Re Sovereign Marine & General Insurance Co Ltd

The court considered applications by 16 insurers for orders to convene creditor meetings to consider schemes of arrangement under section 425 of the Companies Act 1985. It held that the English court had jurisdiction to sanction schemes in relation to the EEA insurers concerned (Allianz Marine and Hibernian) and to the other foreign companies named, applying the tests in the authorities and construing the Insurers (Reorganisation and Winding Up) Regulations 2004 in the context of the Directive. The judge ruled that, for the solvent Scheme Companies, separate voting classes were required: one class for Unpaid Agreed Claims, Outstanding Claims and other claims not requiring actuarial IBNR valuation, and a separate class for IBNR (incurred but not reported) claims. The court declined to require a separate class for reinsurers or for foreign creditors who will be bound in practice, and made case-specific directions (including on Lloyd's syndicate voting).

This was a convening-stage application under section 425 Companies Act 1985 by 16 insurance companies (the "Scheme Companies") seeking orders to convene creditor meetings to consider multi-company schemes of arrangement (a comprehensive "Scheme Document" proposing cut-off, estimation schemes and related arrangements). Sovereign Marine (insolvent) proposed an amended estimation "cut-off" scheme; the other Scheme Companies were largely solvent and proposed estimation schemes in respect of liabilities arising from historic WFUM Pools run-off business. The principal objectors were a number of large policyholders (the "Opposing Creditors") who purchased occurrence policies and objected on (i) jurisdictional grounds in relation to two EEA insurers (Allianz Marine and Hibernian) and (ii) class composition grounds, principally that IBNR claims should form a separate voting class from Outstanding Claims.

Nature of the application: orders to convene creditor meetings under section 425 CA 1985 to vote on proposed schemes of arrangement (cut-off/estimation schemes) and related directions as to class constitution and voting.

Issues framed by the court:

• Whether the English court had jurisdiction to sanction schemes in respect of EEA-insurance undertakings (Allianz Marine and Hibernian) and certain foreign companies;
• How to constitutionally divide creditors into classes for voting purposes under section 425, in particular whether IBNR claims must form a separate class from Outstanding Claims and from Unpaid Agreed Claims;
• Whether reinsurers or certain foreign creditors required separate classes; and related practical directions (including on Lloyd's syndicate voting).

Court’s reasoning (concise):

• Jurisdiction: the court analysed the meaning of "company liable to be wound up under this Act" in section 425(6)(a), considered authority (including In re Drax) and the Insurers Regulations implementing the Directive on insurance reorganisation and winding up. The judge concluded that an EEA insurer is to be treated as capable of being wound up for section 425 purposes if it would be so but for the prohibition in Regulation 4(1)(a), and that the Directive and the Insurers Regulations do not oust English jurisdiction to sanction schemes where there is a sufficient connection with England. Accordingly the English court had jurisdiction in relation to Allianz Marine and Hibernian (and Atlantic and Continental).
• Classes: the court applied established authorities (Sovereign Life v Dodd, Re Hawk) and the test that a class must be confined to those whose rights are not so dissimilar as to make it impossible to consult together with a view to their common interest. After detailed factual and expert consideration of estimation uncertainties, the judge concluded that (i) policyholders have different legal rights depending on the maturity of claims, (ii) Unpaid Agreed/Outstanding Claims and IBNR claims give rise to materially different rights and qualitatively different uncertainties, and (iii) it was therefore necessary to constitute two classes for the solvent Scheme Companies: one for Unpaid Agreed Claims, Outstanding Claims and claims not requiring IBNR valuation, and one for IBNR claims. The court refused to create a separate class for reinsurers or for foreign creditors who will be subject in practice to the scheme (via Chapter 15 recognition or other arrangements), and directed particular voting arrangements for Lloyd's syndicates.

The judge made directions to convene meetings in accordance with these conclusions and reserved detailed procedural directions to follow on handing down.

The court granted the applications to convene creditor meetings in respect of the proposed schemes subject to particular directions. It held that the English court has jurisdiction to sanction schemes in relation to the EEA insurers Allianz Marine and Hibernian and the other foreign Scheme Companies provided there is a sufficient connection with England, and that the Solvent Companies’ creditors must be divided into two classes for voting purposes: (i) Unpaid Agreed Claims, Outstanding Claims and other claims not requiring IBNR valuation, and (ii) IBNR claims. The court refused to require separate classes for reinsurers or for foreign creditors who will be bound in practice, and gave directions on Lloyd's syndicate voting. The reasoning combined an interpretation of section 425 CA 1985, the Insurers (Reorganisation and Winding Up) Regulations 2004 (in light of the Directive), and a fact-specific application of established authorities on class composition (Sovereign Life, Re Hawk, BAIC).