Schemes of Arrangement are an old friend of the insolvent and those at the door of insolvency. The rise of the so-called "solvent scheme of arrangement" changed all that and many companies with a bit of financial muscle have managed to use them as the launch pad for a whole range of deals - from group restructurings to takeovers.
What's the Appeal?
Solvent schemes have an obvious appeal for indemnity insurers looking to crystallise uncertain long-term liabilities with their policyholders. But it's not always as appealing for the policyholders who would rather keep the insurance in place. Can it ever be fair to sanction a "solvent" Scheme of Arrangement in the face of continuing creditor opposition?
In what is good news for the insurance market, a landmark decision of the Inner House of the Court of Session now confirms that it can. This decision is likely to be followed in the English courts too. Solvent schemes have been sanctioned in the past but here the difference was the continuing opposition of particular creditors who opposed the scheme on grounds of principle.
Scottish Lion ceased writing new business in 1994. The company petitioned the Court of Session for sanction of a scheme which would finalise its existing liabilities and thereafter put the company into members' voluntary liquidation. The petition had however fallen at the first hurdle. In dismissing their petition at first instance, Lord Glennie said that schemes had to address a problem which required a solution. An obvious problem for creditors of an insolvent company was the extent of any dividend which might be recoverable should the company enter liquidation. A Scheme of Arrangement offered a solution: it might allow for a better rate of recovery, and could even allow the company to "get back on an even footing". In the context of a solvent company advancing a Scheme of Arrangement proposal, however, what was the problem which the Scheme sought to address? Scottish Lion had made provision to meet its potential liabilities in the future. Why, then, should one group of creditors who might wish to enter into an agreement with the company be entitled to force other creditors to participate against their will? To do so would be unreasonable.
The Inner House disagreed. They said that:
- whilst a company's solvency is not irrelevant when the court comes to exercise its discretion, there is no statutory basis for treating solvent and insolvent schemes differently
- whilst the existence of a problem may be a factor in favour of the granting of sanction, it is not a pre-condition to the sanctioning of a Scheme whether solvent or otherwise.
"It will be for the court, having had regard to all the evidence relevantly bearing on the exercise of its discretion - including the balance, if it exists, of advantage over disadvantage of the scheme and the extent, if any, to which the requisite majorities, properly ascertained, exceed the statutory thresholds - to decide whether sanction should be given to it."
They made two further observations:
- "The loss of contractual rights cannot be said a priori to be something which would disable the court sanctioning the Scheme. It is of the very nature of the power conferred on the court that, provided the statutory majorities are properly obtained and the requisite test for the granting of sanction satisfied, contractual rights will, notwithstanding opposition by persons in right to them, be varied or extinguished".
- The argument - that insured with long-tail policies are being required to accept current estimated values in lieu of their contingent claims - cannot be said to be "so overwhelming a factor against the granting of sanction that the petitioner can be denied the opportunity of establishing, if it can, the positive benefits of the scheme, as well as the soundness and robustness of the procedures it has put in place for valuing claims."
The petition will now potentially go forward to Proof, where it will still be possible for objecting creditors to establish that there was something wrong with the voting procedure employed or some other "blot" on the scheme.
Click here to access the judgment in full.
If you would like to know how this decision affects your business interests, please contact:
Commercial Dispute Resolution
0131 228 7241
0131 228 7164
Given your interest in Commercial Dispute Resolution law, you may find some of our other updates particularly useful. Health & Safety, for example, has been selected by many of our clients who have signed up to Commercial Dispute Resolution. To register for additional bulletins, guides and seminars, visit sign up.
Please feel free to forward on this bulletin to friends and colleagues who may find it of interest and wish to subscribe themselves.