Law firm Addleshaw Goddard comments on 'ground-breaking' decision in proposed Scottish Lion Scheme of Arrangement
A Scottish Court has decided that creditors of Scottish Lion Insurance should be unanimous in approving a solvent Scheme of Arrangement of the company. Schemes of Arrangement have become increasingly popular as part of the insurance run-off and restructuring business, though they are often controversial.
The view of the judge, which upheld the objections of 5 dissenting (US) creditors, has enormous potential ramifications. It threatens the whole viability of solvent Schemes of Arrangement as a mechanism for effecting planned exits from the market, or specific sectors of it, and releasing capital for re-deployment elsewhere.
Where a company is healthy and solvent like Scottish Lion, there was no reason, according to the judge, why creditors should be forced to give up their rights against their will, even if they are heavily outvoted. Creditor democracy should not prevail in circumstances where there is no need for it.
A statement from law firm Addleshaw Goddard said: "It is worth noting that the judge has not (yet) formally dismissed the petition. Instead he invited the parties to consider their positions in the light of his 'opinion'. This ruling would seem to give the parties a chance to settle their differences, and perhaps allow the Scheme to go ahead. But unless the ruling is overturned on appeal, it threatens the success of many other solvent Schemes currently in the pipeline, and the future of solvent Schemes generally."
In this case the arguments of the dissenters were forcefully put. They argued the Scheme amounted to a confiscation of their rights. Even assuming a fair value was attributed to the Scheme Liabilities, early payment of the Liabilities was no advantage to them. The extensive occurrence-based coverage they had purchased through the London Market was a valuable and irreplaceable business asset.
They preferred to retain the benefit of the policies, not least since replacement occurrence-based coverage was no longer available at any price. It was no advantage to them to have the risk compulsorily transferred back to them. The Company was in the risk business; and they were not. Furthermore, since it was accepted that payments under the Scheme were only estimates, there was no reason to justify forcing them to accept the cancellation of policies in return for a payment which might not be adequate to meet the risks handed back.
Under S 899 of the Companies Act 2006, the Court has an unfettered discretion to sanction Schemes which have been approved by the requisite majority at Creditors' meetings. Generally, the Court "will be slow to differ" from the meetings. But the approach of the courts to the exercise of that discretion takes into account various considerations, including "whether the arrangement is such as an intelligent and honest man, a member of the the class concerned and acting in respect of his interest, might reasonably approve." In this case the judge considered that "there was no reason, apart from the wishes of its shareholders, why the company should not continue with run-off."
The judge considered the circumstances in which Schemes are generally proposed and sanctioned. In a typical case, a Scheme arises out of some difficulty or problem with the company that needs to be addressed, such as insolvency. In such circumstances it is easy to see why the creditors must be required to act together and be bound by the majority, since failure to agree would be to the disadvantage of all. Cases such as Re Equitable Life Assurance Society and Re Cape PLC illustrated situations where creditor democracy is needed and will normally be respected. It is those situations, in the judge's opinion, in which the principle of creditor democracy applies. Only then might a Scheme properly be forced through against the opposition of unwilling creditors.