Vol 3 (2006) - Issue 1

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Solvent Schemes for Insurers – A Touch of Class and Jurisdiction

Insurance companies, domestic and foreign,2 have increasingly resorted to solvent schemes of arrangement under section 425 of the Companies Act 1985 as a quicker exit strategy to finalise their run-off while they are still solvent. Regardless of the real motives beneath a solvent scheme, which may range from the cynical to the benevolent, the scheme explanatory statement almost always contains the ritual incantation of the following advantages seemingly enuring to the benefit of the policyholders: early payment of claims, finality, cheap and cheerful out-of-court adjudication procedure, and saving of run-off costs. However, the court in the recent landmark case of Re British Aviation Insurance Company3 (‘BAIC’) unhesitatingly punctured the hype of these advantages and used them as a factor against sanctioning the solvent scheme.
No-one questions the bona fides of those involved in promoting the dozens of solvent schemes in the UK. However, if almost every single scheme promoted so far in the UK, albeit with vastly different commercial backgrounds in each scheme, could only trot out the same menu of benefits to policyholders4 and each of these supposed benefits has now been rebuffed by the court, would a future court still digest the same menu unquestioningly as it had in the past? In addition, more importantly, BAIC shows that contingent creditors5 may have to be put in a different class for voting purposes, failing which the court has no jurisdiction to sanction a solvent scheme. While one may think that the future of insurance solvent schemes suddenly seems more precarious than ever after BAIC, subsequent case-law seems to indicate that solvent schemes will continue to thrive.
As mentioned above, foreign insurers have an increasing appetite for solvent schemes. While case-law seems to have confirmed the English court’s jurisdiction to sanction schemes promoted by EEA insurers,6 the court’s reasoning in this respect is frighteningly dubious.
Accordingly, this article seeks to evaluate the well-reasoned judgment in BAIC, its ripple effect on subsequent case-law, and the jurisdictional issues in relation to EEA insurers’ schemes.