Stronghold Insurance Company Ltd, Re

Stronghold Insurance Company Limited (“the Company”) has applied (by Claim Form issued on 4 October 2018) for an order giving it permission to convene a meeting of its creditors (“a Scheme Meeting”) for the purpose of considering, and, if thought fit, approving (with or without modification) a proposed scheme of arrangement pursuant to Part 26 of the Companies Act 2006 (“Part 26 of the Act”). In the usual way, it also seeks an order directing the method of convening and holding the single Scheme Meeting it proposes.

The Company is an authorised insurance company. It carried on business writing excess of loss and stop loss business (excluding windstorm), and risks of a similar nature. However, it ceased active underwriting in 1985, and has thus been in run-off for the past 33 years.

The Company continues to have long-tail business exposure, especially relating to Asbestos Pollution and Health Hazard (“APH”) liabilities. That is so notwithstanding its efforts, especially since 1997 when this became a market objective, to complete compromise settlements and commutations on a full and final basis with certain policyholders and cedants. There remain now about 245 potential creditors with potential claims to be resolved in run-off. These may be listed as follows:

The purpose of the Scheme under Part 26 of the Act, to be proposed to the Class Meeting sought, is to achieve a settlement or compromise of all the outstanding obligations: it is what is habitually known as a cut-off and estimation scheme.

Such schemes may in structure and purpose be simple: but they raise difficulties, especially as regards the treatment to be accorded to the variety of claims and in particular their estimation.

Most problematic are claims which have been incurred (in the sense that an event has occurred to which the policy should respond) but which have not been reported to the policyholder: such claims are called “IBNR”. The inherent uncertainties to which IBNR claims are subject makes their value estimation difficult.

Further, in the context of a Part 26 Scheme, and especially at the stage of determining what should be the constitution of the classes to which it is to be proposed for approval, the obvious but complex issue arises as to whether IBNR creditors have rights and interests so different that they cannot sensibly be expected to share the same outlook as other creditors. If so, then, as further explained later, that will affect whether a single class comprised of all Scheme Creditors will suffice, or whether two or more classes may be required if a Part 26 Scheme is to proceed.

Thus, the essential question addressed in this judgment is whether in this case the single class meeting that is proposed is appropriate and sufficient. There is also a question as to the cross-border effectiveness of a scheme such as this: that arises because a majority of the Company’s creditors are domiciled in the United States of America (the “USA”), with others in various countries in the European Union and elsewhere.

The context in which the Part 26 Scheme is proposed is of some importance. The Company is unable to meet the minimum capital requirements imposed by Directive 2009/138/EC (brought into force on 1 January 2016) (“Solvency II”). The Company’s shareholders are either not able or not willing to provide the substantial additional capital to rectify the deficiency. In these circumstances, the Company's regulators, the Prudential Regulatory Authority ("PRA") and Financial Conduct Authority ("FCA"), together “the Regulators”, have requested that the Company produces an exit plan to bring closure to the run-off.

After considering various alternatives, which the Company ultimately determined not to be viable, the Company proposes to comply with the Regulators’ request by means of the proposed cut-off scheme of arrangement.

The Company has had iterative discussions with the Regulators as to the proposed scheme and its terms, and both the PRA and the FCA have confirmed they have no objection to the scheme. (This scheme is not, therefore, the type of scheme described in the PRA Supervisory Statement issued in April 2014, by which it notified the market that schemes proposed by companies who were not in breach of regulatory capital requirements, who might want to exit a particular type of portfolio of business for commercial reasons, may not be approved by the PRA (Supervisory Statement, para 3.4)).

The considered alternatives to the proposed scheme have included the injection of further capital, a potential sale to a third party, a transfer of the Company’s assets and liabilities under Part VII of the Financial Services and Markets Act 2000, and liquidation. None of these are considered viable or satisfactory ways forward. To achieve Solvency II compliance would require injection of capital of approximately US$25m, which is not reasonably practicable, and thus capital injection, sale or transfer will not occur.

Thus, this Part 26 Scheme is proposed as the only realistic means of bringing to a close this exceptionally long process of run-off in the near future, and in satisfying the concerns of the Regulators. The Applicant is keen to stress these legitimate motives and objectives, to distinguish it from cut-off schemes designed to secure early pay-out to the advantage of policyholders with outstanding claims, and potentially shareholders, at the expense of IBNR claimants.

As to the scope of the proposed Part 26 Scheme, all claims arising under contracts of insurance, reinsurance and retrocession underwritten by the Company will be included in the Scheme, save Previously Agreed Liabilities (the "Scheme Claims"). A Previously Agreed Liability is defined in the scheme to mean any claim which, according to the Company's records, has been agreed as between the Company and the creditor in respect of such claim but which is unpaid as at the date of the scheme meeting. Previously Agreed Liabilities will continue to be paid, in the normal course of business, outside of the Scheme.

The Scheme will not affect any other liabilities of the Company, for example, trade debts. These other liabilities will continue to be paid in full in the normal course of business.

A “Scheme Claim” is thus any liability of the Company in respect of an Insurance Contract (whether a contract or policy of Direct Insurance or Retrocession) to which the Company is subject at the Effective Date or may become subject after the Effective Date by reason of an obligation incurred before that date, but excluding a Previously Agreed Liability.

Under the proposed Scheme (capitalised terms being therein defined but being for the most part substantially self-evident in their meaning):

The Scheme sets out (in Schedules I and II) a detailed mechanism and actuarial guidelines (“the Estimation Guidelines”) for the valuation of Scheme Claims, and for Scheme Creditors to challenge any such valuation and refer the dispute to independent, final and binding adjudication by the “Scheme Adjudicator”, namely Mr Andrew Maneval (“Mr Maneval”). Mr Maneval trained as a lawyer in the USA, has some 20 years’ experience in the insurance and reinsurance markets, and is accepted by the Regulators to be independent.

The Company submits that the proposed Scheme would provide a number of benefits to all Scheme Creditors which would not be available in a liquidation. It is submitted that these include:

By reference to these suggested benefits, the need to deal with Solvency II and the possibility of liquidation at some stage if the proposed Scheme is not adopted, the Company contends that the proposed Scheme is the best way forward, and that all Scheme Creditors should have a common interest in its adoption.

Part 26 of the Companies Act 2006 (“the 2006 Act”) applies where a compromise or arrangement is proposed between a company and its creditors (section 895 (1) of the Act).

Pursuant to section 896 (1) of the 2006 Act:

“The court may, on an application under this section, order a meeting of the creditors or class of creditors …. to be summoned in such manner as the court directs.”

Such an application for leave to convene and give directions as to the conduct of meetings to consider (and, if thought fit, approve) the scheme is the first stage of the process by which a compromise or arrangement becomes binding on the company and its creditors (or those of its creditors with which the compromise or arrangement is made). The other two stages are the holding of the class meeting or meetings convened, and then, if the scheme is approved by the requisite majorities at the class meeting or meetings so directed, the application back to the court for its sanction of the compromise or arrangement on the terms of the scheme pursuant to section 899 of the 2006 Act.

The identification of what are the appropriate class meetings to be convened is initially a matter for the company proposing the scheme. But is is a matter on which the court must be satisfied as a pre-condition of the exercise of its jurisdiction under Part 26 of the 2006 Act: the court will have no jurisdiction to sanction the scheme at the third stage if the class meetings have been incorrectly constituted (see Re Hawk Insurance Co Ltd [2001] EWCA Civ 241, [2001] 2 BCLC 480; and Re Hellenic & General Trust Ltd [1976] 1 WLR 123). The court’s function at the convening stage of proceedings, for the approval and sanction of a scheme of arrangement, is to give directions as to the calling of the meetings and to deal with any questions of jurisdiction.

Until re Hawk, it was not the practice of the court at the convening hearing to give any provisional view as to the class composition proposed: it regarded that as a matter for the proponent company, leaving it to any subsequent hearing when sanction is sought to determine all issues, including the jurisdictional issue of class composition. The court might only at that third stage conclude that it had no jurisdiction and that the convening of class meetings in the first place, and indeed the entire process, had been to that extent a waste of time.

In re Hawk, Chadwick LJ suggested that this approach and practice should be re-examined. In the result, the practice was swiftly changed, and it has since become the practice to consider matters of class composition, along with any other identified potential reasons for the court lacking jurisdiction, at this first hearing. That is sensible and salutary: there is no point in the court convening meetings to consider the scheme if the court will lack the jurisdiction to sanction the scheme later: see Re Telewest Communications plc (No 1) [2005] 1 BCLC 752 at [14].

Obviously, for the new practice and process to be fair, the relevant creditors must be given sufficient notice and explanation to enable them to participate meaningfully if they so wish. Practice Statement (Companies: Schemes of Arrangement) [2002] 1 WLR 1345 now sets out what has to be done to ensure that creditors affected are properly notified and will have an opportunity to address the court on such issues.

That Practice Statement requires that persons affected by the proposed scheme should be notified that

“it is being promoted, the purpose which the scheme is designed to achieve, the meetings of creditors which the applicant considers will be required and their composition.”

It also specifically directs the court to

“consider whether more than one meeting of creditors is required and if so what is the appropriate composition of those meetings”.

It further directs that

“where a creditor issue has been drawn to the attention of the court it will also consider whether to give directions for the resolution of that issue including if necessary directions for the postponement of meetings of creditors until that resolution has been achieved”; and that “Directions for the resolution of creditor issues may include orders giving anyone affected by a meetings order a limited time in which to apply to vary or discharge that order with the creditors meetings to take place in default of any such application within the time prescribed. While creditors who consider that they have been unfairly treated will still be able to appear and raise objections on the hearing of the petition to sanction the scheme, the court will expect them to show good reason why they did not raise a creditor issue at an earlier stage.”

This has proved a popular change from previous practice, and I return to it later in this judgment to make some general points as to its consequences. I would note one in the meantime, since it does appear to me to have caused some confusion: this is that the focus on the jurisdictional issue of class composition which the present practice brings at the first stage has gradually encouraged a perception that the court at this first stage will also address other matters going to its jurisdiction, following the same rationale. That is not quite accurate; nor is the related and (in my experience) increasing tendency to suggest to a judge at the sanction stage that the fact that class meetings have been directed carries with it the implication that the judge at the first stage was satisfied as to other matters bearing on the jurisdiction of the court.

It is right that the court may indeed also consider other jurisdictional issues at the convening hearing, provided interested parties are given proper notice of the points to be raised at the hearing: see, for example, Re Van Gansewinkel Groep BV [2015] EWHC 2151 (Ch) at [55] and [56]. However, the court is likely to be cautious in this context. First, and as Snowden J explained in the same case, if the court is to be invited to determine a jurisdictional issue in a way which can be relied on (in Snowden J’s words) “as a basis for persuading the judge at the sanction hearing not to revisit the question” that must be very clearly brought to the attention of the judge at the convening hearing, and the judge should be invited to provide a judgment in that regard so that there can be no doubt as to the basis on which that issue was addressed. Secondly, it must be appreciated that even then, since it goes to jurisdiction, a decision at the first stage does not bind the court at the third stage, though of course the court is unlikely to depart from a reasoned conclusion at an earlier stage without change of circumstance or very good reason. Thirdly, the court is unlikely to wish to deal issues involving a discretionary element or value judgment: only with clear and obvious jurisdictional impediments such as can be seen, without factual exegesis, to render the process unavailable, or at least of no substantive avail, in the case of the scheme in question.

Thus, for example, issues as to whether, in a cross-border scheme, the scheme company has a “sufficient connection” to warrant the exercise of jurisdiction, or the related issue whether the scheme is likely to be recognised and given effect abroad, are likely (save in the clearest cases) to require a factual assessment unsuitable at the convening stage. Conversely, there may be issues of law as to cross-border jurisdiction, especially perhaps post-Brexit, capable of being, and which ought to be, dealt with at the first stage. The court will retain flexibility in that regard: but the inaccurate perception that all issues affecting the jurisdiction of the court will be dealt with at the first stage, to which I have referred, needs in, my view, to be corrected; and any suggestion that it is to be assumed from the fact that the scheme in question proceeded after the first stage, or from the fact that a skeleton argument for that first hearing canvassed a particular jurisdictional issue, that the court has been satisfied as to its jurisdiction should not be made.

Furthermore, and in the same vein, it is important once more to emphasise that the convening stage is not an appropriate occasion to consider the fairness of the proposed scheme (which is the principal focus at the sanction hearing). In Re Telewest Communications plc (No 1) [2004] EWHC 924; [2005] 1 BCLC 752 at [14] David Richards J said:

“… it is important to keep in mind the function of the court at this stage. This is an application by the companies for leave to convene meetings to consider the schemes. It is emphatically not a hearing to consider the merits and fairness of the schemes. Those aspects are among the principal matters for decision at the later hearing to sanction the schemes, if they are approved by the statutory majorities of creditors. The matters for consideration at this stage concern the jurisdiction of the court to sanction the scheme if it proceeds. There is no point in the court convening meetings to consider the scheme if it can be seen now that it will lack the jurisdiction to sanction it later. This is principally a matter of the composition of classes. Under s 425, the court will have no jurisdiction to sanction the scheme if the classes have been incorrectly constituted.”

In the present case, what is routinely referred to as the ‘Practice Statement Letter’ or “PSL” was circulated to scheme creditors on 28 August 2018. According to the Company’s records, the majority of the Company’s creditors are domiciled in the USA and the UK, with others in various countries in the European Union and elsewhere. The PSL notified creditors as to the proposal of a single class of creditors to meet to consider the proposed terms of the scheme, and of the court hearing date proposed for 9 October 2018.

The PSL was circulated by a number of methods, to ensure as full notification as possible. The PSL was notified:

There was no advertisement of the PSL, but the insurance press has published articles on the PSL and the proposal of the scheme, thus giving further market exposure. The Insurance Legacy Newsletter, which is a niche publication for the run-off industry and has a worldwide subscriber base, published on the cover page of its 11 September 2018 edition a story entitled “Stronghold Insurance Company Ltd: Proposed Solvent Scheme”, which referred to the PSL and the Company’s scheme website and provided a summary of the Company’s business background.

I am satisfied that the requirements of the Practice Statement as to notification and explanation for the (limited) purpose of the convening hearing were satisfied in this case.

The Practice Statement provides at [2] that:

“It is the responsibility of the applicant to determine whether more than one meeting of creditors is required by a scheme and if so to ensure that those meetings are properly constituted by a class of creditor so that each meeting consists of creditors whose rights against the company are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.”

That incorporates the test enunciated by Bowen LJ in Sovereign Life Assurance Co v Dodd [1892] 2 QB 573, (at 583):

“The word “class” is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the court to order a meeting of a class of creditors to be called. It seems plain that we must give such meaning to the term “class” as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.”

That test has been applied ever since; and it was reaffirmed in Re Hawk where Chadwick LJ said (at [30]):

“.. a class must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest”.

The test is a two-stage one. At the first stage, the focus is on rights: if there is no difference in their respective rights the fact that they may have opposing commercial or other interests is not relevant to class constitution (though it may become relevant at a subsequent stage). This requires consideration of (a) the rights of creditors in the absence of the scheme and (b) any new rights to which the creditors become entitled under the scheme. At the second stage of the test, if there is a difference in such rights, the question is whether, in the court’s assessment and looking at the issue from the point of view of the two groups in the round (that is, not having regard to individual and special or separate commercial interests), the differences in their rights and their treatment under the proposed scheme are such as to make it impossible for them to consult together with a view to their common interest. There is a particularly useful summary of this in the judgment of David Richards J (as he then was) in Re T&N Limited (Number 4) [2006] EWHC 1447 (Ch) at [85]- [87].

As was submitted in the Company’s skeleton argument, the question of class composition is a matter of judgment on the facts of each particular case, but the following points are relevant:

In line with the Practice Statement, the court must, if it can, reach a provisional conclusion so that it may give directions for convening the classes; and (as previously noted) it may direct a further hearing to assist in the resolution of the issue if necessary. However, there may be some cases where the court feels unable to reach even the provisional conclusion usually required. Such a case was Re NRG Victory Reinsurance Ltd [2006] EWHC 679 (Ch). In that case, like this case, Lindsay J was considering a proposed scheme where it was proposed “to replace what is likely to be a long continuing and slow process of paying off the claims of its policyholders as they mature or as they are commuted with a shorter lived process by which their claims will be evaluated and paid off as evaluated.” In taking account of BAIC (see [9 to 12]), and assessing whether accrued claimants should meet with IBNR claimants, Lindsay J held ([15]):

“.. whilst some creditor issues will be capable of being clearly seen as having no real prospect of success and some others no real prospect of failure, there will always be some in the middle or thereabouts of any spectrum and thus being such that, until the creditors have in fact had the opportunity of meeting and consulting together, it will be exceptionally difficult to be sure whether it will prove impossible or not for them to consult together with a view to their common interest.”

At [16], Lindsay J suggested that, if the proponent of the scheme is content to proceed at its own risk, there may

“in these middling cases, be no compelling reason not to allow the scheme to proceed to the single meeting. To require a split into two or more meetings not only might, in such circumstances, introduce further delays and expense to no practical avail but might lead to small pockets of creditors – small either in number or in value – having a veto which a more global regard to fairness would not have given them.”

In the event, and partly as a matter of pragmatism (see above) and partly because he was persuaded, after considering expert evidence put before him, that there were “powerful indications that point to a single meeting sufficing in the case of this Scheme Company and this scheme” (see [19]), Lindsay J decided to permit one meeting. I shall return to various aspects of that decision later, since the case directly concerned the argument as to whether there had to be a separate class for IBNR.

I turn to the approach which the authorities indicate should be adopted in its assessment of the appropriate classes to be convened and their composition.

What is now ordinarily adopted as the starting point is to identify the appropriate comparator: that is, what would be the alternative if the scheme does not proceed. In Re British Aviation Insurance Co Ltd [2006] 1 BCLC 665; [2005] EWHC 1621 (Ch) (“the BAIC case”), Lewison J (as he then was) considered this to be “critical to deciding whether all the policyholders form a single class”; and in Re Apcoa Parking (UK) Ltd [2014] EWHC 997 (Ch) I agreed that “that will necessarily inform, and in many if not most cases be the most important factor in, the discussions”.

The reason is two-fold. First, a fair comparison between a policyholder’s rights if there is no scheme and its rights under the proposed scheme depends on ascertaining the nature and quality of the right in the ‘non-scheme world’, and the latter depends on the appropriate comparator. Secondly, only by identifying the comparator can the likely practical effect of what is proposed be assessed and the likelihood of sensible discussion between the holders of rights so affected and between them and others with different rights be weighed fairly.

Thus, for example, the likelihood of imminent liquidation may accentuate or diminish the importance of lender priority according to the effect of liquidation on the rights in question, and on whether the assets of the company on liquidation would be sufficient to cover all or only some debts according to their different positions in the debt waterfall.

To take another example closer to this case: if an insurance company faces imminent liquidation if no scheme takes effect, IBNR creditors will face estimation of their claims according to the Insolvency Rules: in such circumstances, they may well be open to discussion about (and eventually prefer) a market-driven estimation model, and their interests may be sufficiently close to those of other scheme creditors to make discussion between them with a view to their common interest a sensible prospect (for reasons explained more fully by Lewison J in the BAIC case at [89]). By contrast, where (as in the BAIC case itself) the insurance company is solvent and likely to remain so, the IBNR creditors may so benefit from its continuance that they cannot realistically be expected to discuss with other scheme creditors a scheme which offers an immediate advantage to those scheme creditors, but virtually none to them.

The point can further be illustrated in this particular case by examining the description in the Company’s skeleton argument of the benefits of the proposed scheme which would not be available in a liquidation: I have quoted from that description in paragraph [19] above.

The supposition that the appropriate comparator is liquidation, and that the scheme offers such advantages to all in comparison to that process that all will have a common interest which they can focus upon in their discussions, permeates the Company’s approach in the skeleton argument. It is at heart its justification for a single meeting; and although in his oral submissions Mr Trower sought to suggest that a more case-specific comparator would be the prospect of some form of mandated claims estimation process, either on liquidation or pursuant to some other event dictated or step taken by the Regulators (though it was never explained or suggested what this might be), the reality seems to me to be that this was calculated to side-line the rival comparator of continued solvency.

The evidence in respect of the issue as to whether liquidation or continued solvent run-off is to be taken as the comparator is somewhat ambivalent.

According to the Company’s audited 2017 financial statements (“the 2017 Accounts”), signed off on 19 April 2018, the Company was solvent, with net assets of US$10.7m. This was not, however, sufficient to meet regulatory capital requirements: it was noted in the 2017 Accounts that “The Company did not meet the capital requirements under Solvency II at any time during the year to 31/12/17”.

The 2017 Accounts also noted that “The Company has submitted a plan to the Regulators showing how it intends to meet capital requirements in the future”. However, I was not shown any such plan (except the proposed Scheme itself); and I understand that to achieve Solvency II would require injection of capital of US$25 million which (I was told) “is not possible”.

The present position appears not to be substantially different. It is summarised in the witness statement (dated 4 October 2018) of Mr Andrew James Gregory, the Company’s Chief Executive Officer in his witness statement in support of the proposed Scheme (“Mr Gregory’s witness statement”) to be as follows:

“…the Board and the Company have a reasonable expectation that the Company has adequate resources that enable it to continue in existence for the foreseeable future, notwithstanding its failure to meet the minimum solvency requirements of Solvency II. However, there are material uncertainties which cast significant doubt on the Company’s ability to continue as a going concern in the long term. The uncertainties derive principally from the long-term nature of the Company’s insurance liabilities, comprising reserves for [APH] liabilities. Estimates of these liabilities are subject to greater variability than other categories of liabilities due to:

(a)

a general lack of sufficiently detailed data;

(b)

additional unresolved issues such as whether coverage exists, definition of an occurrence and determination and allocation of damage to financially responsible parties;

(c)

the effect of bankruptcies on co-insurers and/or reinsurance providers;

(d)

the extent to which non-impaired claims can be precluded from making claims; and

(e)

strategies to broaden the population of defendant companies…

…

Whilst the directors of the Company consider that the gross provision for handling of claims and the related reinsurance recoveries, together with provision for claims handling expenses, are fairly stated in the [2017 Accounts] on the basis of the information currently available to them, the ultimate liabilities are relatively uncertain and will vary as a result of subsequent information and events which may result in significant adjustments. Accordingly, whilst the directors of the Company are currently of the view that the Company will be able to pay its liabilities in full whether inside of the proposed Scheme or outside of the proposed Scheme, there is a material risk that that may not be the case and, therefore, they are unable to rule out the possibility that the Company may cease to be able to operate as a going concern in the future as indicated in the [2107 Accounts]. This could cause the Company to go into liquidation or other insolvency process in the future”.

Elsewhere, it is stated that

“Based on the information that it currently has, the Company believes that it will be able to pay all of its liabilities, including once agreed or otherwise determined, Ascertained Claims, in full notwithstanding its marginal solvency”.

The reference to “marginal solvency” is not elaborated.

As to the regulatory consequences of failure to comply with Solvency II, and what action the Regulators might consider, I was told next to nothing. In Mr Gregory’ witness statement it is simply stated that

“Without further action on the part of the Company, it would continue to be in breach of Solvency II and potentially subject to regulatory enforcement by its regulators. It is not possible to determine at this time what such regulatory enforcement would entail.”

That is repeated in the PSL. The PSL goes on to state:

“Based on the Company’s financial position….and the lack of any alternatives to the Scheme, in the event that the Scheme is not implemented, the current likely alternative is that the Company will continue in a solvent run-off pending any regulatory action being taken pursuant to the Solvency II breach, or the Directors otherwise determining that the Company is unable to continue as a going concern.”

This is not satisfactory. I can readily understand both the difficulties in predicting the future and the need for equivocation as to the prospect of liquidation given (a) the relatively healthy present financial position of the Company (b) the considerable uncertainty of the factors that might cause that position to deteriorate (c) the natural reluctance of the directors to bring the shutters down in circumstances where the outcome of the scheme proposal is unknown. However, the result is that it is very difficult to take liquidation as sufficiently imminent and likely to show the best comparator.

It is noteworthy, to my mind, that when describing in the PSL the options it has considered, the Company refers only to

In these circumstances, and given that the Regulators have not clarified their approach or even what options might be available to them, and there is nothing in the evidence to warrant the conclusion that the Regulators would require a liquidation process or otherwise bring the process of run-off to a halt, I consider that the most likely alternative to the Scheme in the near and mid-term is that the Company would continue in solvent run-off, at least pending further regulatory intervention to enforce Solvency II of a presently unclear sort. That accords, it will be seen, with what is forecast in the PSL (see paragraph [60] above).

Mr Trower suggested, nevertheless, that in the particular circumstances, I should not view the choice as being between liquidation and solvent run-off but as being between some form of delayed estimation and/or adjudication and the immediate and market-sensitive process proposed in the Scheme. But Mr Trower did not explain, and on the present state of the evidence I do not think it at all clear, how or on what time-line a process of estimation and/or adjudication would be brought into being and effect other than in the context of the proposed Scheme or the alternative expressly posited of liquidation.

On the basis of the present evidence, therefore, I consider that I must take continuing solvent run-off to be the most appropriate comparator for the purpose of comparing the rights of policyholders in a scheme and no-scheme world. However, especially in assessing whether the policyholders may nevertheless be expected to be able to discuss the proposals with a view to their common interest I think I should also take into account the possibility of regulatory intervention of a presently unspecified nature and/or of supervening insolvency. That gloss or additional factor was not present or applicable in the BAIC case, to which I next turn (after a brief reference to Re Hawk, which also of course concerned an insurance company and class issues relating to IBNR claims).

My choice of appropriate comparator distinguishes the present case from Re Hawk. In that case, the court of Appeal, overturning the decision of Arden J (as she then was) at first instance, held that there should be a single meeting of all creditors, including therefore both policyholders with notified but outstanding claims and those with IBNR claims. There is an interesting and instructive discussion of more general importance in Chadwick LJ’s judgment of the proper approach to class constitution issues (which also led to a change in practice as mentioned previously), in which Chadwick LJ stressed (at [33]) the importance of requiring those with sufficiently similar rights to be able to do so to consult together in a single class “lest by ordering separate meetings the court give a veto to a minority group”.

However, for present purposes, there is an important, indeed to my mind determinative, distinction between Re Hawk and this case, which is that in that case the appropriate comparator was an insolvent winding-up. At [42] Chadwick LJ said this:

“It is, to my mind, essential to have regard to the fact that the scheme is proposed as an alternative to a winding-up. There is no doubt that the company is insolvent. It has presented a petition for winding up and the court has appointed provisional liquidators. The right approach in those circumstances, as it seems to me, is to consider the position on the basis that the relevant rights are those which creditors would have in a winding up.”

On such a winding up, all creditors were, of course, entitled to the same right of proof and either their valuation or estimation according to the Insolvency Rules.

In the BAIC case, on the other hand, Lewison J identified a continuing solvent run-off as being the appropriate comparator (see [88]). In that case, it had been suggested in the course of argument (though without evidential support) that the appropriate comparator was the rights that the policyholders would enjoy in a solvent liquidation; and it was submitted that in such a context, all “would be entitled to have their contingent claims valued and payment of the valuation in full” both in the case of the scheme and in the case of solvent liquidation (see [85]). Lewison J rejected that comparator in that case because although the possibility of solvent liquidation had been canvassed, it “had never been put forward as a realistic alternative”, and in fact was unlikely, given that (a) the scheme only applied to part of the company’s business (the other part was to continue in run-off) and a liquidation of the company must be a liquidation of the company as a whole (see [82]); and (b) the company was a subsidiary of well-known insurers who would be unlikely to support that route “for reasons connected with their reputation and standing in the insurance market” [ibid.].

Lewison J took it to be plain that, at least in the context of such a clear comparator, the rights of policyholders “with outstanding losses” (that is, losses which have been notified but remain outstanding) were not the same as the rights of policyholders with IBNR claims:

Having identified this difference in rights, Lewison J then said this at [92]:

“In my judgment, in the particular circumstances of a solvent scheme, where a solvent liquidation is not a realistic alternative, those with accrued claims and those with IBNR claims have interests which are sufficiently different as not to make it possible for them sensibly to consult together ‘in their common interest’. In truth, they have no common interest at all.”

In Re Sovereign Marine & General Insurance [supra], Warren J had to re-visit the question whether IBNR policyholders should be put into a separate class, again in the context of solvent run-off being the appropriate comparator. He rejected the submission (at [113]) that BAIC laid down a general principle that, wherever there is a solvent scheme and the comparator is a solvent run-off, it is never possible for those with IBNR claims to consult together in the common interest with those with accrued claims, so that IBNR claims must form a separate class. Rather, he considered that each case would be heavily fact dependent.

At [113] in his judgment, Warren J gave two examples to support and illustrate his view that Lewison J could not be taken as laying down a general rule, being

Warren J also pointed out that in Re NRG Victory [supra] Lindsay J, albeit on an unopposed application for convening directions, did not regard Lewison J as laying down a general rule (surmising that Lewison J would be “surprised and even perturbed” to be thought to have done so), and concluded (at para. 17) that

“…BAIC is not, of course, a decision that where there are both ‘accrued’ and ‘IBNR’ claims they will invariably have to vote in separate classes. Whether separate classes for them are truly necessary will depend on a long list of variables such that what is right for one company and one scheme will not necessarily be right for another…much will depend on matter such as the types of business which they covered and in what proportion between those classes of business; whether the business conducted was direct insurance or reinsurance and in what proportions; in what parts of the world, even, that their claimants are to be found; their solvency margins; how recently and when they stopped writing such new business as they used to write; the various times, class by class of business, at which they stopped; how long, accordingly, they have been in run-off and what has been their commutation experience. There are, no doubt, many other variables that may need to be taken into account.”

That said, in Re Sovereign Marine, and having considered considerable expert evidence, Warren J did direct two separate meetings for (1) policyholders in respect of their unpaid agreed claims, other claims not requiring estimation, unpaid additional claims and outstanding claims, and (2) policyholders in relation to their IBNR claims (see [180] in his judgment). He said this (at [173] and [178]:

“[173]…it seems to me that the rights of a scheme creditor in respect of an outstanding claim (and even more so in respect of an unpaid agreed claim or other claim which does not require estimation) at the certain end of the range of uncertainty are so different from those of a scheme creditor in respect of an IBNR claim at the uncertain end of the range that it is impossible for them to consult together (in respect of those divergent rights) for the purposes of voting on the scheme (just as it was impossible for the different classes of claimant to consult together in BAIC). It is not just that the level of uncertainty is different, but also that the uncertainty is qualitatively different. Contrasting the positions of those two policyholders at the opposite ends of the range, one will know that he has a claim against one or more scheme companies and will have a reasonable idea of its value. He has a right to recover a sum of money which simply requires quantification. In contrast, the IBNR claim is uncertain even as to its occurrence.

….

[178] Accordingly, it seems to me that the appropriate course is to place outstanding claims and IBNR claims into different categories and for separate classes to be constituted in respect of those different categories. It may be that this will result in some, atypical, claims being placed in the “wrong” category if the only criterion were uncertainty. However, there is nothing in the evidence before me which would establish that, even given the different levels of uncertainty which exist, it would be impossible for all scheme claimants to consult together in respect of their outstanding claims or, separately, in respect of their IBNR claims. What the evidence does suggest is that it would be impossible for many of the scheme claimants in respect of their outstanding claims, to consult with many other scheme claimants in respect of their IBNR claims thus making a single class inappropriate.”

I accept that Lewison J was not seeking to lay down a general rule: and that his statement at [92] in the BAIC case must be subject to exceptions in particular factual contexts such as those identified by Warren J at [113] in his judgment in Re Sovereign Marine (though I am not persuaded by all of the exceptions posited by Lindsay J in Re NRG Victory Reinsurance Ltd at [17], which to my mind would require a factual analysis too detailed to be workable). As it seems to me, the exceptions reflect the long-established principle that the facts of a particular case may be such that notwithstanding the difference in the respective legal rights of two or more groups their shared or common interests are such that they can sensibly discuss a proposal together. In that context, I agree with Warren J’s observation at [81] in Re Sovereign Marine that

“…where the rights of two opposing groups are not identical, it can sometimes be very difficult to determine whether it is the difference between their rights which leads to opposition between the groups or whether it is the divergence in their interests which does so.”

That difficulty was one of the matters that I sought to address in In the matter of Lehman Brothers International (Europe) (in Administration) [2018] EWHC 1980 (Ch) (“the Lehman Scheme”) in my discussion there of the ‘but for’ test as a “useful heuristic” for determining whether it is the difference in rights or some other personal adverse interest which is the true cause of opposition to a single meeting, or put another way (and cf per Warren J in Re Sovereign Marine at [89]), whether “the differences in interest derive…from the very nature of the rights concerned and not from some special position of the particular policyholder”: and see [91] to 103] of my judgment in the Lehman Scheme.

Always accepting the need to consider the facts of the individual case, I tend to think that in the case of an insurance company presently in solvent run-off, where there are both outstanding notified claims and IBNR claims, separate class meetings for those two groups of policyholders are likely to be required unless on the evidence in the particular case liquidation is demonstrated to be imminent, so that the proper comparator is liquidation and the focus is on the rights which policyholders would have in that event.

In other words, in such a context, the court is likely to have to be persuaded that there are special factual circumstances which are either (a) such as to reduce materially the uncertainties inherent in estimating IBNR claims to the extent that they are more theoretical than real or (b) such that despite such remaining inherent uncertainties, and the resulting qualitative difference between the rights of policyholders with outstanding reported but as yet unpaid claims, and the rights of policyholders with IBNR claims (and see paragraph [70] above), both groups can nevertheless, in the circumstances of the particular case, realistically but objectively be expected to be able to consult together on the proposed scheme with a view to their common interest.

The question then is whether in this particular case, the factual circumstances are such that either (a) the inherent uncertainties in estimating IBNR claims have been sufficiently reduced or (b) the remaining differences in interest deriving from the very nature of the rights concerned are eclipsed by the matters the relevant policyholders can objectively be taken to have in common.

The Company relies on a variety of matters in support of its position that in this case, there is no need or justification for IBNR policyholders to vote in a separate class because (quoting from Mr Gregory’s witness statement):

“The Company’s Board has considered the rights of the Scheme Creditors in respect of their Scheme Claims, and the way in which those rights will be affected under the proposed Scheme. and has concluded that they should be able to consult together with a view to their common interest. Accordingly, it has also concluded that the Scheme Creditors should constitute a single class for the purpose of voting on the Scheme.”

In particular, the Company submits that

As it strikes me, point (1) above and its sub-points primarily relate to an assessment as to whether in this case there is or would be in reality any material difference in the rights of policyholders with outstanding notified claims and those with IBNR claims either before or after the Scheme: and see paragraph [49] above. However, I am unable to accept the Company’s submission that all Scheme Creditors have materially the same rights now or would have materially the same treatment under the Scheme. Whist I certainly agree that it is important to distinguish between scheme rights (before and after) as against the scheme company and other rights (only the former being relevant), and (just as important) to keep clear and apply the distinction between rights and interests, the basic fact that an IBNR claim is inherently (a) uncertain even as to its occurrence, as to the range of events that may give rise to an insured liability and thus as to the range of magnitude of any exposure, and (b) therefore likely also to be subject to much greater ranges in any estimation process, signifies that an outstanding claim gives a scheme creditor a qualitatively different right from an IBNR claim: and see per Warren J in Re Sovereign Marine at [172].

It was submitted on behalf of the Company that these ranges of uncertainty should be seen as likely to be minimised, and possibly even minimal, given (a) the very long length of run-off so far (since 1985) and (b) the identity of the policyholders with IBNR, who (it was suggested in submission but with little by way of evidence) were themselves experienced in the market and able, at least by now, to have brought considerably more than usual certainty to their IBNR claims.

As to (a) in paragraph [83] above, I would be inclined to accept that the length of run-off may well tend to reduce the uncertainty of claims in respect of insured risks of a sort already identified: but it does not eliminate it. Furthermore, insured claims may eventuate from other sources or changing circumstances not yet experienced, or if experienced, not yet capable of accurate measurement. Put summarily, I am not satisfied that the length of run-off is sufficient to support a conclusion that there is no substantive difference in rights against the Company, though I return to that factor in considering whether in the particular circumstances there is in reality more in common between the two groups than divides them.

As to (b) in paragraph [83] above, though it was not expressly so submitted, I suppose that some evidence of this may be thought to be implicit in the very precise measurement of its IBNR exposure in the witness statement of Jenna L. Buda dated 8 October 2018 on behalf of Allstate Insurance Company (“Allstate”), which is reinsured by the Company in respect of long-tail risks including asbestosis. But I am not persuaded that extrapolation is sufficient.

Turning to the consequential question of whether, even if there is a difference in rights, on the facts there is sufficiently more to unite them than divide them such that it is perfectly realistic to expect both policyholders with outstanding but notified claims and policyholders with IBNR claims to discuss the Scheme with a view to their common interest, it does seem to me that the factors relied on by the Company (as set out above) do go some way towards establishing what should be shared objectives sufficient to be a solvent to the difference in their rights. However, I am not persuaded that they go far enough to overcome what I regard as the prima facie position.

Absent evidence to demonstrate the contrary, then (see ibid. at [173]):

“Whilst it might not be correct to place most outstanding claims at the low extreme of the continuum [of uncertainty] or most IBNR claims at the high extreme…many outstanding claims will be of a sufficiently different degree of uncertainty from many IBNR claims as to make consultation between the relevant scheme creditors in respect of those claims impossible.”

Furthermore, the opposition of Allstate, and the further opposition in a letter dated 5 October 2018 from Covington & Burling LLP (the “Covington letter”) on behalf of a number of scheme creditors (“the Covington-Represented Creditors”), based in this context on the differences between the two groups of policyholders under consideration seems to me to indicate that a number of policyholders would not in fact share the view that there is a community of interest. Of course, this position might be the product of or reflect some collateral interest; there is also always the danger of jockeying for position. But I do not think I can dismiss it without evidence on that basis; and although perhaps too highly-coloured the description in the Covington letter of the perceived gulf between the two sets of policyholders is firmly tied to a difference in interests firmly tied to the difference in the rights:

“Specifically, those Scheme Creditors with predominantly past or pending claims have an obvious interest in supporting a Scheme as a way of receiving quick payment for their unsettled claims, because their claims are likely to be paid in full pursuant to their rights under their policies. In contrast, for those Scheme Creditors with predominantly IBNR claims (who have a strong interest in maintaining their coverage so that as their future claims mature they will be paid in accordance with the policies they purchased), the Scheme would have the effect of compromising their rights through an enforced settlement of their contingent claims at a value ascertained through an estimation process marked by substantial and irreducible uncertainties. Past experience suggests, moreover, that such IBNR claims will be grossly undervalued under the Scheme. Because of these differences, those Scheme Creditors with predominantly IBNR claims should be assigned to a separate class for voting purposes. The PSL does not adequately address the interests of Scheme Creditors with IBNR claims and does not give a breakdown of the types of claims of the Scheme Creditors as a whole.”

I should not be taken to agree with the suggestion as to gross undervaluation; and the evidence before me did give more details as to the types of claims: but the overall point is still standing, and the opposition to a single class meeting, does tell against supposing the differences to have been ironed out by time and experience.

In light of the possibility of further evidence, whether (a) from the Regulators as to their intentions; and/or (b) as to the reduction of the range or continuum of uncertainty having regard to the length of the run-off and the experience of the policyholders; or (c) as to any cross-holdings of claims such as to suggest that no policyholders would in fact wish to pursue the advantages of the Scheme for them as policyholders with outstanding but notified claims in clear preference to their much more uncertain and amorphous claims as policyholders also having IBNR claims, I have considered whether to adjourn for further evidence or (unusually) follow the course adopted by Lindsay J in Re NRG Victory.

In Re NRG Victory, Lindsay J, in the absence of any opposition except from someone who had chosen not to be represented, directed a single meeting, but made clear that the Scheme Companies would be proceeding at their own risk that evidence might subsequently expose (at the Sanction Hearing) that the single class was insufficient (see [22] and [23] of his judgment). That clarification was I think in the context of a perceived enhanced risk; but of course, it also reflects the invariable position, notwithstanding the change of practice, that the court’s expressed view and its order as to the constitution of classes taken and made at the Convening Hearing does not and could not (since the jurisdiction of the court is in issue) foreclose the issue at the Sanction Hearing.

I have concluded, however, that I should not take that course. Especially having regard to my view that the evidence is not such as to dislodge the prima facie position which is that policyholders with outstanding but notified claims should be in a different class than those with IBNR claims, I consider that course would not be consistent with the salutary change of practice in the wake of Re Hawk. I do not propose to permit time for further evidence at this stage either. Again, the changed practice makes clear that issues as to class constitution are to be addressed at the convening stage, and I do not think I should assume that this is not well understood, nor encourage leeway in complying with the requirement on a scheme company to martial its evidence accordingly, or if it cannot, indicate special circumstances why it should be deferred.

With tangential reference to the last paragraph, one final late development in the matter which I should mention is this: towards the end of a further hearing on 17 October 2018 to consider new submissions advanced by Allstate initially in the form of a Note dated 15 October 2018 (to which I shall return) I asked for further information as to the split of the Company’s creditors holding notified outstanding claims and those holding IBNR claims. This was duly and efficiently provided in the form of a letter to the court dated 17 October 2018 from Clifford Chance LLP on behalf of the Company (the “CC 17 October letter”), based on information from PricewaterhouseCoopers LLP as the Company’s advisers on the Scheme and the Company’s records, which indicate as regards the split between notified outstanding and IBNR creditors that:

That obviously indicates a considerable degree of cross-holdings in number and value. The information that every creditor with IBNR claims also has notified outstanding claims, and there is no-one with IBNR claims only, is interesting; but so too is the information that of the 237 creditors, 112 have notified outstanding claims and no IBNR claims. Albeit lately provided, that has seemed to me to be information of some considerable importance; and indeed it has caused me, even at this late stage after completing most of this judgment in draft, to reconsider whether there is any practical reality in the proposition that those with IBNR claims may have a different outlook, given that they also have (probably in many cases larger) notified outstanding claims. The creditor profile, in other words, may in practice reduce the prospect of a real division of interest.

Thus, in Re Hawk, great store was put on the factor, especially by Pill LJ in his judgment (at [60]) where he said this:

“This is not a case in which, in the event, there are creditors whose potential claims upon the fund are heavily weighted, for example, towards IBNR and in whose interest it may be to seek a deferment of any proposed scheme. The overwhelming majority in value of creditors, Mr Moss tells the court, have claims in all three categories [being, to interpolate, unsettled paid claims, notified outstanding and IBNR]. Mr Moss submits that the court would have jurisdiction even if that were not the case. Mr Philip Jones, as amicus, submits that different considerations might apply if that factor had been absent. Mr Jones’s caution is in my view justified. In a case where some creditors have only unsettled paid claims, and others only potential claims which are incurred but not reported, different considerations might apply, especially if the state of scientific knowledge were such that the IBNR claims are likely to be numerous, valuable and long deferred.”

Plainly some of those factors would appear to apply here, though it must continue to be borne in mind, in terms of the wider context, that reHawk concerned an insolvent insurer, and the comparator was unequivocally insolvent liquidation and estimation accordingly. It must also be borne in mind that the analysis I have referred to does not drill further down into the position of individual policyholders, some of whom individually may have a preponderance of one type of claim or the other. Furthermore, as Lewison J stated in the BAIC case at [91]:

“The fact that a creditor may fall into more than one class does not, in my judgment, mean that separate classes are inappropriate.”

It also seems to me, on the basis of the information provided, that there is a less than usual likelihood of a direction for two class meetings to result in conferring a veto right upon a collaterally-motivated minority; and that whilst it may be revealed with the benefit of hindsight that the community of interest between the parties in both groups of policyholders was such that arguably a separate meeting was not strictly necessary, the right course in the circumstances as I perceive them presently is to provide for one, given the qualitative differences in rights that I have described. In that connection, and for comprehensiveness, I do not accept that the requirement as stated by Chadwick LJ in Re Hawk (at [33]) to “ensure…that those whose rights are sufficiently similar to the rights of others that they can properly consult together should be required to do so” (quoted previously at paragraph [66] above) means that if it subsequently appears likely that all policyholders were in accord in pursuit of their common interest, the classes may be adjudged inappropriately constituted. That would be to set an unachievable standard; and one which (as it seems to me) would only be asserted to confound a positive vote by the requisite majorities in both classes. It is sufficient, in my judgment, if it appears at the time that there is a difference in rights and the court on the evidence concludes that the community of interest has not sufficiently been established for a separate class meeting to be appropriate. Of course, the question of fairness remains at large.

Lastly, I note that in the CC 17 October letter, it is stated that

“The Company also confirms that, given the age of the run-off (in excess of 33 years) and as a practical matter, both notified outstanding and IBNR claims will be valued by the same expert analyst, using the same kind of data, methodologies and statistical techniques meaning that the manner in which IBNR claims and notified outstanding claims will be valued will be substantially the same.”

I have considered this point earlier; but in the light of that paragraph in the CC 17 October letter I have done so again. The problem remains for me that actuarial or other expert technique and methodology is an extraction from the past to provide a prediction as to the future: but future occurrences may be novel or unexpected, and unpredictable in quantity and in value, and the past may be a false guide. I do not think I can assume on the present evidence, if ever, that the past data, methodology and statistical techniques, even of an expert analyst, can reliably overcome or eradicate the materially different uncertainties inherent in estimating IBNR claims as compared to other claims. I note, for example, that none of the expert witnesses in Re Sovereign Marine felt able to suggest that they could: and see [141] of Warren J’s judgment.

I have not found this issue easy. This is a case nearing the cusp, despite my overall feeling that it is inherently difficult to avoid separate classes for IBNR policyholders unless the comparator is liquidation. There are, in my view, special factors which separate this case from other cut-off and estimation schemes. These include, in particular (leaving aside matters likely to go to the issue of fairness, such as the apparently benign reasons for the proposed Scheme (in contrast, I would suggest, with the BAIC case, where there was no real need for the proposed scheme and the benefits were largely to the company and shareholders at the expense of the rest (see [142] and [143] of Lewison J’s judgment), which are not for this stage of consideration):

As mentioned above, these special features have caused me to consider also whether, even if there remains some doubt, I should nevertheless let the matter proceed with a single meeting at the Company’s own risk, as Lindsay J did in Re NRG Victory Reinsurance.

A more detailed explanation from the Regulators as to what they would intend to do might well have altered my approach: as I made clear during the hearing, I consider it regrettable and surprising that, notwithstanding their concerns and responsibilities in relation to Solvency II, they should both offer no more than an entirely unelaborated confirmation of non-objection to the proposal, apart from an enquiry from the PRA (by email in late August 2018) whether, if approved, the Scheme would be recognised in the USA and that there is “no FSCS eligible business involved”. It is not, of course, for me to dictate to the Regulators how to discharge their difficult and onerous responsibilities: but if this was in truth their preferred solution, and in any event if they have an alternative under consideration, both the Company and this court could greatly have benefitted from a more considered and elaborate report. In particular, this could have helpfully illuminated the identification of the appropriate comparator.

However, in the end I have concluded that the irreducible inherent uncertainties in the estimation of IBNR claims, where solvent run-off is still the most likely alternative and comparator, and the indications from objectors as to their concerns of being deprived of coverage in return for an estimation of value which may prove deficient, remain such that the proper course is to require separate class meeting for policyholders with IBNR claims. As to the exact constitution of the separate class I shall hear further argument. For example, the Covington letter suggests a separate class of Scheme Creditors “with predominantly IBNR claims” [my emphasis].

Subject to that, however, I have concluded in the result that I should not accede to the application in its present form, which simply seeks permission to convene a single meeting, and directions as to how it is to be convened and held.

Nevertheless, since there has also been argument as to further classes, and as to directions with respect to voting entitlements, I turn to consider these also, although in the circumstances, and given that I have already set out my view as to the principles to be applied, I propose to do so considerably more summarily.

Certain Scheme Creditors, who I understand to be cedants in the USA, have contractual rights (to comply with certain regulatory requirements for contracts made by US cedants with non-US reinsurers such as the Company) to require the Company to provide third party security to protect them in the event of insolvency. The CC 17 October letter records there as being some 20 creditors in this category (“subject to reviewing the relevant underlying contracts”).

I understand (from a slightly earlier letter written by Clifford Chance to the court dated 16 October 2018 (“CC’s first letter”) in circumstances further explained below) that, typically, such provisions will require the reinsurer (here, the Company) to provide letters of credit by way of appropriate provision for loss reserves. The obligation of the Company is contingent upon the cedant establishing loss reserves in its books compliant with State insurance regulation.

On the proposed Scheme becoming effective nothing prevents a Scheme Creditor from exercising any security it has in respect of its Scheme Claims. However, from that date the Company would cease to have the contractual obligation to provide third party security, and (as made clear in the PSL at paragraph 19) any security that a Scheme Creditor has cannot be exercised in respect of any Scheme Claims that do not already have the benefit of security.

On behalf of Allstate, which is a cedant having such rights (and recently exercised such a right in early October, which the Company complied with), Ms Hilary Stonefrost of Counsel has submitted that the fact and proposed removal of such rights under the Scheme means that it is impossible for Scheme Creditors with such contractual rights to consult together with the Scheme Creditors who do not have those contractual rights with a view to their common interest. Accordingly, she submits that Scheme Creditors with the benefit of such a contractual right should be in a separate class.

When Ms Stonefrost initially advanced this contention in her skeleton argument for, and orally at, the hearing before me on 9 October 2018, she soon withdrew when I questioned whether, on analysis, there was any real difference in the relevant rights, at least in the context of solvency or solvent liquidation. However, after that hearing, and starting a trend of post-hearing communications which is perhaps regrettable, she sent the court a note dated 15 October (“the Stonefrost Note”) revisiting the theme on the basis that the possibility that the Company may have to cease to operate as a going concern and may then go into insolvent liquidation. She pursued the point further when (given the interests of other creditors, and to promote the fact and appearance of open justice) I required the matter to be ventilated in open court at the further hearing on 17 October 2018.

Put relatively shortly, the substance of her further submissions is as follows:

I do not accept this argument, whether in its original form or as expanded. Put very shortly, it seems to me that my identification of the comparator as being continued solvent run-off with a smaller risk of some later liquidation (see above) should be applied in this context also; and when applied, the assumption of continued solvency means that the removal of right to third party security, which arises only in the different context of insolvency, is neither here nor there.

Furthermore, even taking into account within the comparator the remaining possibility of some erosion in values or elevation of claims such as to cause insolvency and insolvent liquidation, it seems that any difference in right would not be such as to prevent policyholders being able to discuss the proposals with a view to their common interest.

Thus, I do not accept the argument that there should be a further separate class for Scheme Creditors who have the relevant contractual rights to third party security.

I was informed at the hearing (and Clifford Chance subsequently confirmed in writing) that the Company has reinsurance claims against its own insurers amounting in value to approximately US$3 million; and that a small proportion of this asset is owed to the Company by cedants with claims against the Company. I was also told that “it is not possible to give a precise figure, but the Company’s best estimate is that it is less than 10% by value”.

In the “Covington letter” on behalf of the Covington-Represented Creditors, who (as I have already noted) were not represented before me at any of the hearings I have referred to, it was suggested that the Company’s reinsurers should be assigned to a separate class because

“…the Company’s reinsurers have very different rights than those of the direct policyholders, and they do not share any common interest with the direct policyholders since it is clearly in their interest that the Scheme ultimately minimizes the value of all claims submitted against the Company whereas direct policyholders have the opposite interest.”

Substantially that argument was considered by Lewison J in the BAIC case at [93] to [95]. He found it a difficult question, but concluded that a separate class for reinsurers could not be justified. That was primarily because, as Mr Gabriel Moss QC had argued for the scheme company in that case, on true analysis both sets of policyholders (insured and reinsured) have the same right against the company of indemnity in respect of insured risks, and a difference or even conflict of interest does not, if there is no difference in rights, justify a separate class meeting. Lewison J noted that

“…the fact that some members of a class have personal or special interests in supporting the proposals may be relevant at the third stage, when the court exercises its discretion in sanctioning (or refusing to sanction) the scheme.”

But that is not under consideration at this stage.

Warren J reconsidered the question in Re Sovereign Marine (see [181] to [185] of his judgment). He too found the issue to be a difficult one, but came to the same conclusion on the basic question for the same reasons.

He also considered a further consequential or related point which also arises in this case: the issue being whether at any class meeting reinsurers should be entitled to vote only on the net values of their claims, that is, after set-off (as was proposed and approved in the BAIC case), or whether (as was proposed in Re Sovereign Marine) they should be entitled to vote without set-off.

There are arguments both ways. Against set-off and net value and for gross value it was submitted by Mr Moss QC in Re Sovereign Marine that (a) in a solvent situation reinsurers are entitled to payment of sums due to them without a set-off and (b) as matter of general principle, set-off is only allowed for liquidated and ascertained claims so that (c) the ‘gross value’ approach ensures that at the voting stage reinsurers are in the same position as they are under ordinary law. In favour of set-off and a ‘net value’ approach it was submitted by Mr Richard Sheldon QC and Ms Hilary Stonefrost (instructed, I note also, by Covington & Burling LLP) on behalf of the opposing creditors, that the ‘gross value’ approach would have grossly distorting effect on the vote at the meeting(s) and would not reflect the economic interest of creditors in the companies, nor their entitlements under the scheme(s) if they became effective. Mr Sheldon went further, and as his argument is recorded by Warren J (at [183]) submitted that

“By proposing to exclude the application of set-off for the purpose of voting, the votes cast by creditors who are also reinsurers will, notwithstanding their different rights and interests, count disproportionately towards the final result, unless they are constituted as a separate class.”

Warren J decided that, at least in the circumstances of the case before him, either approach was “proper” (and see [185] of his judgment).

In this case, the Company’s preference is to adopt the ‘net value’ approach, but it has made clear that “it would be content for the direction to provide for creditors to vote gross if the court considers that this is the most appropriate course of action”.

On the facts of this case, the relevant amounts are relatively small. However, I consider that the Company’s preferred course is ‘proper’ and (assuming that remains its preference) should be adopted.

According to the information provided in the CC 17 October letter:

A further point floated in the Covington letter is that

“to the extent that insurers reinsured by the Company will be allowed to vote as Scheme Creditors, the Covington-Represented Creditors believe that their interests and claim characteristics diverge significantly from those of direct insured such that they should be assigned to a separate class. That is particularly true for those insurers that are either in run-off, insolvent, or subject to their own schemes of arrangement, given their clear incentives to receive quick payment for any claims under the proposed Scheme”.

In the way the point is put forward, the objection appears to go to interests and not to rights and is not relevant at this stage, although it could be relevant at the sanction stage. That would not justify a separate class meeting.

However, as the Company and its advisers have recognised and have fashioned the Scheme to address, a more difficult issue would arise if an Insolvency Event defined in the proposed Scheme as “written notice by the Company to Scheme Creditors…that the Board has determined, after consultation with the Scheme Adviser [also defined], that the Scheme Company is unable to pay its debts within the meaning of section 123 of the Insolvency Act 1986”.

That is because in a formal insolvency, the Insurers (Reorganisation and Winding Up) Regulations 2004 (the “2004 Regulations”) would require direct insureds to be paid in priority to reinsurance creditors. The Company’s skeleton argument emphasises that this point does not concern scheme creditors’ present actual rights, because the Company considers it ought to remain solvent, provided the scheme becomes effective and run-off can be accelerated. However, to take account of the possibility of insolvency, the proposed Scheme includes a special resolution procedure if an Insolvency Event occurs. The special resolutions allow for separate classes of the direct insureds to vote, and the re-insureds to vote as to whether to continue the scheme or not. If the resolutions are passed, claims will be paid in accordance with the priority rules provided for by the 2004 Regulations. If the resolutions are not passed, the likelihood is that the Company will then go into an insolvency process to be determined.

I mention that point for comprehensiveness; it would not arise if solvency continues. But in any event, the inclusion of the provision above described in the proposed Scheme seems to me to address the potential class issue that might arise in the event of insolvency, or if that were the comparator.

Four further points (numbered 4 to 7) were floated in the Covington letter in support of further class meetings.

The first of these further points is the suggestion that any subsidiaries, affiliates or companies owned in whole or in part by the Company or any parent company of its should be assigned to a separate class. I do not know whether the issue in fact arises at all. But even if it does on the facts, I do not consider that any class constitution issue arises. In considering the similarity or dissimilarity of rights, the court must have regard to creditors’ existing rights (insofar as they are to be released or varied by the proposed scheme) and the new rights to which the creditors will become entitled under the proposed scheme: see Hawk at [34]. These are not affected. This is not a case like Re Hellenic & General Trust Ltd [1976] 1 WLR 123 which concerned a members’ transfer scheme; and in any event, in my view, it is now clear that in the context of a creditors scheme, such companies may be said to have different interests, but not different rights: and see the analysis by Lord Millett in the Hong Kong court of Final Appeal in UDL Argos Engineering & Heavy Industries Co Ltd v Lin Holdings [2001] HKCFA 19.

The Covington Letter then posits that

“…to the extent that certain creditors have been offered or will be offered or accorded preferential treatment by the Company or its parent(s) (if such exist) or affiliates under the Scheme prior to the Scheme vote – treatment not offered to other creditors – these “preferential” creditors should be assigned to a separate class”.

I do not understand there to be any factual basis for this surmise. Whether consideration for a vote in favour of a scheme (which I assume is the target of the suggestion) is such as to trigger a class constitution issue is heavily fact sensitive. It may not be such as to cause any class difficulty: see, for example, per David Richards J in Re Seat Pagine Gialle SpA [2012] EWHC 3686 (Ch) at [22]. It will probably ultimately depend on “whether the fee had a serious impact on the way in which creditors voted” (see ‘Schemes of Arrangement: Theory, Structure and Operation’ by Jennifer Payne (2014) at page 203). There is no basis at all at this stage for the surmise, still less the floated suggestion.

Next, it is contended in the Covington Letter that

“…to the extent that Creditors from jurisdictions in the United States or other countries, whose policies are governed by United States or other non-English law, have rights under their policies with respect to assets in the United States or other foreign jurisdictions, such Creditors should be assigned to a separate class”.

To the extent that this point relates to the right of certain US cedants to third-party security, I have already addressed it: see above. To the extent that it raises a cross-border jurisdictional issue I discuss it briefly later. If the intended target is or includes the mere fact that some policies may be governed by some other law than English law, then in the absence of any evidence as to the nature of the differences supposed, I do not presently see any basis for contending that, even if the rights under such foreign law are different, there should be any real or sufficient difficulty in policyholders with policies governed by different laws, but having the same basic right of indemnity, consulting together with a view to their common interest.

Apart from a useful quotation from Lewison J’s judgment in the BAIC case (at [143]) which I consider supports my conclusion as to the need for a separate IBNR class but not the other points in the Covington Letter, the last point made in the Covington Letter is that

“to the extent that Creditors from jurisdictions in the United States or other countries, the law of which entitles the Scheme Creditor to an “All Sums” allocation that is not net of contribution, or the law of which otherwise entitles the Scheme Creditor to a claim valuation different than the proposed Estimation Guidelines would mandate, such Creditors should be assigned to a separate class.”

Again, however, there is no evidence to substantiate the point. If any of the Covington-Represented Creditors enjoyed such an entitlement it would surely have been easy to provide an evidenced example. As it is, I cannot assess the point with any real focus. I must take it, at least for present purposes, that the Company and its advisers would have told me of any substantive differences, and explained their relevance or not to the matters in issue at this stage.

In that regard, the Company’s skeleton argument does refer to what is described as “a further minor potential class point”, in that scheme creditor claims are to be paid in US dollars if incurred in US dollars (subject to the point noted above in the case of mixed currency claims), and in sterling if incurred in sterling. There is a default for other currencies, to pay them in US dollars. It is submitted for the Company that this difference between creditor payments is not sufficiently material to amount to a class differential. I agree: it does not seem to me that the differential is likely to be such as might prevent them consulting together with a view to their common interest.

Before addressing briefly (and lastly) the cross-border issues canvased by the Company, I wish to emphasise a further point which has come to concern me as to the consequences of the Practice Statement (see paragraphs [28] to [31] above) which has governed procedure post- Re Hawk. I have previously cautioned against the perception that at the convening stage the court will in the ordinary course deal with all jurisdictional issues. Now I turn to focus on what the court is likely to expect of the company and creditors who object to the class constitution it proposes at the convening stage.

The beneficial change of the post- Re Hawk procedure, which has increased the utility and practicality of schemes of arrangement, and markedly increased their use accordingly, depends not only upon the accuracy and sufficiency of the requisite Practice Statement Letter (which I confirm I am satisfied with in this case) but also upon its recipients, if they have a class issue they wish to raise, (a) recognising that the Convening Hearing is the appropriate time at which to do so and (b) advancing any point they may have with cogency and (where necessary) its evidential underpinning.

For although the court must always be satisfied as to its jurisdiction, and since class constitution is ultimately a jurisdictional issue, must keep open and cannot finally decide until the last sanction stage whether the appropriate classes have been convened, the Practice Statement expressly makes clear (in paragraph 7) that the court will expect persons raising new or elaborating old points relating to class constitution at the Sanction Hearing to show good reason why they did not raise or elaborate their concerns at an earlier stage.

I have experienced a growing tendency for creditors to purport to reserve their position by floating or trailing generic points without proper explanation, elaboration or evidential base, often with the expressed expectation of returning to their points (or some of them) in the future (usually the Sanction stage). It seems to me that the Covington Letter is an example of this tendency.

This developing tendency places a growing burden, not only on the Company (which has an obligation to do its best to address and deal candidly with points of substance going to the court’s jurisdiction or likely to affect its proper exercise), but also on the court, which is obliged to sift through disparate and sometimes undeveloped points without proper assistance.

Furthermore, even in the case of creditors with comfortably the financial wherewithal to fund appropriate representation (such as the Covington-Represented Creditors in this case which include some of the largest corporations in the world), this tendency is accompanied by an apparent reluctance or disinclination to arrange to be represented at the Convening Hearing. That tends to increase, not decrease, the burden on the court, which will often (almost invariably, in my own experience) be assisted by properly focused oral argument.

In case this reluctance or disinclination is the result of concerns that attendance may trigger some exposure to costs, I would wish to make clear my understanding (and certainly my own usual practice) that, unless the objections are wholly improper or irrelevant, obviously collaterally motivated, or sprung on the scheme company without affording a proper opportunity for their discussion, there is very little likelihood of any adverse order for costs at that stage; and indeed there will usually be a real prospect of the relevant creditor recovering its reasonable costs of helpful and focused representation, fairly outlined in good time before the convening hearing to enable their proper consideration, on the class issues raised.

Conversely, if class points which should have been made at the Convening Hearing, are only brought forward or properly evidenced and elaborated at the Sanction Hearing, without good reason, the creditor concerned may well not recover its costs even if successful; and especially so if its success is based on some correctible deficiency relied on, but not earlier properly explained, which causes the entire process to founder and to have been a waste of time and money.

With the warnings I have sounded in mind, the final matter I must address at this stage arises from the fact that although the Company is incorporated and domiciled in England with its principal place of business in Norwich, according to the Company’s records, the majority of the Company’s creditors are domiciled in the United States (where, indeed all its direct policyholders are based) and in the UK, with others in various countries in the European Union and elsewhere. The Compamy’s skeleton argument has invited review of the issues thereby raised.

As regards enforcement of the scheme in the United States, if in due course the scheme is approved by creditors and sanctioned, it is proposed to seek Chapter 15 relief from the United States Bankruptcy court so that the scheme terms are recognised and enforced in the USA, as appropriate.

The issue raised by the Company really concerns the position as regards the European Union and elsewhere. In particular, the Company has raised the point as regards the Jurisdiction and Judgments Regulation Number 1215 of 2012 (“the JJR”). An application to sanction a scheme is a civil or commercial matter within the meaning of Art 1 (1). This means that the JJR applies unless it is excluded by Art 1 (2); and there is still some controversy as to whether or not schemes are excluded by Art 1 (2)(b) as judicial arrangements, compositions and analogous proceedings.

The Company’s skeleton argument notes that the prevailing view is that they are not because this exclusion is limited to proceedings covered by the EU Regulation on Insolvency Proceedings 848 of 2015, with the result that Art 4 of the JJR may apply. Art 4 provides that persons domiciled in a Member State shall, whatever their nationality, be sued in the courts of that Member State; and the skeleton argument points out that it remains undecided whether proceedings for the sanction of a scheme involve any person being sued, and there is therefore an open question as to whether or not the restrictions contained in Art 4 are engaged.

Having raised these issues, the Company’s skeleton argument offers solutions to each. For example, even if Art 4 does apply so as to require creditors notified of a scheme to be treated as if they were defendants being sued, the Company submits that jurisdiction is still established where there are UK domiciled creditors (see Art 8): and in the present case, the evidence is that there are a number of UK domiciled policyholders.

Similarly, having raised another issue concerning the JJR, which is whether the provisions of Arts 10 to 16 apply in this case to curtail this court’s jurisdiction or its effectiveness, as regards insurance contracts, the skeleton argument provides the answer that they do not limit the jurisdiction of the English court where the only scheme creditors domiciled in the EU are reinsurance creditors. The reason for this is that the words “matters relating to insurance” in Art 10 exclude reinsurance contracts (see Agnew v Lansforsakringsbolagens AB [2001] 1 AC 223, where the House of Lords considered similar wording contained in the Lugano Convention); and in the present case, the only scheme creditors based in the EU are cedants, thus being reinsurance creditors (not direct insured creditors within Art 10).

I have noted these arguments, though I did not invite great elaboration of them at the hearing. For the present all I think I need say is that the suggested answers seem to me to be well arguable at the very least: indeed, I provisionally consider them compelling. On that basis, there do not presently appear to me to be obvious jurisdictional roadblocks to the Scheme or its enforcement. Since the Convening Hearing should not be concerned with cross-border issues unless it is suggested on properly formulated grounds that there is some obvious jurisdictional or enforcement issue, to which there seems to be no answer and is such as could well render the Scheme nugatory or of no sufficient real effect, I think that is sufficient for present purposes. As I have previously stated, and now repeat, the business of the convening hearing is the composition of classes and directions for the class meeting(s) thought necessary. It should not ordinarily be extended to other matters, save in the exceptional circumstance that a compelling argument is raised and particularised that there is some jurisdictional impediment or difficulty in the way of its recognition or effective enforcement, such that the court is persuaded that its resolution as soon as possible is necessary to warrant the future progress of the scheme. That is not suggested in this case.

I appreciate that my decision on the IBNR issue will be likely to occasion some re-thinking and re-drafting if the proposed Scheme is to proceed. I envisage that a further hearing may be necessary to deal with that and consequential matters. I propose to retain the matter to assist in that regard. I would invite Counsel to liaise with listing and my clerk accordingly.

I am grateful to Counsel and their respective teams for their assistance and patience. My reservations about the practice of direct communication by email on substantive points remain: but that does not lessen my gratitude for the considerable and continuing amount of work on the part of all concerned.