Re British Aviation Insurance Co Ltd

The court considered an application under section 425 of the Companies Act 1985 for sanction of a scheme of arrangement proposed by a solvent insurer in respect of part of its insurance and reinsurance business. The central legal issues were (i) whether the classes of creditors had been properly constituted for the purposes of summoning a single scheme meeting, (ii) whether notice and the explanatory materials were adequate, (iii) whether the scheme meeting was fairly conducted and whether the votes cast properly represented the views of affected creditors (particularly holders of IBNR claims), and (iv) whether the terms of the proposed scheme were fair so as to justify the court exercising its discretion to sanction it.

The judge held that the appropriate comparator for class analysis was a continuing solvent run-off (not an insolvency) and that policyholders with accrued or outstanding claims and those with IBNR (incurred but not reported) claims had sufficiently different interests that they could not sensibly consult together in a single class in the circumstances of this solvent company. For that reason the single meeting was improperly constituted and the court lacked jurisdiction to sanction the scheme. The judge also found that the conduct and result of the meeting were not sufficiently representative — in particular many opposing IBNR claims had effectively been discounted to nominal values for voting purposes while supporting creditors with substantial IBNR votes had been treated differently — and that the Estimation Methodology and certain scheme powers (notably the Company’s wide discretion to revert to run-off) created unfairness. The petition was dismissed.

The petitioner, British Aviation Insurance Company Ltd, a solvent aviation insurer in run-off, sought the court's sanction under section 425 Companies Act 1985 for a scheme of arrangement affecting part of its business (primarily long-tail US product and liability exposures including asbestos and pollution). The scheme proposed to value and pay in present value terms contingent liabilities as at an ascertainment date, establish a Bar Date for claims, provide an out-of-court adjudication process (a Scheme Manager and Scheme Adjudicator) and bar further proceedings in return for payment; the Company also reserved a contractual right to terminate the scheme and revert to conventional run-off.

Parties and procedure: The Company (petitioner) applied for an order summoning a meeting of affected creditors; notice was sent to approximately 17,500 ascertained addresses and advertised internationally. A meeting was held and, of 72 admitted voters, a statutory majority in number and value was recorded in favour. The scheme was opposed by several large United States insureds and other creditors who raised procedural and substantive objections.

Issues framed:

• Was adequate notice and disclosure given at the first- and second-stage procedures?
• Were the classes of creditors correctly identified for the meeting(s)?
• Was the scheme meeting properly and fairly conducted and did the admitted votes fairly represent creditors' views?
• Are the terms of the scheme, including the Estimation Methodology, Bar Date, adjudication process and the Company’s right to revert to run-off, fair?
• If jurisdiction existed, should the court exercise its discretion to sanction the scheme?

Court’s reasoning and findings: The court explained the three-stage scheme process (application to summon meetings, creditor meetings, and court sanction) under s.425 and applied authorities on class constitution and the court’s supervisory role. The judge accepted that the appropriate comparator for class analysis in this solvent situation was continued solvent run-off rather than insolvent liquidation. He found that rights and expectations of creditors with accrued/outstanding claims differed materially from those with IBNR claims because the latter stand to lose insurance indemnities in exchange for an up-front valuation. That difference meant creditors with IBNR claims could not sensibly consult with those having accrued claims, so a single meeting was improperly constituted and the court had no jurisdiction to sanction the scheme.

On the conduct of the meeting the court observed that many opposing creditors’ IBNR claims had been admitted for voting at nominal values while some supporting creditors had their sizable IBNR votes admitted after negotiation, producing an outcome the judge considered unrepresentative. The Estimation Methodology was treated as imprecise and the adjudication process raised concerns (though comparable adjudication schemes had been sanctioned previously). The Company’s wide power to terminate the scheme and revert to run-off was insufficiently circumscribed and contributed to unfairness. Even if jurisdiction had existed, the judge stated he would have refused sanction in the exercise of his discretion for the reasons given: unrepresentative voting on IBNR claims, uncertainty in valuation methodology, the reversion power and the fact the scheme largely advantaged the Company and its shareholders by allowing earlier release of surplus funds.

The judgment notes that this was, on the evidence, a rare instance of a contested solvent insurer scheme and emphasises the court’s protective role toward dissenting creditors when contingent long-tail risks are involved.

The petition to sanction the scheme is dismissed. The court held that it lacked jurisdiction to sanction the scheme because the single convened meeting did not properly constitute the relevant classes (creditors with accrued/outstanding claims and those with IBNR claims could not sensibly consult together in the circumstances of a solvent run-off). Further, even if jurisdiction existed the court would, in its discretion, have refused sanction because the meeting was unrepresentative (many opposing IBNR claims were effectively discounted for voting), the Estimation Methodology and adjudication arrangements gave rise to unacceptable uncertainty, and the Company’s power to revert to run-off was insufficiently circumscribed.