Consumer insurance contracts law: Recent Irish legislation diverges from UK position
Out-Law Guide | 08 Feb 2010 | 10:51 am | 8 min. read
Scottish Lion Insurance Company Limited v (First) Goodrich Corporate & others
Scottish Lion wrote a mixture of insurance and reinsurance business in the London market. A significant part of this business was "occurrence-based", covering liabilities arising out of events occurring within the policy period, even though actual claims may not be made for many years afterwards. This long-tail business included exposure to asbestos, pollution and health hazard losses.
The company stopped writing new business in December 1994 and went into run-off. Scottish Lion is solvent so its policyholders could expect to have their claims adjusted and settled as and when they are received and their validity and quantum agreed - a process that could take many years, even decades.
The company, however, wished to enter into a scheme of arrangement with its creditors in order to bring all its liabilities as insurer to an end.
Under the proposed scheme, the value of policyholders' claims and potential claims as at a specific date would be agreed or, in the absence of agreement, estimated by a scheme adjudicator following guidelines set out in the scheme document. Once all claims were paid, the company would be put into members' voluntary liquidation.
Scottish Lion said the proposal provided a practical, straightforward and cost-effective means of determining the value of present and future claims, bringing finality and certainty to the company’s liabilities. Scheme creditors would have the benefit of early payment without discount, although, since their potential claims would be given an estimated value, it was possible that some would receive more, and others less, than they would have received in the course of the run-off.
The scheme, however, was opposed by five US-based creditors, who argued that it amounted to a confiscation of their rights.
They said the occurrence-based insurance cover they had bought for substantial premiums was a valuable - and irreplaceable - business asset that they would prefer to retain. The company was financially sound. Each of its creditors could confidently expect to be paid as and when it made a valid claim under its policy. The proposal, however, simply transferred the risks assumed by Scottish Lion back to the policyholders, depriving them of the security of their insurance cover for little or no compensation.
The procedure for solvent and insolvent schemes of arrangement is now set out in part 26 of the Companies Act 2006 and replicates the relevant provisions of the Companies Act 1985.
The process falls into three stages. At the first stage, the court is asked to order meeting(s) of creditors to be convened. For voting purposes, creditors may have to be segregated into classes and vote at separate meetings. These classes must be made up of creditors "whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest" (Sovereign Life v Dodd).
The second stage is holding the creditors' meeting(s). For the scheme to proceed, a majority in number representing at least 75% in value of the creditors (or each class of creditors) present and voting must vote in favour.
The third stage is a further application to the court to sanction the scheme. Under Scottish procedure, this application is made by a petition.
Even if the creditors have given their approval by the requisite majority, the court still has a discretion to refuse to sanction the scheme at this third stage. It must be satisfied that the Act has been complied with, that the classes of creditors were fairly represented by those who attended and that the statutory majorities acted in good faith.
It must also be satisfied that the arrangement "was such as an intelligent and honest man, a member of the class concerned and acting in respect of his interests, might reasonably approve" (Buckley on the Companies Act).
In the case of Scottish Lion, the court made an order at the first stage for two separate meetings: one for scheme creditors with claims that had been incurred (in that an insured event had occurred) but not yet reported (known as IBNR claims) and the other for those with non-IBNR claims.
The meetings were duly held in March 2009 and the chairman reported that the statutory majorities of 75% in value of creditors present and voting had been achieved. Scottish Lion proceeded to issue a petition requesting the court to sanction the scheme.
The respondents, however, challenged the way in which values had been attributed to IBNR claims for voting purposes. The company had appointed an independent assessor to estimate the value of the votes and advise the chairman. But the respondents questioned the assessor's methodology and claimed the process was inherently biased.
They said IBNR claims belonging to scheme creditors who supported the scheme were devalued significantly less than those who opposed it. Had the chairman accepted the creditors' valuation of these claims, the requisite majority would not have been achieved at either meeting.
The company argued that, in the absence of perversity, dishonesty or irrationality, there was no basis for going behind the chairman's determination of the results of the votes cast at the meetings. He had done precisely what he was required to do under the terms of the court order.
The Scottish court was asked to rule on two preliminary questions:
(i) whether the respondents were entitled to challenge the chairman's decision that the statutory majorities had been achieved at the creditors' meetings; and
(ii) whether it could ever be fair to sanction a solvent scheme of arrangement in the face of continuing creditor opposition to having occurrence-based cover compulsorily terminated.
On point (i), Lord Glennie agreed with the respondents that they could challenge the chairman's decision. Such a challenge was not limited to occasions where the chairman could be said to have acted perversely, dishonestly or irrationally, or to a particular stage in the process. This decision was not appealed.
On point (ii), he said the real question was: in what circumstances might a court sanction a solvent scheme such as this in face of opposition from dissenting creditors?
In Lord Glennie's view, the common thread in schemes of arrangement was the need to address a problem facing the company, such as the company's financial difficulties. In such circumstances, it was in the interests of all the creditors that a solution should be found and that they should agree to be bound by the wishes of the majority. This was the principle behind creditor democracy.
"But I do not see why it need apply in all cases where a scheme of arrangement is proposed," he said. "A solvent scheme is an instance of a case where, subject to other considerations, creditor democracy should not carry the day".
The judge could see no reason, apart from the wishes of the shareholders, why the company should not continue with the run-off. The company was solvent and had made provision to meet its potential liabilities. Any individual creditor who wished to enter into a commutation agreement with the company could do so, but Lord Glennie did not see why they should be able to force other creditors to participate against their will.
The judge said he was not suggesting a line should necessarily be drawn between solvent and insolvent schemes of arrangement. "But in a solvent scheme, I would expect petitioners, applying for a scheme to be sanctioned, to be able to place before the court averments and supporting material justifying the proposition that in the particular case, notwithstanding that it is a solvent scheme, the minority should be bound by the decision of the majority".
The company appealed, arguing that the Act drew no distinction between solvent and insolvent schemes as regards the application of a creditor majority and Lord Glennie was wrong to do so.
His approach effectively required unanimity for solvent schemes, even if the dissenting creditors' reasons were perverse. Moreover, he had ruled on a general point of law raised in advance of an evidential hearing and before he had reached the stage of exercising his discretion.
Giving judgment on the appeal, the Lord President of the Inner House, Court of Session found Lord Glennie had been wrong to dismiss the petition essentially upon a preliminary point.
The purpose of dividing creditors into classes was to protect the minority from being oppressed by the majority. There was no suggestion that the class division in this case (into IBNR and non-IBNR creditors) had been anything other than fair and appropriate.
Another protection came later, when the court exercised its discretion whether or not to sanction the scheme. But this scheme had not yet reached that stage. Consequently, it was not yet necessary to decide whether the company could show the arrangement was one an intelligent and honest man might reasonably approve (the Buckley test) or whether it had to "go further" because it was a solvent scheme, as Lord Glennie had suggested.
There was, however, nothing in the legislation to suggest solvent schemes should be dealt with differently from insolvent schemes. The company's solvency would be one factor, among others, for the court to take into account at the sanction hearing. Another might be whether or not there was a problem that needed to be resolved. But the existence of a problem was only a factor, not a precondition to the sanctioning of a scheme, solvent or otherwise.
The Lord President concluded: "The argument that the proposal in this scheme is unreasonable…is one which should be addressed when the whole relevant factual circumstances are before the court and it is, in light of these, considering the exercise of its discretion.
"At that stage the argument based on the fact that insured with long-tail policies are being required to accept current estimated values in lieu of their contingent claims may, possibly with other arguments, win the day.
"But that circumstance is not, in our view, at this stage so overwhelming a factor against the granting of sanction that the [company] can be denied the opportunity of establishing, if it can, the positive benefits of the scheme, as well as the soundness and robustness of the procedures it has put in place for valuing claims."
The scheme will now go back to the lower court for a hearing to be fixed.
The outcome of the appeal has been welcomed by the run-off market. The effect of Lord Glennie's decision, had it been upheld, would have been to block almost all solvent schemes before they got off the ground.
The company still has to persuade the court to sanction the scheme. But the circumstances that swayed Lord Glennie against the proposal are factors, among many others, that must be weighed and balanced by the court at the sanction hearing and not before.
The appeal court has also confirmed that there is nothing in the legislation to say solvent schemes are to be treated differently, which suggests the company will not have to "go further" in justifying the scheme than satisfying the Buckley test.
Consumer insurance contracts law: Recent Irish legislation diverges from UK position