Re British Aviation Insurance Company Ltd

JurisdictionEngland & Wales
CourtChancery Division
JudgeMr. Justice Lewison
Judgment Date21 July 2005
Neutral Citation[2005] EWHC 1621 (Ch)
Docket NumberCase No: 165 of 2005
Date21 July 2005

[2005] EWHC 1621 (Ch)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

COMPANIES COURT

Royal Courts of Justice

Strand, London, WC2A 2LL

Before

Mr. Justice Lewison

Case No: 165 of 2005

In the Matter of the British Aviation Insurance Company Limited

Mr. Gabriel Moss QC and Mr Daniel Bayfield (instructed by Herbert Smith) for the Petitioner

Mr. Richard Sheldon QC & Ms Hilary Stonefrost (instructed by Covington & Burling) for the Opposing Creditors

Miss. Rosalind Nicholson (instructed by Edwin Coe) for United Technologies Corporation & Ors

Hearing dates: 7 th, 11 th, & 13 th July 2005

APPROVED JUDGMENT

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic

Mr. Justice Lewison Mr. Justice Lewison

Introduction

2

The Company and its business

3

Pollution and asbestos claims

5

The scheme

6

Procedural history

8

Ascertaining policyholders

8

The meeting is summoned

9

The meeting

10

The opposing policyholders and their objections

11

The opposing policyholders

11

The grounds of opposition

11

The legal framework

13

The statutory provisions

13

Overview

13

The first stage: summoning the meeting

14

What is a class?

15

The second stage: the scheme meeting

18

The third stage: sanctioning the scheme

19

Was adequate notice of the first-stage application given?

21

Were the classes of creditors correctly identified?

22

Was adequate notice of the second stage (Scheme Meeting) given?

27

Did the explanatory memorandum adequately explain the contents of the scheme?

27

Was the meeting properly and fairly conducted?

28

Did the votes cast adequately represent the views of the creditors?

31

Low turnout

31

Special interests

32

Treatment of IBNR claims

33

Are the terms of the scheme fair?

33

The Bar Date

34

Estimation Methodology

34

Adjudication process

34

Reversion to run off

35

Other criticisms

36

Should I, as a matter of discretion, sanction the scheme?

37

Jurisdiction

37

Benefits of the scheme

37

Conclusion

38

Introduction

1

The British Aviation Insurance Company Ltd ("the Company") was incorporated in 1930. As its name suggests, it writes insurance and reinsurance in the aviation sector. Since 1 January 2002 it has ceased to write any new business; and has been in run-off. The Company is a private company, owned directly or indirectly by three major insurance companies: Royal & Sun Alliance Insurance Group plc (57.10%); AVIVA plc (38.14%) and AXA Investment Managers UK Holdings Ltd (4.76%).

2

The Company applies to the court for the sanction of a scheme of arrangement which it proposes to make with some of its creditors, in relation to certain classes of insurance and reinsurance business. The proposed scheme does not encompass the whole of the Company's business. The scheme has been notified to the Financial Services Authority, which raises no objection from a regulatory point of view. The scheme is opposed by a number of creditors. I am told that this is the first case in which a scheme of this kind, in relation to a solvent insurer, has been opposed. The grounds of opposition are directed both at the court's jurisdiction to sanction the scheme; and at the merits (or lack of them) of the scheme itself which, it is said, should persuade the court, as a matter of discretion, to refuse to sanction the scheme.

The Company and its business

3

The Company wrote mainly aviation direct business or facultative reinsurance and was a recognised lead underwriter in the aviation risks in which it participated. The categories of risk underwritten by the Company (both directly and as reinsurer) included the following: hull; war risks; liability for passengers; third parties and baggage/cargo; airport liabilities; product liability cover; personal accident cover; loss of licence and cargo all risks insurance. The Company's main potential liabilities affected by the scheme are claims and potential claims by policyholders in the USA under product liability and general liability insurance covering potential exposure to claims arising out of exposure to asbestos, pollution and other health hazards.

4

The Company also underwrote business through a Canadian branch from 1942 until the branch went into run off on 1 January 2002. Although the Company issued some 9,500 policies to Canadian residents after 1985, it is likely that there are currently only two Canadian resident creditors likely to be affected by the scheme; with known claims arising under business written by the Canadian branch with an aggregate reserve of CAN $360,000.

5

The evidence in support of the petition includes a table of the Company's estimated liabilities:

Claim type

Estimated liability before reinsurance (£m)

% of total

Pollution

22.3

41.68

Asbestos

27.7

51.78

Hull and Liability

2.6

4.86

Health hazard and other

0.7

1.31

Canada

0.2

0.37

Total

53.5

100

6

The Company says that about 92 per cent of its asbestos liabilities are owed to direct insureds, all of whom are resident in the USA. The remaining 8 per cent of these liabilities arise under reinsurance policies issued by the Company. Mr Cracknell (a director of the Company) says that the Company has "current claims" arising under Scheme Business from 459 policyholders, the majority of which are in the USA and the UK, most of whom will have more than one claim.

7

The Company is solvent. Its audited balance sheet as at 31 December 2004 shows total assets of £227,136,000 as against total liabilities to third parties of £125,997,000. The Company's total net assets in respect of all its business, including Scheme Business, were more than £100 million. This is just under double its estimated liabilities for Scheme Business.

8

The insurance and reinsurance policies underwritten by or on behalf of the Company for the United States and Canadian aviation industry that comprise the Scheme Business were primarily policies of a kind called "occurrence" policies. This type of policy provides unlimited prospective coverage against claims relating to the risks covered by the policy (for example, asbestos, chemical and product liability) as long as the underlying act or omission happened during the relevant policy period. These claims (known as long-tail claims) typically arise and are asserted years or even decades after the claimant's latent exposure to the allegedly hazardous substance. This kind of policy is to be contrasted with a "claims made" policy, which covers only claims made during the period covered by the policy. An "occurrence" policy is a particularly valuable kind of policy, for which policyholders are prepared to pay (and did pay) a higher premium.

9

The kind of business covered by the scheme is principally related to the amounts claimed in the United States of America from U.S. policyholders and others under product liability and general liability insurance in respect of potential exposures to various environmental type liabilities such as Asbestos, Pollution and related Health Hazard (AHP liabilities). These potential claims are covered under occurrence policies.

10

Occurrence policies (at least for these kinds of claims) are no longer available in the market at any price.

11

Claims under insurance or reinsurance contracts of this kind may fall into one of three classes:

i) "unsettled paid claims". These are losses for which the Company would be liable to indemnify a policyholder under an insurance or reinsurance contract, where the amount of the claim has already been ascertained, and the liabilities both of the policyholder to the claimant and of the Company to the policyholder have been established;

ii) "outstanding losses". These are claims that have been reported to a policyholder and for which the Company may be liable to indemnify the policyholder under a contract of insurance or reinsurance, but where there is not yet any established liability; and neither the quantum of the claim nor the Company's liability to indemnify the policyholder has yet been agreed; and

iii) "incurred but not reported" claims ("IBNR claims"). These are potential claims where the event giving rise to the policyholder's liability (e.g. exposure to asbestos) has already taken place, but where no claim has yet been made against the policyholder or reported to the Company.

12

The Company has met and continues to meet its contractual liabilities in full. If the scheme is not sanctioned, there is no reason to suppose that it would not continue to do so in the future. The Company has promoted the scheme on the basis that it is solvent and is able to meet all its liabilities in full. Its estimated liabilities in relation to business covered by the scheme are some £53 million ($93 million).

13

It is an important consideration that the scheme does not include the whole of the business written by the Company. As regards business excluded from the scheme, the Company will remain in conventional solvent run-off.

Pollution and asbestos claims

14

It is common ground that asbestos related injuries are often latent for long periods before their existence becomes known; and the most serious asbestos related diseases, mesothelioma and lung cancer, usually do not appear until 30 or 40 years after exposure. In the aviation sector, the products which are typically alleged to have caused asbestos related diseases are brakes and other friction products, together with gaskets. Exposure to asbestos in aircraft hangars can also give rise to claims. The majority of claims are made by...

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