Re Hawk Insurance Company Ltd

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
JudgeLORD JUSTICE CHADWICK,LORD JUSTICE PILL,MR JUSTICE WRIGHT
Judgment Date23 February 2001
Neutral Citation[2001] EWCA Civ 241
Docket NumberCase No: 2000/0033/A3
Date23 February 2001

[2001] EWCA Civ 241

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM MRS JUSTICE ARDEN

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

Lord Justice Pill

Lord Justice Chadwick and

Mr Justice Wright

Case No: 2000/0033/A3

In The Matter of the Hawk Insurance Company Limited

MR GABRIEL MOSS QC and MISS FELICITY TOUBE (instructed by DLA, London for the Company)

MR PHILIP JONES amicus curiae (instructed by the Treasury Solicitor)

LORD JUSTICE CHADWICK
1

This is an appeal from the refusal by Mrs Justice Arden, in an order made on 21 December 1999, to give the sanction of the court under section 425(2) of the Companies Act 1985 to a scheme of arrangement proposed between The Hawk Insurance Company Limited (in provisional liquidation) and its creditors. The appeal is brought with the permission of the judge.

The background facts

2

The Hawk Insurance Company Limited ("the company") was incorporated in 1964 under the Companies Act 1948. Its business, as its name suggests, was the writing of insurance contracts. From 1965 until the end of 1968 the company wrote motor business. That proved unprofitable; and from 1969 until 1976 other non-life business (including liability business) was written through a Lloyd's underwriting agency. In October 1976 the company ceased to write new business or to renew existing business. But it continued to receive claims in the course of the run-off of its business.

3

In October 1979 the company entered into a non-marine re-insurance contract with its parent company, Al-Ahleia Insurance Co. S.A.K., under which the parent company undertook to provide re-insurance cover for the run-off of the company's business. The amount of the re-insurance cover was increased from time to time over the period 1979 to 199But, in the light of the position shown in draft accounts as at 31 December 1994, the parent company decided not to increase its support further, beyond its then existing commitments. It was recognised that the company was insolvent, with gross liabilities of £7.6 million or thereabouts, and a net deficiency of some £2.7 million.

4

It was in those circumstances that, on 21 December 1995, the company, by its directors, presented its own petition for winding up, pursuant to section 122(1)(f) of the Insolvency Act 1986, on the grounds that it was unable to pay its debts. That petition has been adjourned pending the final determination of the petition under section 425 of the Companies Act 1985. But, in order to protect the company's assets and to enable a full investigation of its affairs to be undertaken, provisional liquidators were appointed. The need for provisional liquidators to undertake the role which would more usually be undertaken by administrators appointed under Part II of the Insolvency Act 1986 arises because an administration order cannot be made in relation to an insurance company – see section 8(4) of the Insolvency Act 1986.

5

The provisional liquidators, after consultation with an informal committee of creditors, took the view that the most appropriate and beneficial method of winding-up the company's affairs would be through a scheme of arrangement between the company and its creditors under which, subject to the court giving its sanction to the scheme, those creditors within the scheme ("scheme creditors") would be paid a proportion of their valid claims against the company, after allowing for any applicable set-off. The relevant proportion, or percentage, would be calculated under the scheme by reference to the assets of the company available for distribution at the time. In the absence of agreement the value of the claims would be determined by a scheme adjudicator in accordance with a procedure prescribed in the scheme.

6

It will be necessary to examine the provisions of the scheme more closely later in this judgment. It is sufficient to note, at this point, that the scheme was approved, without dissent, at a meeting of scheme creditors held on 9 December 1999; that no creditor sought to oppose the scheme on the application for sanction under section 425(2); that the judge accepted, at the hearing in December 1999, that there were strong commercial arguments in favour of the scheme; and that, when the petition came back before her for further consideration in January 2000, the judge indicated that, subject to the question of jurisdiction (upon which she had ruled against the company in December 1999), to certain modifications in the drafting and to any change of circumstances in the meantime, she would have seen no reason to refuse the court's sanction.

The issue on this appeal

7

The judge held, for the reasons which she gave in a judgment delivered on 21 December 1999, that she had no jurisdiction under section 425(2) of the Companies Act 1985 to sanction the scheme of arrangement. She took that view because she was not satisfied that the scheme creditors constituted a single class for the purposes of the statutory requirement that the scheme be approved by the requisite majority at a meeting of the creditors or class (or classes) of creditors with whom the compromise or arrangement proposed by the scheme was to be made. As she put it:

"I appreciate that there are very strong commercial reasons for this scheme, but the question of constitution of classes does go to jurisdiction and therefore is one which the court is bound to consider even in the absence of a creditor making the point …"

The issue on this appeal is whether the judge was right to take the view that she did.

8

The point is of some general importance. The practice of using a scheme proposed by provisional liquidators and sanctioned under section 425 of the Companies Act 1985 as an effective method of winding-up an insolvent insurance company has developed over the past decade for the reasons explained in paragraph H16.04A of Totty and Moss: Insolvency. And, as the editors observe: "Recent decisions have highlighted the difficulty faced by scheme draftsmen in ensuring that the classes of creditors are correctly identified for the purpose of holding valid statutory meetings to approve the scheme." Examples of the problems which have faced judges of the Companies Court on applications for sanction under section 425 can be found not only in the present case, but also in two recent decisions of Mr Justice Neuberger, In re Osiris Insurance Ltd [1999] 1 BCLC 182 and In re Anglo American Insurance Company Ltd (unreported, 12 April 2000), and in the decision of Mr Justice Jonathan Parker in In re BTR plc [1999] 2 BCLC 675.

9

As I have indicated, the petition was not opposed before the judge. There is no respondent to the appeal. But we have had the benefit of written and oral submissions from counsel instructed as amicus curiae. He did not feel able to support the reasoning of the judge. But he put forward a careful and thorough analysis of the relevant principles and, for my part, I have found his submissions of much assistance. They have led to an application by the company to adduce further evidence for the purposes of the appeal. That evidence explains (with more particularity than had appeared in the evidence before Mrs Justice Arden) the nature of the company's business and of the claims arising from that business that fall to be dealt with under the scheme. We have thought it right to allow that evidence to be adduced.

Section 425 of the Companies Act 1985

10

I turn, therefore, to the provisions of section 425 of the Companies Act 1985. The section is in these terms, so far as material:

"(1)Where any compromise or arrangement is proposed between a company and its creditors, or any class of them, … the court may on the application of the company or any creditor …, order a meeting of the creditors or class of creditors … (as the case may be) to be summoned in such manner as the court directs.

(2)

If a majority in number representing three-fourths in value of the creditors or class of creditors … (as the case may be), present and voting either in person or by proxy at the meeting, agree to any compromise or arrangement, the compromise or arrangement, if sanctioned by the court, is binding on all creditors or the class of creditors … (as the case may be), and also on the company …"

11

There are, as I sought to point out in In re BTR plc [2000] 1 BCLC 740, at page 742, when this Court refused permission to appeal from the order made by Mr Justice Jonathan Parker, three stages in the process by which a compromise or arrangement becomes binding on the company and all its creditors (or all those creditors within the class of creditors with which the compromise or arrangement is made). First, there must be an application to the court under section 425(1) of the Act for an order that a meeting or meetings be summoned. It is at that stage that a decision needs to be taken as to whether or not to summon more than one meeting; and, if so, who should be summoned to which meeting. Second, the scheme proposals are put to the meeting or meetings held in accordance with the order that has been made; and are approved (or not) by the requisite majority in number and value of those present and voting in person or by proxy. Third, if approved at the meeting or meetings, there must be a further application to the court under section 425(2) of the Act to obtain the court's sanction to the compromise or arrangement.

12

It can be seen that each of those stages serves a distinct purpose. At the first stage the court directs how the meeting or meetings are to be summoned. It is concerned, at that stage, to ensure that those who are to be affected by the compromise or arrangement proposed have a proper...

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