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

This was an application under section 111 of the Financial Services and Markets Act 2000 for the court to sanction a Part VII insurance business transfer scheme to transfer the 1992 and prior business of Lloyd's Names to Equitas Insurance Ltd (EIL). The court held that the statutory threshold conditions in Part VII were satisfied, that the independent expert's section 109 report concluded that no group of policyholders would be materially disadvantaged and that the Financial Services Authority did not object. The judge exercised his discretion under section 111 to sanction the scheme, having regard to the principles in Re Axa (in particular the need to assess whether any class of affected persons would be adversely affected and to give weight to the independent expert and the regulator).

Material subsidiary findings included that the independent expert (Allan Kaufman) was properly appointed and independent, that publicity and consultation with affected parties had been extensive, that steps were in place to protect cedents in overseas jurisdictions (including a separate US trust arrangement pending any foreign recognition), and that legal objections based on the nature of reinsurance to close and on authority to enter the original Equitas contracts were without substance for the purposes of the scheme. The court approved and made an order sanctioning the scheme and attached undertakings and provisions to give effect to the transfer.

The applicants, Equitas Ltd (EL) and Equitas Insurance Ltd (EIL), applied under section 111 of the Financial Services and Markets Act 2000 for the sanction of a Part VII business transfer scheme to transfer the 1992 and prior business carried on at Lloyd's to EIL. The scheme was designed to achieve legal finality for Names by transferring to EIL the legal liabilities under the original policies while preserving the existing reinsurance and run-off arrangements, including management by Resolute Management Services Ltd (formerly EMSL) and additional reinsurance from National Indemnity Company (NICO).

Background and parties: The scheme follows the Lloyd's Reconstruction and Renewal arrangements of 1996 under which ERL, EL and related entities were established and the Equitas Reinsurance and Retrocession arrangements put in place. EL and ERL occupy positions in a group of companies ultimately owned by trustees for the benefit of Names. In 2006 EL retroceded liabilities to NICO and delegated run-off management to EMSL (now RMSL). The Society of Lloyd's, the Financial Services Authority (FSA) and various other parties were represented at the hearing; two former Names attended in person to object.

Relief sought: sanction of a Part VII insurance business transfer scheme under section 111 FSMA 2000, together with attendant orders under section 112 to give effect to the transfer and undertakings to secure regulatory capital and other protections.

Issues before the court:

• jurisdictional threshold matters under Part VII (whether the scheme qualified as an insurance business transfer, compliance with the Requirements on Applicants, and the existence of the required independent expert report and necessary authorisations);
• whether the independent expert appointed under section 109 was properly appointed and independent, and whether his report supported the scheme;
• the role of the FSA and whether the FSA's views justified objection;
• whether any class of affected persons, including transferring policyholders, reinsurers (cedents) and Names, would be adversely affected; and
• specific legal objections about the nature of reinsurance to close and the authority by which the original Equitas reinsurance contracts were entered into on behalf of Names.

Court's reasoning and conclusions: The judge found that the scheme fell within the Part VII regime and that the procedural and threshold requirements had been met (including the FSA-approved independent expert under section 109). The independent expert's main and supplemental reports concluded that no group of policyholders would be materially disadvantaged and that overall policyholders would gain, in particular because of the additional $1.3 billion NICO cover. The FSA had produced three reports, conducted extensive scrutiny and, after engagement with and challenge to the independent expert, did not object to the scheme. The court adopted the approach in Re Axa and related authorities: the principal question was whether the scheme as a whole was fair between classes of affected persons, with close regard to actuarial judgment and the views of the independent expert and regulator.

The judge addressed publicity and consultation and concluded that affected parties had been adequately notified and consulted. Particular objections were considered: protection for cedents and overseas trust arrangements (the court accepted that a separate US trust fund mechanism would operate pending any foreign recognition); the risk of a subsequent solvent scheme of arrangement was not a reason to refuse sanction; and the submissions about reinsurance to close and authority were dealt with. On reinsurance to close the judge observed that it has long been understood (and so held in Harris v Society of Lloyd's) that reinsurance to close does not amount to a novation extinguishing the original liability, and in any event the independent expert's analysis showed that uncertainty on that point did not materially affect the fairness of the transfer. On authority the judge concluded there were lawful mechanisms (including substitute agency and delegated authority under the relevant Lloyd's powers and contracts) enabling EL to act in relation to closed-year Names and that Part VII as applied to Lloyd's transfers covered the present case.

Result and wider comment: On that basis the court exercised its discretion under section 111 and sanctioned the scheme, making an order incorporating the scheme, attendant undertakings and provisions under section 112. The judgment records the importance and public interest in the scheme and the thoroughness of the preparatory work by the applicants, the FSA and the independent expert.

The court sanctioned the Part VII insurance business transfer scheme. The judge concluded that the statutory threshold conditions were satisfied, the independent expert’s section 109 report and the FSA’s reports supported the scheme, consultation and publicity had been adequate, and the legal objections raised (as to reinsurance to close and authority to act for Names) were without substance for the purposes of the transfer. On that basis the court exercised its discretion under section 111 to approve the scheme and made the sanction order with attached undertakings and supplementary provisions under section 112 FSMA 2000.