Cross-border ------publisher, the of Cross-border permission the www.practicallaw.com/insurancehandbook. with visit www.practicallaw.com/4-501-3104 or reproduced is and 2010 Handbook ager) by a specified date (bar date). Claims for uncrystallised fu ture amounts, outstanding and incurred but not reported claims (IBNR), and incurred but not enough reported claims (IBNER) commutations. must be estimated, as they would in individual valu and agreeing for timescales and method a incorporate Schemes tech actuarial detailed include schemes complex More claims. ing prohibit schemes These claims. uncrystallised to value used niques scheme. allow but the by circumstances, most in prescribed arbitration or are courts the to which access of rules the adjudication, binding Once the scheme is complete, and all claims properly submitted company scheme the paid, and valued been have date bar the by is released from all future claims and under, obligations in rela tion to, the scheme’s insurance contracts, and creditors under these contracts cannot assert any future claims. clos- for mechanism familiar a are schemes market, London the In of schemes solvent 177 2008, of end the At business. legacy ing (KPMG effective become had companies non-life for arrangement 2009). Run-Off Survey Non-life Insurance October claims to the scheme company (or the appointed scheme man PREPARATIONPROCEDURALAND REQUIREMENTS A well-constructed scheme undergoes significant legal and com- The domain. public the reaches it before work preparatory mercial scheme business must be accurately identified and described so that creditors know whether they are affected by it. whether to have determine may be considered must also who issues Jurisdictional Policyholders scheme. UK a propose may company be the must details contact their and identified be must claims scheme intensive. and labour can which be very time consuming updated, the Also, proposals. about if be should and creditors scheme consulted, contacted Potential informed reinsurers outwards and notices practical, forms, claim and (voting drafted. documentation be must related and scheme application) court a for evidence and creditors to The key piece of documentation in a scheme of arrangement is terms and scope the out sets which itself, document scheme the of the scheme the and, business, crucially, assets and liabilities the scheme covers. Although all schemes contain certain boiler plate clauses, the key clauses of the scheme, concerning claims submission and agreement, conflict resolution and payment are particular the of preferences or needs the to specific highly often sensi be should drafting The creditors. its and company scheme tive to considerations and technical problems which have arisen in previous schemes and to creditors’ concerns, particularly in valuation and adjudication. [email protected], ------CROSS-BORDER HANDBOOKS www.practicallaw.com/insurancehandbook 13 CROSS-BORDER HANDBOOKS www.practicallaw.com/insurancehandbook Reinsurance contact PLC and please [2009] Scots Scots [2009] copies Insurance obtain to or Cross-border PLC the information ) on its proposed solvent scheme. Fol scheme. solvent proposed its on ) in further For published Scottish Lion Insurance Company Limited, Re An Re Limited, Company Insurance Lion Scottish first Scottish Lion Scottish was Company.

Law chapter

Overseas recognitions and enforcement of schemes. Overseas recognitions and enforcement of The sanctioning of a scheme. Case law developments. The background to schemes of arrangement. Preparation and procedural requirements.

„ „ „ „ „ This

Michelle Kierce, Helen Martin, Adriana Cotter and Nigel Montgomery Helen Martin, Adriana Cotter Michelle Kierce, Sidley Austin LLP ongoing currency ongoing Insurance and Reinsurance 2010 and Reinsurance Insurance their and arrangement of Schemes A wide variety of commercial arrangements have been achieved activ M&A with connection in schemes court-sanctioned through This article is primarily concerned with the use of schemes arrangement of by solvent insurance companies. These schemes, often called “estimation” or “cut-off” schemes, are used to exit run-off business, by achieving a commutation of the Without parts. selected or business portfolio, company’s the all comprising a scheme, the run-off of books of discontinued insurance busi Under these schemes, the assureds or cedants whose insur lated by Part 26 (Arrangements and Reconstructions) of the Com the of Reconstructions) and (Arrangements 26 Part by lated Companies the of 427 to 425 sections (formerly 2006 Act panies on force into came 2006 Act Companies the of 26 Part 1985). Act arrange of schemes permitting legislation although 2008, April 6 statutory The century. a over for existed has forms various in ment or a allow to ar a company reach compromise provisions binding them. of class any or creditors, or members its with rangement ity and shareholders’ rights. In insurance, schemes have been widely used by solvent companies to bring finality to the whole, as companies, insolvent by and business their of, lines certain or running- of method a offer Schemes liquidation. to alternative an creditors. to distributions making and business company’s the off ness can continue for many years. ance contracts are included in the scheme must submit their A scheme of arrangement is an English statutory procedure regu procedure is A an statutory of scheme English arrangement „ BACKGROUND „ „ „ „ Order Under Section 896 of The Companies Act 2006 Act Companies The of 896 Section Under Order UK UK schemes of are arrangement used for closing and insurance was of Glennie Lordopinion The significant business. reinsurance in given recently ( CSott_127 CS Against this backdrop, this article looks at: lowing the handing down of the opinion, Lord Glennie agreed to the the to agreed Glennie Lord opinion, the of down handing the lowing the to sanction the petition to dismiss request creditors’ objecting many divided has appealed), been has (which ruling This scheme. Lord Glennie’s schemes. for future consequences on the potential rel and persuasive is courts, English on binding not while opinion, schemes. many to common are with deals it issues the as evant © Practical Cross-border Practical © This 14 jurisdiction context, this In jurisdiction. of lack is which of one reasons, various for scheme a sanction to refuse can court The SCHEME A SANCTIONING „ „ „ scheme, includingthe: proposed a to relation in considers FSA the factors procedures the FSA’son and the on guidance provides which fsa.gov.uk, firms insurance for Arrangement of Schemes published FSA The to sanctionaproposedscheme. hearing court the at account into taken is scheme a to objection no has it that statement FSA an status, official lacking Although supervises. it which company insurance an by proposed scheme in relation to schemes. However, it is consulted in relation to any industry. role services statutory financial no UK has the FSA The of regulation the for responsible regulator the (FSA), Authority Services Financial the to notified be must scheme intended Any authorities, and where practicable, with the company’s creditors. visers undergo a consultation process with the relevant regulatory While documentation is drafted, the scheme company and its ad the schemeworks. how explain to and voting, their on bearing a have to likely are draw creditors’ attention to particular aspects of the scheme that to be drafted and sent to creditors. The aim of the statement is to statement explanatory an requires also framework statutory The Cross-border US Bankruptcy Code, to make the scheme the binding under US of law. 15 Chapter under US the in Injunction Permanent a for creditor base and/or assets in the US, it can make an application taken, is and depending step on whether the scheme this company has a significant after or before either However, England. in order granting sanction is delivered to the Registrar of Companies scheme. Following court sanction, the the scheme becomes effective rejects once the or approves either discretion, its whichthe at at court, hearing the sanction is stage final and third The if otherclassesapprovethem. tain provisions that survive rejection in a particular class meeting, con which schemes in is this to exception An meeting. creditor each in obtained been have votes of value and number requisite the if stage next the to on move only can scheme proposed The effect of the scheme on their rights against the the scheme company.to according classes into grouped be must creditors poses, 2006 Act Companies 899(1), (section proxy by or person in meeting the at voting creditors the of value in 75% representing number in majority a by approved be must proposal scheme The scheme. proposed the against or for cast are votes which during meeting(s) creditor the involves stage second The convene the creditor meeting(s) to vote on the scheme proposals. to it allowing order an for court the asks scheme the company proposing the where hearing, convene” to “leave the as known hearing, court initial an is stage first The scheme. the of proval ap court and creditor obtaining for process three-stage statutory the is step next the complete, are stages preparatory these Once chapter „ „ „ Law Degree ofsolvencythecompanyproposingscheme. Type ofbusinesstowhichitrelates. scrutiny is required where the policyholder is a reinsurer). Type of policyholder affected by the scheme (for example, less PLC CROSS-BORDER HANDBOOKS www.practicallaw.com/insurancehandbook Company. was first published For further h poes ud t dcso mkn on making decision to guide process The in information the PLC Cross-border or to obtain Insurance copies , available at available , ). For voting pur voting For ). please and contact Reinsurance www. [email protected], - - - - Handbook „ „ „ interest. industry considerable provokes and rare contrast, by is, sanction schemes for a wide range of purposes and therefore any refusal to employed effectively have companies insurance of succession A LION SCOTTISH OF DEVELOPMENTS „ „ principles indecidingtosanctionascheme: of sets two follow generally courts 772, BCLC 1 [2005] 2) (No. in it put J Richards David As tion the scheme, he would not have on grounds of fairness. In opposingthe creditors havereasonable objections scheme.theto acting in relation to his interests). However, the test is not whether concernedandclass the ofmember areasonably approve,being arrangementintelligenttheanthat one honestiswould andman courtswillsanction schemesBuckleytheis test(that whether is, scheme’swhetherfortest overallexpressedfairnessthe andthat the regardingconcerns had also J, Lewisonjudge, However,the dictionfollowing classmeetingsincorrectly.heldbeen which had jurishave not did consideredhejudge the because scheme the LtdCo In so. do to fair is it whetherconsider then must it scheme, a sanction jurisdictionto has court the If that the: satisfied be therefore must court the jurisdiction, to relation In favour ofthescheme. in voted have creditors of majority requisite the the if even sanction scheme, to jurisdiction have not does court the purposes, voting for classes correct the into creditors group to failed has rect statutory procedure has been followed. If a scheme company cor the that basis the on sanction to court’spower the to refers „ „ „ „ „ BAIC who voted at the meeting(s), whetherProposed in person scheme or was by approvedproxy. by the requisite majorityance withtheorderofcourtconveningmeeting(s). of those Meeting(s) ofcreditorswassummonedandheldinaccord- meeting ormeetings. Creditors wereplacedinappropriateclassestoconvenethe „ „ „ either ofthefollowingapply: ever, courtsdonotgenerallydifferfromthemeeting,unless acting bonafideandregisterthemeeting’s decision.How- The courtdoesnotmerelyreviewwhetherthemajorityare „ „ „ „ The followingmustbetrue: „ „ „ „ „ „ „ [2006] BCLC1665 ( , Lewison J stated that even if he had jurisdiction to sanc 2010 an errorisfoundinthescheme. bind; or sidering theinterestsofclassitcanconsequently the meetinghasconsideredmatterwithoutcon- the classhasnotbeenproperlyconsulted; the Buckleytestisfulfilled. the classtheyrepresent; coercing theminoritytopromoteinterestsadverse the statutorymajorityareactingbonafideandnot the classwasfairlyrepresentedbymeetingattendees; statutory provisionshavebeencompliedwith; and is reproduced or visit with BAIC www.practicallaw.com/insurancehandbook. Re Telewest Communications plc Communications Telewest Re Insurance andReinsurance2010 the ), the),court refused sanctionto permission e Te rts Aviation British The Re, of the publisher, - - - Cross-border ------publisher, the of Scottish Lion fo- Cross-border permission the www.practicallaw.com/insurancehandbook. with visit or reproduced is BAIC and Lord Glennie in and case) that proponents of solvent schemes will schemes solvent of proponents that case) BAIC 2010 would be inherently difficult to value due to their uncertain value due to their uncertain difficult to would be inherently nature. The estimation methodology used to establish the value of to establish the value methodology used The estimation credi- basis for treating all not provide a clear the votes did resulting in uncertainty. tors uniformly, Es run-off. to revert to power unfettered an had company The share and company largely were benefits scheme creditors. supposed scheme The benefit not did therefore, and benefits holder sentially, this would have allowed the company to return to run- to return to company the allowed have would this scheme, the sentially, sanctioning before was it as state same company. the in the to off beneficial longer no was scheme the because Handbook Scottish Lion, Lord Glennie makes reference to the first, sec „ „ „ Both Lewison J in ties involving more than one country. To enforce an overseas insol overseas an enforce To country. one than more involving ties entity or person (a representative foreign a decision, vency-related authorised to administer the debtor’s affairs) files a petition for administrative or judicial (a proceedings foreign the of recognition have which schemes, solvent UK country). foreign a in proceeding OVERSEAS Cayman RECOGNITION the Bermuda, ANDAustralia, ENFORCEMENTincluding jurisdictions of number A with to a system legal and countries similar other Jersey, finalise Islands, to companies enables which legislation have UK, the of that arrangement. of scheme a through liabilities long-term potentially Recognition and enforcement of UK schemes of arrangement in Code, Bankruptcy US the of 15 Chapter under achieved is US the which for provides mechanisms effective dealing with insolvency cases from debtors, assets, claimants and other interested par „ „ „ ond and fourth bullets above, in response to forward by submissions counsel for put the opposing creditors, and he is clearly remarks on fairness. influenced by Lewison J’s However, Lord Glennie appears to go further than Lewison for that J requirement his in with particularly issue, the of analysis his creditor democracy to prevail in relation to a scheme there must of ratio the of part forms This solution”. a requiring “problem a be Glennie’s Lord of status judicial the respect, this in and case the opinion is stronger than Lewison’s obiter remarks on fairness in solvent schemes in BAIC. Lord opinion Glennie’s presents challenges for some approaches to solvent schemes. Solvent schemes can offer substantial ben efits not only for insurers butalso for their creditors, and many would consider it unfortunate (and an unexpected legal interpre tation) if a minority of dissenting creditors were able to overrule happened (as likely is It case. every in majority the of wishes the the following step back and reflect on the lessons of this judgment (and any appeal that follows it), but that solvent schemes will continue to sanctioned. be proposed, debated and ultimately, there However, will probably be a re-evaluation of some scheme tactics, a renewed emphasis on dialogue with creditors and con sideration of how the drafting of the scheme affects new place, their have them. to continue will schemes traditional Al though avoid to structured, are schemes which in way the to approaches the pitfalls of BAIC and Scottish Lion, are expected. cused on the specific facts of the cases before them. cused on the specific In [email protected], ------CROSS-BORDER HANDBOOKS www.practicallaw.com/insurancehandbook 15 CROSS-BORDER HANDBOOKS www.practicallaw.com/insurancehandbook Reinsurance contact con- PLC and please BAIC copies Insurance obtain to or Cross-border PLC the information in further For published was the first scheme, in relation to a sol a to relation in scheme, first the was BAIC Lord Glennie dismissed the petition by Scottish Scottish by petition the dismissed Glennie Lord first was Company. , Lewison J thought it unfair and unreasonable to compel dis compel to unreasonable and unfair it thought J Lewison , Law chapter The votes to be cast did not fairly represent creditors with Such claims substantial claims under the IBNR category. Can it ever be fair to sanction a solvent scheme with con- Can it ever be fair to sanction a solvent scheme tinuing creditor opposition? Can the decision that the statutory majorities were achieved Can the decision that be challenged? Scottish Lion, Scottish BAIC „ „ „ This However, However, Lord Glennie appeared where to “creditor envisage democracy” circumstances legitimately he considered solvent schemes prevails, would be sanctioned indicating in certain circumstances (for example where the scheme company was in danger of insolvency). it However, is unclear what these circum stances would be. The fact that a majority of creditors, correctly grouped into classes, may reasonably consider the scheme to be in their interests and therefore approve it is insufficient (in Lord view) to entitle them Glennie’s to force other creditors to partici pate against their will. The requirement for a “problem requiring a solution” to justify a creditors’ scheme for a solvent company appears to be a new test which is not present in the statute and has not featured in which previous has case merely law, required a balance between the advantages and disadvantages of proposed schemes (that is, some element flexibility producing a fair result). main In the forms a that whole a creditors’ as class a to benefit the is it scheme, consideration. On the first point, Lord Glennie did not want to preclude credi- tors from challenging vote valuations. On the second point, Lord shareholders’ from apart reason, no was there considered Glennie with run-off. wishes, why the company should not continue „ THE EFFECT OF BAIC ON SCOTTISH LION In , the court was asked to consider two issues: In Scottish Lion, the court was asked „ ity), there must be a “problem requiring a solution”. However, he However, solution”. a requiring “problem a be must there ity), considered a solvent scheme as an example of “where…, credi tor democracy should not carry the day”. He essentially required that appears It scheme. solvent a for approval creditor unanimous in J Lewison of that to view similar a had Glennie Lord schemes. cerning fairness in solvent „ In Lion Insurance Company Limited to sanction its solvent scheme of arrangement. He stated that for creditor democracy principles to apply in relation to a scheme (that is, for it to be fair for the majority of creditors in a class to be able to coerce the minor Insurance and Reinsurance 2010 and Reinsurance Insurance BAIC concerned a proposed solvent scheme of arrangement by British Aviation Insurance Company Ltd which wrote insurance and reinsurance business in the aviation sector until 1 that January found J Lewison run-off. into entered it point which at 2002, he constituted, correctly been not had creditors of class the since had no jurisdiction to sanction the scheme and it was dismissed 2005. July 21 on senting creditors to accept payment of an estimate of their claims. claims. their of estimate an of payment accept to creditors senting Despite concluding that he lacked jurisdiction, Lewison J consid J Lewison jurisdiction, lacked he that concluding Despite vent insurer, that had been opposed. vent insurer, ered other grounds for objection to the scheme, which are sum marised as follows: © Practical Cross-border Practical © This 16 the schemecreditors.Thispositionremainsunchanged. lish courts which have jurisdiction, irrespective of the location of contract is to be enforced, this requires an application to the Eng governed law English an Where contracts. governed law German involving scheme a to specifically related decision the However, be ofinteresttoEuropeanschemeproponents. will appeal the of outcome the and Court, Civil Federal German the in appeal under currently is decision This creditors. its company and the between agreement an approved merely had but scheme, the sanctioning by Regulation Brussels the of meaning the within judgment a made not had Court High English the that other reasons, including local law reasons, the German court held Germany.Among in unenforceable and invalid was arrangement However, recently a German court held that an English scheme of tribunal, or court whatever thejudgmentiscalled. states’ member a by given judgment any as Denmark. Article except 32 of the Brussels states, Regulation defines judgment member EU all in matters commercial and civil in judgments of enforcement which and implementation Regulation), the regulates (Brussels matters commercial and civil in judgments of enforcement and recognition the and jurisdiction rec on 44/2001 No. be (EC) Regulation to through enforced potential and ognised the have schemes solvent UK EU, the In ants ofitsCanadianbranch. non-Canadian insurer attempted to enforce a scheme on the ced fairly. The decision was important as it was the first time a solvent treated be would reinsureds Canadian the ensure to criteria tain legal system. The recognition order was made conditional on cer solvent schemes neither “foreign nor repugnant” to the Canadian English made explained, Farley Justice as of which, schemes arrangement, UK regulating those to legislation Ontario in exist provisions similar that fact the and process, court UK the with courts Ontario the of familiarity the as such account, into taken were considerations policy of number A Canada. in enforced and recognised be can arrangement of schemes solvent foreign that (Re) the Ontario Court of by Appeal in upheld was scheme solvent UK a of recognition Canada, In its previous form of section 304 of the US Bankruptcy Code. the US for many years under the Chapter 15 procedure and under insuccessfully recognisedbeen policyholders, have US involved Cross-border chapter Law and confidently advise your clients on law and its practical implications. implications. practical its and law on clients your advise confidently and PLC KarenCrozier, Financial Services Knowledge Management Lawyer, Freshfields Bruckhaus excellent.” Deringerare service their of LLP. quality and scope speed, The PLC PLC 3 a 20, okt 467 Ti dcso confirmed decision This C43657. Docket 2006, May 23 is the essential know-how service for financial services lawyers. Never miss an important development development important an miss Never lawyers. services financial for service know-how essential the is Services Financial CROSS-BORDER HANDBOOKS www.practicallaw.com/insurancehandbook Company. Financial Services was first published For further in information the PLC Cavell Insurance Company Limited Cross-border or to obtain Insurance copies please and contact Reinsurance [email protected], - - - - Handbook frame thanwouldbepossibleintheordinarycourseofrun-off. time shorter much a in business reinsurance and direct closing for solution practical a remain schemes Solvent agenda. ment develop scheme the of top the at placed are consultation and communication Preparation, underestimated. be cannot nication commu clear and creditors of treatment fair of importance The to paid is creditors. benefit “uplift” other or premium risk a that quires re normally FSA the scheme, a proposing companies insurance solvent” “substantially to relation In cover. of loss for creditors compensates scheme the that show must scheme proposed the success. scheme’s a to vital is of which are paramount. Early and effective creditor consultation scheme’sthe and creditors their on fect both procedure, working ef the is consider to companies scheme for point important An either wind up their business or close a particular book of to business.wishcompaniesthatproposing schemessiderationsolventfor It wouldprematureItbe viewto CONCLUSION for schemes. for Sidley AustinLLP Nigel Montgomery Michelle Kierce,HelenMartin,AdrianaCotterand W E F T

nmontgomery@sidley acotter@sidley hmartin@sidley +44 2073602580 +44 2073602559 +44 2073602582 www.sidley.com [email protected] +44 2076267937 +44 2073602583 2010 www.practicallaw.com/about/financialservices and Scottish Lion Scottish CONTRIBUTOR DETAILS CONTRIBUTOR is .com reproduced .com or

.com visit , like , with www.practicallaw.com/insurancehandbook. ScottishLion Insurance andReinsurance2010 demonstrates that demonstrates Lion Scottish the BAIC permission , highlighted areas of con of areashighlighted , as signallingas endthe of the publisher, - - - - -