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Solvent Scheme Update
Scottish Lion judgment sparks debate These are the key words from Lord Glennie’s recent judgment that will impact heavily on a run-off market that has increasingly looked to schemes of arrangement as an exit strategy, reports Tom Rennell. Lord Glennie’s opinion, which addressed the overall fairness of schemes, followed on from Scottish Lion’s scheme sanction hearing, and appeared to demand 100 per cent creditor approval rather than a majority for proposed solvent schemes. It promises to have far reaching consequences for the market if its appeal fails. Importantly, while an appeal to the ruling is expected to be heard in October, many companies who are looking to propose a scheme may very well put their activities on hold until the verdict is heard. ‘For me the good thing about the Scottish Lion judgment is that it is in respect of a point of law,’ adds Schwarzmann. ‘He’s been asked his view and he’s given his view as a point of law. Which is, “in my view I cannot bind a minority on a solvent scheme if I can’t see that there’s an impairment.” That is a clear point that can be discussed in the court of appeal.’ US lawyer David Strasser of Eckert Seamans was concerned about the judgment giving objectors increased powers: ‘The way I read the opinion is he’s only protecting objectors, he’s not protecting no-votes. You can still have a scheme go through if you buy off the objectors. So you’re giving the objectors a huge club to come in and say “okay I want four times what everybody else is getting”.’ For Philip Hertz of Clifford Chance the real worry was the wider reaching effects of the judgment: ‘I think the most important question is “what does it mean”, as opposed to what it means for Scottish Lion. Because actually this is a judgment that is made in the context of a solvent scheme which could have huge ramifications in other areas. What the judge is basically saying here is unless you have a problem, whatever that means, then effectively you need unanimous consent to do anything for creditors or members.’ Not all participants at the roundtable viewed Lord Glennie’s judgment so negatively though. According to Forrest Krutter of Berkshire Hathaway, for example, the ruling was ‘one of the great achievements that will stand along with the Magna Carta.’ Kevin Gill – Ernst and Young: ‘The Scottish Lion judgment goes a step further than the judgment in BAIC and has implications for the way in which solvent cut-off schemes are proposed in the future. Notwithstanding that the majority of creditors may be in favour of such a scheme, the Scottish Lion judgment recommends that solvent companies proposing such schemes submit evidence to explain why any minority opposing creditors should not be allowed to prevent such a scheme proceeding. ‘The judgment did however carry some positive news for solvent schemes. The judge recognised a scheme's application as a solution to a variety of problems (such as a financially impaired insurer) and accepted that there is some “give and take” with the proposal put forward by Scottish Lion. This is very much an “arrangement” between the company and its creditors. ‘The uncertainty created by the case around solvent schemes will drive further innovation in the run-off sector. A scheme is a highly flexible solution with wide application and can be adapted accordingly. Perhaps in some cases we will see optionality being provided to creditors. In other cases, we may find that other solutions, such as portfolio transfer or entity disposals will provide better value or certainty for exiting a run-off. Juliette Winter – Ruxley: ‘We continue to believe that solvent schemes are viable mechanisms to close out old legacy business. The ruling confirms that schemes should be viewed on a case by case basis and it is our objective to propose schemes that are acceptable to policyholders. An example of Ruxley's approach is the scheme proposed by its subsidiary City General that was sanctioned by the Court in April. Great efforts were made to make the scheme process transparent and to engage with policyholders at an early stage.’ Mark Adams – Deloitte: ‘It does not come as a complete surprise. The unease of the judiciary with respect to solvent schemes highlighted in the WFUM decisions has been elaborated upon by the Scottish Court. We will now see whether shareholders will consider opt out schemes as attractive, which do not force creditors into a commutation they actively do not wish to do. We shall of course also see whether Scottish Lion will appeal.’ Vivien Tyrell – Reynolds Porter Chamberlain: ‘The judgment handed down in this case does seem to imply that if no problem can be demonstrated and there is opposition to the scheme the court will reject it. Any insurer facing these circumstances is now likely to hesitate before presenting the court with a scheme. ‘Insurers are going to be disappointed with this judgment. They will see it as undermining legislation that was designed to introduce creditor democracy for voluntary schemes of arrangement, so that a small percentage of creditors wouldn’t have the power to derail a scheme favourable to the vast majority. ‘Insurers will be worried that the opposition of just one creditor could now put a spanner in the works and prevent them closing down a scheme in run-off.’ Tim Goodger - Elbourne & Mitchell: ‘It has been suggested that the judgment means that a single creditor is able to veto a scheme notwithstanding and the requisite majority of scheme creditors have voted in favour of a scheme. The judgment does not however appear to be as draconian as that. The judge states that schemes are to be treated on a case-by-case basis and it is as well to consider this decision in the context of a judgment that provides a clear recital of the objecting policyholders’ points in this case. What it does make clear is that a scheme is not the only way that a solvent business can end run-off, with the judge making clear reference to the alternatives such as the use of commutations with individual policyholders.’ |
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Background to Solvent Schemes
The Scottish Lion roars - the appeal decision analysed by Clifford Chance and PricewaterhouseCoopers
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Run Off & Restructuring is published by BD Communications (London) LLP. © 2002 to 2010 All rights reserved.
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At a roundtable discussion held by Run Off and Restructuring last week on the subject of solvent schemes of arrangement, the proceedings were, not surprisingly, overshadowed by the recent judgment. The debate considered both the implications for the Scottish Lion scheme and the potential impact on schemes in general. Dan Schwarzmann of PricewaterhouseCoopers made the point that the Scottish scheme approval process differs from the English one, and that Lord Glennie’s opinion focused not on the Scottish Lion scheme in particular but on schemes in general: ‘The exam question was “forget Scottish Lion, forget any scheme that’s come through – can the minority be bound by schemes?” And his [Lord Glennie’s] response to that was “not unless it’s impaired”.
