First Alternative Insurance Company Ltd v Esure Insurance Ltd

Under section 111 of the Financial Services and Markets Act 2000, the court must decide whether the statutory requirements have been met and whether, in all the circumstances, it is appropriate to sanction an insurance business transfer scheme.

For general insurance business, substantial overcapitalisation is not itself a reason to refuse sanction. Where the evidence establishes that policyholders will retain security exceeding the accepted standard, surplus capital may support a rationalisation involving the return of shareholders’ funds.

The claimant sought sanction under Part VII of the Financial Services and Markets Act 2000 for the transfer of its general insurance business to the defendant, followed by the claimant’s winding up and the return of surplus assets to its members.

An independent expert concluded that the transferring policyholders’ security would improve and that the defendant’s policyholders would not be materially adversely affected. The Financial Services Authority raised no objection. The Chancellor nevertheless considered whether the return of approximately £65 million to shareholders indicated inadequate provision for policyholder liabilities. The central issue was whether, in those circumstances, it was appropriate to sanction the scheme.

1. Sanction granted. The court was satisfied that the certificates and authorities required by section 111(2) of the Financial Services and Markets Act 2000 had been obtained. The remaining question was whether sanction was appropriate in all the circumstances.
2. The court was not required to treat the Financial Services Authority’s approval of the form of the independent expert’s report, or its decision not to object, as sufficient by themselves to resolve the court’s concerns. The court had to consider the substance of the independent expert’s report.
3. The independent expert’s evidence showed that the combined entity would hold capital materially exceeding the level required to maintain the prescribed confidence against insolvency. The transferring policyholders would become policyholders of a stronger company, and the defendant’s policyholders would retain capital in excess of the required level.
4. The return of approximately £65 million to shareholders did not demonstrate inadequate provision for liabilities. The court inferred that both companies had been substantially overcapitalised. In general insurance business, unlike long-term or life business, the surplus did not involve reserves or bonuses. It represented shareholders’ funds to which they were entitled.
5. Accordingly, overcapitalisation was no reason to withhold sanction. It provided a rationalisation for the scheme. The court concluded that sufficient provision had been made for the defendant’s liabilities and sanctioned the scheme, making an order in the draft form subject to amendments discussed in argument.

First instance decision. No appellate history is stated in the judgment.