Vol 1 (2004) - Issue 1

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UK Insurance Insolvency - Achieving Finality

The ultimate achievement in insurance insolvency is “finality”. Over time the procedures for dealing with insurance insolvencies have evolved with solutions now being implemented which enable insolvencies to be concluded and final distributions made to creditors at a much earlier stage than had previously been possible.
Finality or closure can now be achieved through the use of the scheme of arrangement (scheme), now generally accepted as the primary tool for dealing with the resolution of an insurance company’s insolvent run-off and increasingly used as a mechanism for achieving finality for solvent companies, either in respect of the whole of their business or for certain classes of discontinued business.

Dealing with insolvency

Schemes of arrangement have been used for some time for insolvent insurance companies as they generally represent a better alternative for creditors than liquidation. This is particularly due to the rigidity of the winding up rules for insurers and the delays that are likely to be experienced before dividends are declared. An insolvency process is however required to provide a stay on proceedings whilst the company’s strategic options are being considered. The most commonly used insolvency proceedings for insurers are provisional liquidation or administration.

Provisional liquidation

This was generally the preferred process before a modification in UK Insolvency law in May 2002 resulted in administration for the first time becoming available for insolvent insurers. The usual process was that the directors would petition the Court for a winding up order which when coupled with the appointment of a provisional liquidator (an independent, licensed insolvency practitioner) would provide a stay against an action or proceeding in the United Kingdom, against the company or its property. The winding up petition is usually adjourned so that whilst the company is protected from creditor attack it is not in liquidation. The provisional liquidator takes over day-to-day control of the company and its assets in accordance with a Court order and will also investigate the circumstances surrounding the company’s insolvency.
Provisional liquidation was in origin only intended to be used as a short term mechanism to protect the company against any action or proceeding that a creditor may seek to take to gain advantage over creditors as a whole, pending the hearing of the winding up petition.
The winding up of an insolvent insurance company is not something that can usually be concluded in a short period of time particularly where the insurer wrote long term business such as employers’ liability cover. For such a company, claims could potentially continue to arise for thirty to forty years hence. Further, there are often disputes, particularly in respect of large losses, to be settled and reinsurance to collect. A mechanism is therefore required to ensure that there is an orderly run-off of the company’s business and that the maximum possible distribution is made to creditors in the shortest practicable time without prejudicing the potential reinsurance recoveries. These insurance specific issues led to the development of the scheme, further discussed below.

Administration

This insolvency process also protects the company from creditor attack and has some similarity to the Chapter 11 process in the US. The administrator is an independent licensed insolvency practitioner and is required, shortly after appointment to call a meeting of the company’s creditors in order to present his proposals for achieving the purpose of the administration order.
A significant difference between the administration rules for an insurer versus those for other companies is the extension of Rule 4.90 of the Insolvency Rules 1986, which deals with set off of the amounts due between an insolvent company and a creditor at the liquidation date. Article 5 of the Order permitting administrations for insurers requires set-off to be determined at the date of the presentation of the administration petition, thus preventing debt trading during the period of the administration.