Re Stronghold Insurance Co Ltd

The court considered an application under Part 26 of the Companies Act 2006 for permission to convene a single creditors' meeting to approve a cut-off and estimation scheme for a long-run-off insurer. The central legal question was class composition: whether policyholders with IBNR (incurred but not reported) claims could sensibly be expected to consult in a single class with policyholders who had notified outstanding claims. The court applied the two-stage test derived from Sovereign Life Assurance Co v Dodd and subsequent authorities, focusing on the comparator (solvent run-off or liquidation), the nature of rights pre- and post-scheme (section 895 et seq. of the Companies Act 2006), and the qualitative differences between IBNR and notified claims.

The judge concluded that, on the evidence, solvent run-off (with some regulatory uncertainty) was the appropriate comparator and that the inherent uncertainties of IBNR claims meant they had qualitatively different rights from notified outstanding claimants. Accordingly the court would not permit the application as drafted to convene a single meeting and required a separate class (or classes) for IBNR claims. The court left open detailed constitution of that class and retained the matter for further directions.

Background and parties: Stronghold Insurance Company Limited, an authorised insurer in long-tail run-off since 1985, sought permission to convene a single Scheme Meeting under Part 26 of the Companies Act 2006 to approve a proposed cut-off and estimation scheme to resolve all insurance, reinsurance and retrocession liabilities (excluding Previously Agreed Liabilities). The firm faced a Solvency II capital shortfall and the regulators (PRA and FCA) had indicated no objection to the proposed scheme. Objectors included Allstate and a group represented in a letter from Covington & Burling LLP.

Nature of application: Permission to convene and directions for holding a single class meeting of creditors to vote on a proposed scheme of arrangement that would value Scheme Claims by an actuarial estimation process and provide adjudication by an independent Scheme Adjudicator.

Key issues framed:

• What is the appropriate comparator for assessing class composition (insolvent liquidation or continued solvent run-off)?
• Do IBNR claimants have rights so different from notified claimants that they must form a separate class for voting purposes?
• Whether other groups (holders of contractual third party security, reinsurers, direct insurers reinsured by the Company, cross-border creditors) require separate classes.

Court's reasoning: The court first reiterated the Practice Statement (Companies: Schemes of Arrangement) and authorities requiring the court to be satisfied as to class composition at the convening stage. The two-stage test was applied: (i) compare rights without the scheme and rights under the scheme; (ii) if differences exist, assess whether the groups can sensibly consult together in pursuit of a common interest.

On the evidence the judge found the appropriate comparator to be continued solvent run-off (with regulatory uncertainty) rather than immediate liquidation. Under that comparator, IBNR claimants retain a materially different right — the right to await the occurrence of claims and be indemnified if they materialise — whereas notified claimants have claims whose occurrence is established and only require quantification. The qualitative and inherent uncertainties of IBNR claims meant it was not realistic to expect the two groups to consult together on their common interest. The judge reviewed and distinguished the leading authorities (including BAIC, Re Hawk, Re Sovereign Marine and Re NRG Victory) and concluded the present facts required a separate IBNR class. The court rejected separate classes for holders of third-party security and for reinsurers on the evidence, and provision in the Scheme addressing insolvency priorities was held to be sufficient to meet related concerns. Cross-border jurisdictional obstacles were considered arguable but not plainly dispositive at the convening stage.

Disposition: The application as presented (for a single class meeting) was refused; the court required separate class(es) for IBNR creditors and retained the matter for further argument and drafting of directions.

The court did not grant permission to convene a single creditors' class meeting. It held that, on the evidence and with solvent run-off as the appropriate comparator, the inherent uncertainties of IBNR claims produce qualitatively different rights from notified outstanding claims, such that IBNR creditors must vote in a separate class. Other suggested separate classes (third-party security holders, reinsurers) were rejected on the evidence; cross-border recognition issues did not disclose a clear jurisdictional bar at this stage. The matter was retained for further directions on the precise constitution of the IBNR class.