British Aviation Insurance Company Ltd, Re

A solvent insurer’s scheme of arrangement must be assessed against the realistic alternative of continuing solvent run-off where liquidation is not a realistic possibility. Policyholders with accrued claims and those with incurred-but-not-reported claims may therefore require separate classes where their rights and interests differ fundamentally. The court must also ensure that voting values genuinely represent creditors’ claims, particularly where future liabilities depend on controversial actuarial estimates. A statutory majority is not conclusive. The court may refuse sanction where the meeting is unrepresentative, the scheme transfers insurance risk back to policyholders, or its principal benefits accrue to the company and shareholders. A scheme giving the company an effectively unrestricted power to revert to run-off is also a material unfairness.

The petitioner, a solvent aviation insurer in run-off, sought sanction under section 425 of the Companies Act 1985 for a scheme affecting insurance and reinsurance liabilities, principally long-tail asbestos and pollution claims. The scheme would require present and future claims, including incurred-but-not-reported claims, to be valued as at a fixed date and paid by reference to that valuation.

Creditors opposed the petition on grounds including inadequate notice, incorrect constitution of creditor classes, unreliable voting valuations, special interests among voting reinsurers, unfair scheme terms, and the company’s power to terminate the scheme and revert to solvent run-off. The central questions were whether the meeting had been properly constituted and, if so, whether the court should exercise its discretion to sanction the scheme.

1. Jurisdiction. Approval of a scheme under section 425 of the Companies Act 1985 involves three stages: summoning the meeting, obtaining the statutory majority, and seeking the court’s sanction. Each stage has a distinct function. The first-stage order did not prevent class objections being raised at the sanction hearing.
2. Classes. The appropriate comparator was continuing solvent run-off, because a solvent liquidation was not a realistic alternative. In solvent run-off, a policyholder with an incurred-but-not-reported claim retained the right to wait and receive a full indemnity if the insured contingency materialised. Under the scheme, that risk was transferred to the policyholder through an actuarial valuation. Accrued-claim policyholders and incurred-but-not-reported-claim policyholders therefore had sufficiently different rights and interests that they could not sensibly consult together in their common interest. They should have been convened in separate meetings.
3. The fact that some creditors had both types of claim did not prevent separate classes. Reinsureds who were also reinsurers did not constitute a separate class, although their conflicting economic interests were relevant at the sanction stage.
4. Voting and representation. A chairman valuing disputed claims for voting purposes had to ascribe a genuine value. Treating substantial incurred-but-not-reported claims as nominal claims because they were uncertain or unreliable was not a valuation. The resulting vote did not fairly represent creditors, particularly because reinsurers had an incentive to cap their own liabilities and some supporting creditors received more favourable treatment.
5. Sanction. The court was not a rubber stamp and could refuse sanction despite the statutory majority. The scheme’s unclear and effectively unrestricted power to revert to run-off, the uncertainty of the estimation methodology, and the fact that its principal benefits accrued to the company and shareholders all weighed against sanction. More fundamentally, it was unfair to compel policyholders who had purchased occurrence-based cover to accept an estimate and bear again the risk which the insurer had contracted to bear.
6. The petition was dismissed because the meeting was improperly constituted and the court therefore had no jurisdiction to sanction the scheme. In any event, the scheme would have been refused as a matter of discretion.

First-instance decision. The petition for sanction of the scheme was dismissed.