Equitas Ltd (the Names At Lloyd's for the 1992 and Prior Years of Account), Re

When sanctioning an insurance business transfer scheme, the court exercises a discretionary jurisdiction. It must consider whether sanction is appropriate in all the circumstances, while recognising the commercial judgment of the companies promoting the scheme.

The central question is whether the scheme is fair between the interests of the affected classes. The court gives close attention to the independent expert’s assessment of security and reasonable expectations, and to the regulator’s views. Individual disadvantage does not necessarily require refusal. The court need not select the best available scheme or improve its details where the scheme as a whole is fair.

Equitas Ltd and Equitas Insurance Ltd applied under Financial Services and Markets Act 2000 Part VII for sanction of a scheme transferring the 1992 and Prior Business carried on at Lloyd’s to Equitas Insurance Ltd.

The scheme was intended to provide legal finality for Names while preserving existing reinsurance and run-off arrangements. Objections concerned the effect on policyholders and cedents, the independence of the independent expert, the nature of reinsurance to close, the applicants’ authority to act for Names, and the possible future use of a solvent scheme of arrangement.

The court had to determine whether the statutory threshold conditions were satisfied and whether, exercising its discretion, it was appropriate to sanction the scheme.

1. The court sanctioned the scheme. It was satisfied that the statutory threshold conditions had been fulfilled, including that the scheme was an insurance business transfer scheme, that the statutory requirements had been complied with or waived, that the required scheme report had been provided, and that Equitas Insurance Ltd had the necessary authorisation and capitalisation.

2. The discretionary approach in Re Axa Equity and Law Life Assurance Society plc [2001] 2 BCLC 447 was adopted. The court had to give due recognition to the commercial judgment of the companies’ boards, consider whether affected policyholders or other interested persons would be adversely affected, and compare security and reasonable expectations with and without the scheme. The independent expert’s report and the FSA’s views deserved close attention.

3. The fundamental question was whether the scheme as a whole was fair between the interests of the different affected classes. The possibility that an individual or group might be adversely affected did not require refusal. The court was not required to devise the best possible scheme or amend details which did not undermine overall fairness.

4. The court rejected the objection that reinsurance to close had extinguished the Names’ original liabilities by novation. Following the analysis in Harris v Society of Lloyd’s [2008] EWHC 1433 (Comm), reinsurance to close insured continuing liabilities into another syndicate and did not itself extinguish them.

5. The applicants had authority to act in relation to the scheme through Lloyd’s power to appoint a substitute agent, the appointment of Additional Underwriting Agencies (Number 9) Limited, the authority conferred by the reinsurance contracts, and the subsequent delegation to Equitas Ltd. The court also relied on Society of Lloyd’s v Leighs [1997] CLC 759 and Society of Lloyd’s v Noel [2002] EWCA Civ 397.

6. The objections did not establish that the objectors or affected parties would be materially disadvantaged. The independent expert concluded that no group of policyholders or other parties would be materially disadvantaged, and that policyholders overall would gain from the transfer. The FSA accepted that conclusion and did not object.