the rights of those
who are to be affected by the scheme proposed such that the scheme can
be seen as a single arrangement," (as claimed by the applicants)
"or ought it to be regarded … as a number of linked arrangements?"
(as Warren J ultimately held).
Warren J said that although BAIC had many similarities to the applications
before him, the evidence before him was different and he had to determine
the class issue by reference to that evidence. In commenting on the
reference to comparators in BAIC, Warren J, said the purpose of identifying
the appropriate comparator was to see what the existing "rights"
of creditors were in such circumstances and whether they were so dissimilar
that they must be put into separate classes for voting purposes. As
in BAIC, Warren J also determined that the appropriate comparator in
WUFM would be a solvent run-off. However, he rejected the opponent's
assertion that it is never possible for those with accrued claims and
those with IBNR claims to consult together in their common interest
with the result that there must always be separate class meetings and
that he was bound by the decision in this regard in BAIC. He said that
the conclusions in BAIC were on the basis of the facts of that case
and that, as stated in Hawk, each case will be heavily fact dependent.
Warrant J determined that a given policyholder may have claims which
fall into one or more of the claims categories adopted for the purposes
of the Scheme, each claim representing in whole or in part, the rights
which the policyholder has against the relevant applicant, i.e. agreed
claims, outstanding claims and IBNR claims. Having done so, he reviewed
what he described as the considerable amount of expert evidence filed
in relation to the class issue. This, he said, was directed principally
at demonstrating the level of uncertainty which existed in relation
to the estimation and valuation of claims within each of the three categories.
The opposing creditors sought to show that the difficulties and uncertainties
of estimating and evaluating IBNR claims was significantly greater than
in relation to outstanding claims. The Applicants sought to show that
in relation to both types of claim the difficulties were common and
that there were cases where it is more difficult and more uncertain
to estimate and value an outstanding claim than an IBNR claim. Opposing
creditors maintained that outstanding claims and IBNR claims were so
different as to make it impossible for creditors of each class to consult
together. The Applicants maintained that in fact all policyholders had
the same right, namely the right to an indemnity in respect of any insured
loss. Warren J rejected this and so had to consider whether the rights
were so different as to make consultation in their common interest impossible.
Warren J concluded that he did not think he could, or needed, to resolve
the differences between the rival expert evidence and it would be undesirable
to set a precedent which would encourage even more detailed evidence
on convening applications in the future. He did, however, conclude that
there was a large range of uncertainty in estimation and valuation of
claims. Unpaid agreed claims were very nearly completely certain, there
was considerable certainty, although not always, in the estimation and
valuation of outstanding claims and large uncertainty in relation to
IBNR claims.
He held that there should be two separate classes; (1) in relation to
unpaid agreed claims, other claims not requiring estimation and unpaid
additional claims and outstanding claims and (2) in relation to IBNR
claims. Unpaid agreed claims were grouped with outstanding claims because
they were not significant and would be paid as far as possible before
the meetings. The applicants having maintained, in reliance on Equitable
Life Assurance Society [2002] BCC 319, that the Court could refuse
to carve out a little group and give them a veto, particularly where
that group has no real interest one way or the other and is going to
be paid in full whatever happens. The Court also did not order separate
classes, on the facts of the case, for reinsurers of the applicants
who were also reinsureds or foreign companies.
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