Vol 3 (2006) - Issue 2

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Challenging Times: United States Policyholders and English Solvent Schemes

The Scheme of Arrangement (‘Scheme’) has long been a tool in the restructuring and insolvency professional’s kit. In recent years, however, it has become increasingly popular with solvent insurance companies seeking to exit the market. A Scheme is a statutory compromise or arrangement between a company and its creditors, as permitted under section 425 of the Companies Act 1985. To become effective, the Scheme must be approved by a majority in number representing three-fourths in value of creditors present and entitled to vote at a meeting or meetings convened by order of the English High Court.
Schemes have been commonly used in insurance insolvencies, but their use in the context of solvent insurers is a relatively new development. The flexible nature of the Scheme process is allowing solvent insurers with discontinued lines of business to construct compromises enabling a company to draw a line under all or part of its business by way of estimation and payment of ultimate claims, fixed at a ‘bar date’. The process has caused some consternation amongst some policyholders, particularly in the United States; after all, their understanding of the concept of what a Scheme is may be very different to that intended in the English legislation (the American Heritage Dictionary defines a ‘scheme’ as ‘a secret or devious plan’!). There is a concern, expressed by certain United States policyholders in particular, that solvent Schemes may not fairly protect the interests of creditors.

Size of the problem

Identifying the liabilities which have been the subject of solvent Schemes of Arrangement to date is a difficult process – the number of Schemes dealing with portfolios rather than whole companies makes this exercise complex. The third annual joint KPMG LLP (UK)/Association of Run-Off Companies (ARC) survey,1 released towards the end of 2005, estimated that only GBP 107 million (USD 175 million) of liabilities had been finalised through the Scheme process to the end of 2004 where whole companies used the procedure to close. This is a mere drop in the ocean compared to the estimated GBP 38.4 billion of liabilities of the UK non-life run-off market as a whole and hardly seems to justify the pages of print dedicated to debating the issue of Schemes in the press. What the non-life run-off survey appears to show is that the impact of Schemes to date is relatively inconsequential.