Stronghold Insurance Company Ltd, Re

At the convening stage of a scheme of arrangement, the court must identify the appropriate comparator and compare creditors’ rights in the scheme and no-scheme worlds. In a solvent insurance run-off, outstanding notified claims and incurred-but-not-reported (IBNR) claims ordinarily involve qualitatively different rights. Separate classes will generally be required unless liquidation is the realistic comparator or special evidence shows that the uncertainties of IBNR estimation have materially reduced, or that both groups can realistically consult with a view to their common interest. The court should not determine the fairness or merits of the scheme at this stage. It may address clear jurisdictional impediments, but other issues are ordinarily reserved for the sanction hearing.

Stronghold Insurance Company Limited sought permission under Part 26 of the Companies Act 2006 to convene a single meeting of creditors to consider a cut-off and estimation scheme for its long-running insurance run-off. The scheme would estimate and pay claims, including IBNR claims, and compromise outstanding liabilities.

The company had ceased active underwriting in 1985. It remained solvent but failed to meet Solvency II capital requirements, and the evidence did not establish that liquidation was imminent. Allstate Insurance Company opposed a single class, principally because IBNR creditors would lose continuing cover and receive estimated payments. The central issue was whether one meeting was sufficient, or whether separate classes were required for creditors with notified outstanding claims and those with IBNR claims.

1. Convening-stage function. The court’s function is principally to address jurisdictional questions and direct the constitution and conduct of creditor meetings. It must not ordinarily determine the fairness or merits of the scheme, which are matters for the sanction hearing. A clear jurisdictional issue may be determined at the convening hearing if properly notified and suitable for decision without extensive factual investigation.
2. Class-composition test. The relevant class comprises creditors whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest. The inquiry has two stages. First, the court compares the creditors’ rights absent the scheme with the rights conferred or affected by the scheme. Secondly, if rights differ, it asks whether the differences and treatment make meaningful consultation objectively impossible. Commercial interests alone do not create separate classes where the relevant rights are the same.
3. Comparator. The appropriate comparator is the realistic alternative if the scheme does not proceed. Here, the evidence supported continuing solvent run-off, with a possibility of later regulatory intervention or insolvency, rather than imminent liquidation. The comparator therefore did not eliminate the distinction between accrued or notified claims and IBNR claims.
4. IBNR claims. An outstanding notified claim is uncertain principally as to quantification. An IBNR claim is uncertain both as to whether an insured liability will arise and as to its amount. That is a qualitative difference in rights. The long period of run-off, common estimation methodology, cross-holdings and creditor profile were relevant special factors, but did not sufficiently overcome the inherent and irreducible uncertainty or establish a sufficient community of interest.
5. The court therefore refused permission in the form sought, namely a single meeting. A separate class meeting for policyholders with IBNR claims was required, with the precise constitution of that class to be determined after further argument. No separate class was required for creditors with contractual third-party security rights, reinsurers, or insurers reinsured by the company. Reinsurers could vote on a net-value basis, as proposed by the company.
6. The court retained the matter to address consequential amendments and directions. The cross-border issues were not obvious jurisdictional roadblocks and did not require determination at the convening stage.