The judge who refused to sanction the British Aviation Insurance Company Limited (BAIC) Scheme, has now sanctioned a Scheme promoted by 18 Dutch insurance companies. This is the first Scheme to be sanctioned by the English Court since the BAIC judgment in July 2005. The judgment proves that schemes of arrangement are still possible, even though their future relevance to the insurance industry was questioned in the aftermath of the BAIC decision. In addition, the case provides the first reasoned judgment on the jurisdiction of the English Court to sanction schemes of arrangement in respect of companies not incorporated in the UK. This will assist other foreign insurance companies looking to promote schemes of arrangement in England as an alternative to running-off their books of business.
The 18 Dutch insurance companies formed a pool known as the Dutch Aviation Pool. The pool was managed by DAP Holding NV ("DAP"), which also participated in the pool. On 31 December 1996 the other 17 insurers, who are all solvent, ceased participating in the pool. DAP continued to write business, wholly for its own account, for a further four years before it went into run-off. DAP is now insolvent. The scheme (in law 18 schemes) is a mixture of solvent schemes for the 17 solvent pool members, and an insolvent scheme for DAP.
In our Law Now in July 2005 we drew attention to the two most important points in the BAIC decision which would have a significant effect on other solvent schemes in the future. The first was that in a solvent scheme, where the alternative to the scheme is continuation of the solvent run-off, IBNR creditors must be in a separate class from creditors with accrued claims. This is significant because if the classes have not been properly constituted there is no jurisdiction to sanction the scheme. The second was that it could be unfair for direct policyholders to have to estimate their future claims and be paid a figure based on an estimate, rather than receiving a full indemnity if and when the claims materialise. The point here is that if a scheme is unfair to some creditors , the court may refuse to sanction the scheme even if it has been approved by the creditors.
In the days following the BAIC judgment, the Dutch Aviation Pool scheme was revised (before the convening hearing) so as to address those two main points. Thus for the 17 solvent insurers there were two separate classes of scheme creditor, IBNR and non-IBNR. This was not necessary for DAP; Mr Justice Lewison had agreed in BAIC with the decision in Hawk Insurance Company Limited to the effect that, where a scheme company is insolvent, IBNR creditors do not have to be in a class on their own. In fact, for other reasons, DAP had three separate classes, constituted on different grounds. To meet the second BAIC point, direct policyholders were excluded from the scheme.
Care was taken in the drafting of both the scheme and the explanatory statement, and in the conduct of the scheme meetings and the evidence at the sanction hearing concerning the agreement of claims for voting purposes, to meet other criticisms which Lewison J had made of the contents of the BAIC scheme and of the process by which that scheme was approved by creditors, particularly in relation to the voting process.
Interestingly, although Lewison J said, in the BAIC case, that a period of four months from the effective date to the bar date was unacceptable and that he would have required one year, he did not object to a six month period for the DAP scheme. The evidence showed that scheme creditors had been made aware, some five months before the sanction hearing, of the fact that the scheme was to be promoted.
Lewison J commented during argument that he had no problem on the classes, and no problem on the contents of the scheme . The only problem which he had was in relation to jurisdiction, in view of the fact that all 18 scheme companies were Dutch companies.
Section 425(6) says that a company, for the purposes of section 425, means a company liable to be wound up under what is effectively now the Insolvency Act. There are precedents for foreign companies promoting schemes in England. Section 425 schemes have previously been sanctioned for Dutch and Netherlands Antilles finance companies in an English property group, for an Indonesian airline, and for Australian and Bermudian insurance companies. This was the first case in which the judge had given a reasoned decision to the effect that an EU insurance company still qualifies as a company for these purposes, notwithstanding various pieces of Euro legislation in the last few years.
The judge considered the EC Regulation on Insolvency Proceedings, the EC Directive on the reorganisation and winding up of insurance undertakings, the Insurers (Reorganisation and Winding Up) Regulations 2004 and the EC Regulation on Jurisdiction and the Recognition and Enforcement of Judgments. He concluded that notwithstanding all of these, he still had jurisdiction to sanction the scheme for these Dutch companies. The scheme was one which he considered he ought to exercise his jurisdiction to sanction, and he made an order sanctioning the scheme.
The message from this case is two-fold. First, solvent schemes are still possible after BAIC. Secondly, the Euro legislation does not bar insurance companies in the EU from promoting solvent schemes in England.
Related article: BAIC scheme of arrangement: sanction refused (2 August 2005).