Vol 2 (2005) - Issue 5

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Schemes of Arrangement under the Companies Act 1985: Lessons to be Learnt from Re The British Aviation Insurance Company Limited

Schemes of arrangement have been gradually increasing in popularity among solvent insurance companies in run-off as a means of extinguishing their liabilities in respect of part or all of their business. Some 40 solvent schemes have been implemented over the last decade, and both the number of schemes being proposed and the size of the liabilities dealt with by such schemes have been steadily increasing. In light of this it was only a matter of time before a solvent scheme, most of which have hitherto achieved fairly smooth passage, was the subject of a challenge by policyholders. The company on the receiving end of the first successful challenge was The British Aviation Insurance Company Limited (‘BAIC’), whose scheme was denied sanction by Mr Justice Lewis on in the High Court in London in July this year following a challenge mounted by 18 dissenting policyholders.

Opposers of solvent schemes may be congratulating themselves on having scored an important victory, although BAIC has been given leave to appeal. Lewison J’s judgment does contain some fairly trenchant criticisms of BAIC’s scheme and appears to question the fairness of such schemes in general. However, a careful review of the thirty-seven page judgment shows that most of the issues of concern to the Judge can be easily dealt with whether by changes in practice or in drafting and the concerns on fairness in many ways are very specific to BAIC and the type of business it wrote. The judgment also contains some very useful lessons for those, whether solvent or insolvent insurers or otherwise, considering implementing a scheme of arrangement with creditors.

The importance of class

There are three main procedural stages involved in implementing a scheme. The first stage involves an application to court for leave to convene [a] meeting[s] of creditors to vote on the scheme and for directions as to how that/those meeting[s] should be convened. The second stage is to convene and hold the meeting[s] in accordance with the directions given at stage one, obtaining the approval of a majority in number constituting not less than three fourths in value of those voting at each meeting. The third stage is a further application to court for sanction of the scheme, following which a copy of the order must be delivered for registration to the registrar of companies.
The major potential pitfall in this deceptively simple-sounding process is the correct identification of classes for voting purposes. The main reason given by Lewison J for refusing to sanction BAIC’s scheme was that the correct class meetings were not held. The rule is that only those whose rights are not sufficiently dissimilar to prevent them voting together with a view to their common interest can vote in the same meeting. The responsibility for identifying the differing rights of creditors and hence the different class meetings that should be convened rests with the company, and the consequence of getting it wrong is that the court will not have jurisdiction to sanction the scheme at stage three.
The potentially absurd results that this can give rise to were clearly demonstrated in Re Hawk Insurance Company Limited, where the vote in favour of the proposed scheme was unanimous, but the judge refused sanction at first instance because she considered that there should have been more than one class meeting. Her conclusions on classes were overruled by the Court of Appeal, but the principle that a failure to hold the correct class meetings robs the court of jurisdiction to sanction a scheme remains. The Court of Appeal acknowledged however that it was unacceptable that, in a case where there was no opposition from any creditor, the court was obliged by the procedural rules applying at that time to consider at the third stage whether the order it made at the first stage was appropriate.