Insurance Companies Schemes of Arrangement: clarity on classes and jurisdiction

United Kingdom

The judgment in the case of the WFUM pool scheme (Re Sovereign Marine and others), handed down on 9th June, has brought some much needed clarity into two troublesome areas, namely classes of creditors required for voting on a scheme and jurisdiction. The case is welcome news for EU/EEA insurers wishing to promote schemes of arrangement in England.

That scheme is a pool scheme, involving 16 insurers who participated in a pool managed by companies in the Willis Group. It comprised Sovereign, a wholly-owned subsidiary of the Willis Group, which was insolvent, two subsidiaries of Sovereign and 13 other companies, which included a New York and a Bermudian insurer and two EU insurers. Unusually, there was opposition at the convening stage from a number of US companies, many of whom opposed the BAIC scheme at the sanction stage in 2005, and a hearing lasting over 5 days.

On classes, Warren J decided that incurred but not reported (IBNR) and notified outstanding claims must be in separate classes, thus confirming, but for different reasons and on different evidence, the view expressed by Lewison J in BAIC. He stated that Lewison J had not laid down a general rule of universal application. Inevitably, decisions on whether IBNR claims can be in a single class with notified outstanding claims, or must be in a separate class, will be very heavily fact dependant and the fact that they had to be in separate classes in this scheme does not mean that they will always have to be in separate classes.

Warren J considered extensive actuarial expert evidence which had not been put before Lewison J in BAIC. Having considered all this evidence Warren J came to the conclusion that the rights of creditors with notified outstanding claims were different from the rights of creditors with IBNR claims. That, itself, was not conclusive, because the next question was whether the difference in rights was so great that they could not properly consult together in the common interest. He considered that they might be able to consult together in two sorts of case; one is where creditors all have roughly the same "mix" of outstanding claims and IBNR claims; the other is where the scheme creditors are all insurer companies, who are well able to assess risk and may be willing to take a view on the extent of their exposure across the board.

The issue on jurisdiction concerns the meaning of "a company liable to be wound up under the Insolvency Act 1986" in section 425(6) of the Companies Act 1985. Warren J confirmed that, for foreign, non-EU, companies what is needed is a sufficient connection with England.

For the two EU insurers, the issue was whether any of the Community instruments meant that such companies were not "companies liable to be wound up" in England. Warren J came to the conclusion that the Jurisdiction Regulation did not apply and that by virtue of Regulation 5(1) of the Insurers Regulations the test for whether an EU/EEA insurer is liable to be wound up in England for the purposes of section 425 is the same test as applies to any non-EU/EEA company, namely the sufficient connection test referred to above.

This is welcome news for EU/EEA insurers wishing to promote schemes of arrangement in England. It confirms the decisions in a number of unopposed insurance schemes and is the first case where the contrary view has been argued by opposing creditors