Mercantile Indemnity Company Limited & Ors, Re

On an application to sanction an insurance business transfer scheme under Financial Services and Markets Act 2000, the court must first determine whether the statutory jurisdictional conditions are satisfied and then exercise its discretion judicially. The court’s paramount concern is whether the transfer creates any material adverse effect on policyholders, creditors, employees or other stakeholders, including their security, service standards and governance.

The court must scrutinise the independent expert’s and regulators’ reports, but should give them full weight absent significant and appropriate reasons to depart from them. A material adverse effect requires a consequence of the scheme involving a real or significant risk which cannot sensibly be ignored. Foreign recognition need not be established with certainty: credible evidence will ordinarily suffice, although independent expert evidence of foreign law is preferable.

Mercantile Indemnity Company Limited and Rombalds Run-Off Limited applied under Part VII of Financial Services and Markets Act 2000 for sanction of a scheme transferring their insurance and reinsurance businesses to River Thames Insurance Company Limited. The applicants also sought ancillary orders, including dissolution without winding up.

The businesses were in run-off and formed part of the Enstar group. The scheme was intended to consolidate UK non-life run-off business, with anticipated administrative, regulatory, capital and diversification efficiencies. The court considered statutory compliance, the independent expert’s assessment, the positions of the PRA and FCA, policyholder interests, and whether the order would have sufficient effect in the United States.

1. The court sanctioned the scheme and made the ancillary orders sought. The statutory conditions under Financial Services and Markets Act 2000 were satisfied: the scheme involved the transfer of authorised insurance business to an authorised transferee carrying it on in the United Kingdom, and it was not an excluded scheme.

2. The court adopted the approach stated by the Court of Appeal in Re Prudential Assurance Company Limited. It identified the nature and purpose of the business transfer, scrutinised the independent expert’s reports and the regulators’ reports, and considered whether the scheme would materially adversely affect policyholders, employees or other stakeholders.

3. The independent expert’s conclusions were a central and ordinarily decisive consideration. The court was entitled to interrogate the reports for errors, omissions or defective reasoning, but should not substitute its own actuarial or specialist expertise. The reports were clear, cogent and convincing, and there was no reason to depart from them.

4. A material adverse effect requires a possibility which cannot sensibly be ignored in light of the nature and gravity of the feared harm, which is a consequence of the scheme, and which creates a real or significant rather than fanciful or insignificant risk. The evidence established no material adverse effect on policyholders, employees, reinsurers, service standards or governance. It was unnecessary to show that the transfer would benefit policyholders.

5. The court would not act in vain merely because some policies were governed by foreign law. Certainty of recognition in the foreign jurisdiction was unnecessary; credible evidence that the scheme was likely to be recognised and given effect was sufficient. Independent expert evidence complying with CPR 35 was preferred, particularly where the foreign-law issue was uncertain, but the evidence in this case met the lower applicable standard.

6. The ancillary orders, including dissolution without winding up under section 112(8)(b), fell within the court’s statutory powers and were commercially desirable.