In the Matter of The Hawk Insurance Company Limited

Under section 425 of the Companies Act 1985, separate creditor meetings are required only where the rights affected by a proposed scheme are so dissimilar that the creditors cannot consult together in pursuit of a common interest. The inquiry requires analysis of both the rights released or varied and the rights conferred by the scheme.

Differences in the valuation of contingent claims do not alone create separate classes. Where weighting merely provides a practical estimate of contingent liabilities in an insolvent winding-up alternative, creditors may remain a single class. The court must also avoid dividing creditors into classes in a way that gives a minority an unwarranted veto over a scheme.

The company was an insolvent insurer in provisional liquidation. Its proposed scheme of arrangement would pay unsecured creditors a dividend on admitted claims. Insurance claims were weighted differently according to whether they comprised paid losses, outstanding losses, or incurred-but-not-reported losses.

Mrs Justice Arden refused to sanction the scheme. She considered that the weighting provisions created separate creditor classes, so that the single meeting held could not satisfy the jurisdictional requirements of section 425 of the Companies Act 1985.

The company appealed with fuller evidence about its long-tail insurance liabilities. The central issue was whether the creditors' pre-scheme and scheme rights were sufficiently dissimilar to require separate class meetings.

1. Appeal allowed unanimously. Lord Justice Chadwick, with whom Lord Justice Pill and Mr Justice Wright agreed, held that the court had jurisdiction to sanction the scheme and made the proposed sanction order.

2. The governing question under section 425 was whether the scheme was a single arrangement with the creditors concerned, or linked arrangements with distinct classes. Applying Sovereign Life Assurance Company v Dodd [1892] 2 QB 537, separate meetings are required only where the relevant rights are so dissimilar that the creditors cannot consult together with a view to their common interest. The court must examine both the rights to be released or varied and the new rights given by the scheme.

3. The judge had wrongly treated accrued and contingent insurance claims as different rights. In a winding-up, all creditors could prove for debts and liabilities, including contingent liabilities. Claims without a certain value required estimation. The weighting of outstanding-loss and IBNR claims therefore reflected a practical and simplified method of making a just estimate, rather than a difference in creditors' legal rights.

4. On the fuller evidence, neither the existing rights nor the replacement rights were so dissimilar as to prevent consultation. The creditors had a common interest in an inexpensive and expeditious alternative to formal liquidation, and in fact approved the scheme without dissent. The court should not create unnecessary classes, since that could confer a veto on a minority.

5. Lord Justice Pill agreed but stressed that the facts required scrutiny. A different conclusion might be warranted where one group had only paid claims and another only remote, substantial and long-deferred IBNR claims. On these facts, however, a broad but fact-sensitive application of the class test supported a single meeting.

• Court of Appeal (Civil Division) — allowed the appeal and sanctioned the scheme of arrangement.
• High Court — Mrs Justice Arden refused sanction on 21 December 1999, holding that separate creditor-class meetings were required and that the court therefore lacked jurisdiction under section 425 of the Companies Act 1985.