The Royal London Mutual Insurance Society Ltd, Re Companies Act 2006

This is an application to convene a meeting of certain creditors of Royal London Mutual Insurance Society (“Royal London”) to consider and vote upon a scheme of arrangement under part 26 of The Companies Act 2006.

Royal London was originally founded as a friendly society, under the name The Royal London Friendly Society, in 1861. In 1908 it converted into a company limited by guarantee without share capital pursuant to section 71 of the Friendly Societies Act 1896, at the same time taking its current name. Royal London is authorised by the PRA with permission under Part 4A of the Financial Services and Markets Act 2000 ( “FSMA”) to effect and carry out contracts of long-term insurance in the United Kingdom in classes I-IV, VI-VII falling within Part II of Schedule 1 to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (as amended).

Royal London is a mutual insurance company and has no shareholders. The rules determining membership of Royal London are set out in its articles of association but, in summary, the members comprise:

Since 2000, Royal London has acquired various insurance businesses, including the businesses of:

Royal London, together with its subsidiaries, is now the largest mutual life, pensions and investment group in the United Kingdom, with (as at 31 December 2017) group funds under management of approximately £114 billion and approximately 9 million in-force plans.

In accordance with legal and regulatory requirements under the Solvency II regime and the terms of various insurance business transfer schemes relating to the business acquired by Royal London, Royal London maintains a number of funds and sub-funds.

This application concerns the holders of policies allocated to the fund to which the former policyholders of Scottish Life were allocated (the “Scottish Life Fund”), and more particularly those whose policies contain a Guaranteed Annuity Rate (“GAR”). Under the terms of the offer (the “Offer”), Royal London is proposing to offer certain plan holders (the “Eligible Planholders”) a choice either:

The motivation of Royal London is, in essence, to give plan holders access to certain flexibilities introduced by pension reforms in 2015.

Scottish Life stands to benefit in two ways:

The issues for determination on this application today are certain “gateway” issues: whether this court has jurisdiction to order the convening of meetings for a scheme of arrangement; questions of class composition; the directions to be given for the meetings; and whether there are any “show stoppers” which ought to prevent the scheme from being put to a meeting.

There is no doubt that there is jurisdiction under the Companies Act in respect of the company, since it is a company liable to be wound up under the Insolvency Act 1986 (see s.895(2)(b) of The Companies Act 2006).

The question, though, is whether the appropriate court is the High Court in England, or the Court of Session in Scotland. The relevance of Scotland is that in relation to some of the policies, they are governed by Scottish law. Under s.425 of the Companies Act 1985, the predecessor section, the court was defined as “the court having jurisdiction to wind up the company”. That would have been the English court in this case as the company is registered in England. But there is no similar provision in the 2006 Act.

The starting point is that, as an English registered company, it is to be expected that the English court is the appropriate court. There is some support for that in the cross-reference to the Insolvency Act in the definition of “company” in the Companies Act. Section 117 of the Insolvency Act 1986 gives jurisdiction to the English court for English registered companies. Section 120 of that Act gives jurisdiction to the Court of Session for Scottish registered companies.

Mr Moore QC submits, and I accept, that the 2006 Act was a consolidating statute which should not be taken as having implemented a fundamental change to the position as it was under the 1985 Act. The company has, in addition, received advice that the scheme would be recognised and enforced in Scotland. Accordingly, I accept that this court is the appropriate court to exercise jurisdiction under part 26 of the 2006 Act in respect of this scheme.

One particular gateway issue that arises relates to whether the scheme might infringe principles of gender equality. I will return to this later.

It is proposed to hold a single meeting of all affected plan holders, on the basis that they fall within a single class. The test for identifying the appropriate class or classes is succinctly summarised in the following five points set out in Mr Moore’s skeleton:

The first potential class issue to consider in this case is governing law, given that some plans only are governed by Scottish law, the remainder being governed by English law. There is no suggestion that the application of Scottish law would lead to any different outcome so far as substantive rights of plan holders are concerned. Nor is there any practical risk in this case that a creditor whose rights are governed by Scottish law could seek to enforce claims over assets in Scotland or elsewhere, on the basis that the variation of those rights by an English scheme of arrangement would not be recognised.

The second potential issue is that there are numerous differences in the applicable GAR as between different plan holders, whereas the rights under the scheme are provided pursuant to a methodology which identifies the principal drivers of differences in existing GAR right rates, and rights, and reflects those differences in different percentage uplifts under the scheme in bands, rather than on a basis which precisely reflects the specific characteristics of each plan holder.

The starting point is that the mere existence of different GAR rights does not split the class. It all depends upon how the scheme responds to them. If the scheme consideration reflects those differences in GAR rights then there would be no bar (on this basis) to all plan holders being included in a single class. Conversely, if the same (i.e. flat) consideration was provided to all, then that would give rise to a risk of splitting the class.

While the scheme consideration in this case does not fully reflect all existing differences between plan holders, I do not think this causes a split in the class. The valuation of the GAR to each plan holder is not an exact science. It is based on assumptions as to the personal preferences of each holder, about which it is impossible to be specific. The essential question for each plan holder is – do I want to swap my GAR rights for an uplift in my current savings calculated by taking into account the main (objective) drivers for the value of GAR? In those circumstances, in my judgment, it is clear that the differences between rights is not sufficient to render it impossible for creditors to consult together in their common interest.

Mr Moore also refers to the fact that those who do not want to participate can opt out altogether, and that this minimises the class issue. The class requirement is designed to identify the appropriate group or groups of people for voting purposes, and to prevent a creditor being bound into a scheme against its wishes by the vote of a majority whose rights were different. Any member of the class that believed its rights were different can, in this case, avoid being coerced into the scheme by the simple expedient of opting out. Although not a complete answer in itself, this does mitigate any residual objection to the slightly broad-brush approach adopted under the scheme.

I am told that the uplift will be recalculated shortly after the meeting, but with the floor being no more than 10 per cent less than the uplift that was calculated in April this year. This potential revaluation affects all plan holders equally, and thus does not give rise to any class issue.

The third possible issue is that certain classes of plan holder have been excluded altogether. I am satisfied this, too, does not cause a split in the single class. In accordance with the Court of Appeal’s decision in Sea Assets Ltd v PT Garuda Indonesia [2001] EWCA Civ 1696, it is for the company to select which members of the putative class to include within the scheme of arrangement, provided that the reasons for exclusion could be justified on sensible commercial grounds. The exclusion here is for justified reasons of practicality.

The fourth potential class issue is that the company will pay, in full, for advice taken by some plan holders, but will require a small contribution towards the cost of advice from others. The advice to which payment relates is as to whether it is in the interests of the relevant plan holder to enter into the scheme at all. This is not a term of the scheme itself, nor is it dependent on the scheme being approved. It takes effect wholly outside the scheme, both technically and substantively. Nor does it constitute a difference in the rights of plan holders that are to be varied under the scheme. Accordingly, it does not provide any reason to split the class. Even if it did amount to a difference in rights as between different groups of creditors, it could hardly affect the ability of them to consult together in their common interests.

Turning to the directions for holding the meeting, the first issue to consider is the enfranchisement of certain plan holders who hold their interests through a trust structure where the trustee is Royal London itself. By number, this comprises the vast majority of plan holders affected by the scheme. The only creditor for the purposes of voting on the scheme, absent some step being taken, is Royal London itself.

The wishes of the beneficial holders can be taken into account for voting purposes, so far as value is concerned, by Royal London’s vote being split, see Re Equitable Life Assurance Society [2002] BCC 319 (Lloyd J).

That is the proposal that is to be implemented in relation to the trustees of certain pension schemes (and I approve that course in relation to them).

This solution does not help, however, in enfranchising underlying plan holders for numerosity purposes. A split vote could create only a maximum of two (self-cancelling) votes: one for, and one against. To overcome this problem, it is proposed that Royal London will enter into a deed poll with each underlying plan holder, promising that in the event that it fails to make payment to the trustee, then the plan holder may enforce its rights under the plan directly against Royal London. In that way, plan holders are contingent creditors. I consider this to be an appropriate method, in order to deal with the requirement in the statute that more than half in number of the creditors in each class must vote in favour of the scheme. That requirement was first imposed long before the numerous and ingenious ways of the structured holding of debt interests in a company were developed. It best reflects the economic reality that it is the plan holders not the trustee who have an interest in voting on the scheme. To avoid any problem of double-counting, the order contains a direction that the trustee will abstain from voting.

I’ve been taken by Mr Moore through the documentation that will be sent out to creditors. That includes a circular and a decision pack. I am satisfied that those documents explain the benefits and disadvantage of the scheme. It also explains the need to take advice, and the availability of subsidy (either in full or in part) for the cost of that advice. It also explains the ability of plan holders to opt out of the scheme. The documentation is in clear and accessible terms.

I am satisfied that the proposals contained in the draft order are sensible in the circumstances.

I note that the Financial Conduct Authority, although not required to participate in this process, has submitted a report considering the proposed scheme and the overall process and makes no objection either to the scheme or the process which is to be adopted.

Voting in the scheme will be by reference to the value of the uplift in investments which is to be offered by the scheme. This approximates to the value plan holders are being asked to give up, by virtue of giving up GAR, and as such is the best guide to the amount each plan holder has at stake in the scheme.

I turn finally to the question whether the scheme would fall foul of the Equality Act 2010. This is raised for decision now because it potentially creates such a ‘blot’ on the scheme that it could not reasonably be sanctioned.

The Equality Act, by s.29(1) states:

“A person (a ‘service-provider’) concerned with the provision of a service to the public or a section of the public (for payment or not) must not discriminate against a person requiring the service by not providing the person with the service”.

By sub-section (2) it goes on:

“A service-provider (A) must not, in providing the service, discriminate against a person (B) -

(a)

as to the terms on which A provides the service to B”.

Schedule 3, paragraph 23(1) to the Equality Act 2010 states that:

“It is not a contravention of section 29, so far as relating to relevant discrimination, to do anything in connection with insurance business in relation to an existing insurance policy.

(2)

‘Relevant discrimination’ [includes …] (g) sex discrimination”

Paragraph 23(4) states:

“Sub-paragraph (1) does not apply where an existing insurance policy was renewed, or the terms of such a policy were reviewed, on or after the date on which this paragraph comes into force”.

Paragraph 23(5) states:

“A review of an existing insurance policy which was part of, or incidental to, a general reassessment by the service-provider of the pricing structure for a group of policies is not a review for the purposes of sub-paragraph (4)”.

There is no further definition in the Act of either an existing insurance policy, the concept of renewal or the concept of an insurance policy being reviewed. These provisions were, however, the implementation by the UK of the Gender Equality Directive 2004/113/EC (the “Directive”). They are to be interpreted so far as possible, therefore, so as to make them compatible with the Directive.

Article 5.1 of the Directive states:

“Member States shall ensure that in all new contracts concluded after 21 December 2007 at the latest, the use of sex as a factor in the calculation of premiums and benefits for the purposes of insurance and related financial services shall not result in differences in individuals’ premiums and benefits”.

I pass over Article 5.2 which creates exceptions from that, but has since been declared void.

The key point in Article 5.1 is that it applies only to new contracts. There is no definition in the Directive of “new contract”. Guidelines issued by the European Commission in 2012, however, provide some assistance. At paragraph 10 of the Guidelines it is stated:

“The implementation of Article 5.1 requires a clear distinction between existing and new contractual agreements. The distinction must meet the need for legal certainty and be based on criteria that avoid undue interference to the existing rights and preserve legitimate expectations of all parties”.

Paragraph 11 then says:

“Accordingly, the unisex rule pursuant to Article 5.1 should apply whenever:

(a)

a contractual agreement requiring an expression of consent by all parties is made, including an amendment to an existing contract; and

(b)

the latest expression of consent by a party that is necessary if the conclusion of that agreement occurs as from 21 December 2012”.

Pausing there, all of the contracts in issue in this case were concluded long before 21 December 2012.

The question therefore is whether, insofar as the scheme effects a variation in the rights of creditors, does this amount either to a new contract or an amendment to an existing contract. These terms have autonomous meanings, but beyond what I have referred to above, there is no assistance in any case law or other relevant source material on this point.

I have heard submissions from Mr Moore QC on behalf of the company, but from no-one else. Indeed, no-one has articulated any objection to the scheme on this basis. Mr Moore points in particular to paragraph 13 of the Guidelines of the European Commission which identifies certain situations that should not be considered as constituting a new contractual agreement. Those include:

He relies in particular on sub-paragraph (d): the transfer to another insurer, noting that this would take effect under English law by way of a part 7 transfer, something with similar fundamental characteristics to a scheme of arrangement. It seems to me, however, that sub-paragraph (d) is aimed at the fact of transfer, not the mechanism by which it is achieved, and I therefore do not find it of much assistance.

More relevantly, Mr Moore submits that any rational system of law would require a contract to have at least the following three characteristics:

He identifies the need for consent by all parties as the most important element in that list. He cites in support of that paragraphs 11 and 13 of the Guidelines of the Commission (referred to above).

In considering whether a scheme of arrangement, and this scheme in particular, gives rise to a new contract, it is necessary to have regard to its juridical nature. As to this:

Mr Moore submits that, whatever may be settled to be the autonomous European meaning of “new contract”, the approval of a part 26 scheme does not fall within it. Nor would such approval constitute an amendment to the contract within such autonomous meaning

I accept those submissions and conclude – on the basis of the materials presented to me – that any variation in rights effected by a scheme of arrangement such as the one proposed in this case does not constitute either a new contract or an amendment to an existing contract. Consent, as emphasised by the Commission’s guidelines, is the touchstone of a “new contract”. Even where a creditor consents to the scheme, the binding force of the scheme comes, not from that consent, but from the three factors identified above. For a creditor that is bound, but who voted against the scheme, there is a total absence of consent.

I was initially troubled, however, by the fact that any plan holder who does not wish to lose their GAR right can opt out of the scheme altogether. One would ordinarily expect any rational plan holder who did not agree with the proposal in the scheme to opt out as opposed to staying in and voting against. The opt out is a matter of bilateral consent: the offer is made by Royal London to each plan holder to opt out, and the choice whether to do so is a matter for that plan holder alone. His or her decision is not dependent on the vote of others, the approval of the court, or the effect of the statute.

It was accepted by Mr Moore, at least for the purposes of argument today, that if the variation in the rights of plan holders which is sought by the scheme had been achieved by way of bilateral agreement with each plan holder, that would have been an amendment that fell within the definition of “new contract” in the Directive. There would be a real risk, in those circumstances that, even though the new rights would do no more than reflect the economic value of the existing right to GAR, the fact that they continued to discriminate on the basis of gender would cause the “new contract” to fall foul of the Act.

However, I am persuaded that the opt out mechanism would not cause the revised terms implemented by way of the scheme to constitute an amendment and thus a new contract within the Act or the Directive. If a plan holder opts out of the scheme, then there is no variation at all to its rights, and no question of there being any new contract or amendment within the meaning of the Directive. If, on the other hand, a plan holder does not opt out, then although that involves an element of consent (even if that is a deemed, or negative, consent by reason of the plan holder not having positively opted out), it is not consent to the variation in rights, but consent to participation in a scheme which (a) may or may not be approved by the requisite majority of plan holders and may or may not be sanctioned by the court; (b) accordingly may or may not lead to a variation in rights; and (c) for the reasons outlined above, is not itself a new contract or amendment to an existing contract.

For this reason, while I am conscious that I have not heard argument other than on behalf of Royal London, and so have not heard from anyone who might oppose this conclusion, I am satisfied, when considering whether the scheme should go forward to a meeting, that there is not sufficient blot on the scheme to prevent that from happening.

I stress, however, that my conclusion does not necessarily preclude anyone seeking to persuade the court at the sanction hearing of the opposite conclusion. While the procedure adopted in the wake of the decision in Re Hawk Insurance Co Ltd [2001] 2 BCLC 480 is intended to ensure that issues of this nature are identified and determined at an early stage, interested parties are not shut out from raising such points at the sanction hearing if the court, in its discretion, considers it appropriate. The gender equality issue is not an entirely straightforward one, involving as it does a question of interpretation of European law on which there is no prior authority. It is an atypical issue to arise on an application to convene a meeting of creditors to consider a scheme of arrangement, and one on which a court could well benefit from adversarial argument.

Finally, I note that certain individuals have raised objections to the scheme on the basis that it should be structured by way of opt-in and not opt-out (in particular, a document submitted by a Mr Roger Hart dated 19 June 2018, which I have read and taken into account). This is, however, an issue which goes to the overall fairness of the scheme (as opposed to an issue of jurisdiction for, or blot on, the scheme) and is to be considered, not now, but at the sanction hearing.

For those reasons I am content to make the order in the form that has been presented to the Court.