Petition Of The Scottish Lion Insurance Company Limited V. Goodrich Corporation And Others

JurisdictionScotland
JudgeLord President,Lord Mackay of Drumadoon,Lord Reed
Neutral Citation[2009] CSIH 6
CourtCourt of Session
Published date29 January 2010
Year2009
Date29 January 2010
Docket NumberP1981/08

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

Lord President Lord Reed Lord Mackay of Drumadoon [2009] CSIH 6

P1981/08

OPINION OF THE COURT

delivered by THE LORD PRESIDENT

in Petition of

THE SCOTTISH LION INSURANCE COMPANY LIMITED

Petitioner and Reclaimer;

against

(FIRST) GOODRICH CORPORATION AND OTHERS

Respondents:

_______

Act: Howie, Q.C., Delibegović-Broome; Morton Fraser LLP

Alt: McNeill, Q.C., Munro; Simpson & Marwick WS

29 January 2010

The procedural history

[1] The petitioner has presented to the court applications under sections 896 and 899 of the Companies Act 2006 in which it seeks respectively an order for meetings of creditors and thereafter sanction of a scheme of arrangement annexed to the petition. The petitioner is an insurance company which has issued various policies of insurance, a significant number of which are "occurrence" insurance, that is, where claims may be made after, and in some cases significantly after, the relative policy has expired. The petitioner is solvent. It has not written any new business since 1994. It is in "run off".

[2] By interlocutor dated 15 December 2008 the Lord Ordinary ordered two separate meetings of creditors. At the first of these meetings the creditors entitled to attend and vote were those who had claims other than "IBNR" claims and at the second the creditors so entitled were those who had "IBNR" claims. An "IBNR" claim is, broadly speaking, a claim with respect to which, as at the date relevant for scheme purposes, a loss has been incurred but has not been reported. These meetings were held on 2 March 2009. In a report dated 23 April 2009 the chairman of the meetings reported that, in the case of each meeting, a majority in number representing 75% in value of the creditors present and voting either in person or by proxy had voted in favour of the scheme. The actual percentages reported were as follows: at the non-IBNR creditors' meeting 78% in number and 89% in value voted in favour of the scheme; at the IBNR creditors' meeting 61% in number and 97% in value so voted. The valuation of the claims upon the basis of which these figures were calculated took into account, among other things, professional advice from a "Scheme Actuarial Advisor" and an "Independent Vote Assessor".

[3] The respondents, who are American corporations, are creditors with IBNR claims. They are insured under policies which provide protection against "long tail" losses - essentially losses by reason of exposure to asbestos, pollution and health hazard. These losses are liable to become evident long, often decades, after the exposure to which they relate. At the relevant meeting of creditors they voted against the scheme. They have also lodged answers to the petition opposing the application for sanction.

[4] The respondents challenge the decision of the chairman that the requisite majority in number representing 75% in value of the creditors voting at the meeting of IBNR creditors was in favour of the scheme. They contend that the methodology employed by the chairman to evaluate claims for voting purposes was not fair and reasonable.

[5] On 7, 8 and 9 July 2009 the Lord Ordinary heard the parties in debate on two issues of principle which had been identified in advance, namely, (1) are the respondents entitled to challenge the decision by the chairman of the creditors' meetings that the statutory majorities, both by number and value, were attained at the meetings of both classes of creditors? and (2) can it ever be fair to sanction a "solvent" scheme of arrangement in the face of continuing creditor opposition to having their occurrence cover compulsorily terminated? As noted hereafter, the second question was in the course of the discussion reformulated. Having issued an Opinion on these issues the Lord Ordinary then put the case out By Order on 14 October. Having heard parties further on 16 October he dismissed the petition. Against that interlocutor the petitioner has reclaimed.

[6] So far as concerns issue (1) the Lord Ordinary answered it in the respondents' favour. However, no issue concerning it is raised in the reclaiming motion. It is accepted that, if the Lord Ordinary was in error in dismissing the petition, it will be necessary to have a hearing into whether the respondents' challenge to the valuation methodology is well-founded. The reclaiming motion concerns whether the Lord Ordinary was entitled to resolve the second issue (as reformulated) in the respondents' favour and to sustain their motion that the petition be dismissed without further inquiry.

The statutory provisions

[7] Part 26 of the Companies Act 2006 (in so far as material for present purposes) provides:

"895(1) The provisions of this Part apply where a compromise or arrangement is proposed between a company and -

(a) its creditors, or any class of them, or

(b) its members, or any class of them.

...

896(1) The court may, on an application under this section, order a meeting of the creditors or class of creditors, or of the members of the company or class of members (as the case may be), to be summoned in such manner as the court directs.

(2) An application under this section may be made by -

(a) the company,

...

899(1) If a majority in number representing 75% in value of the creditors or class of creditors or members or class of members (as the case may be), present and voting either in person or by proxy at the meeting summoned under section 896, agree a compromise or arrangement, the court may, on an application under this section, sanction the compromise or arrangement.

(2) An application under this section may be made by -

(a) the company,

...

(3) A compromise or agreement sanctioned by the court is binding on -

(a) all creditors or the class of creditors or on the members or class of members (as the case may be), and

(b) the company ...

..."

The Lord Ordinary's decision

[8] The Lord Ordinary, rejecting a contrary submission by counsel for the respondents, held that the scheme annexed to the petition was an "arrangement" for the purposes of Chapter 26. In addressing issue (2) he accepted a distinction made between on the one hand a company which was either insolvent or was at risk of becoming insolvent should it fail to make a compromise or arrangement with its creditors and on the other a company which was in neither of these states. A scheme proposed by a company in the latter state he described as a "solvent" scheme.

[9] In the course of the discussion issue (2) was reformulated. The Lord Ordinary identified the real question in issue between the parties as follows:

"[42] ... in what circumstances might the court sanction a solvent scheme such as this in face of opposition from dissenting creditors? Or, to put it another way, what does a petitioner seeking sanction of such a scheme in the face of such opposition have to show? Is it sufficient for him simply to say that 'the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve' (applying the test stated in Buckley) and rely on creditor democracy to carry the day? Or must he go further?"

The reference to "the test stated in Buckley" is to a passage in Buckley on the Companies Acts (14th ed.) at pages 473-4 where the learned authors state:

"In exercising its power of sanction the court will see, first, that the provisions of the statute have been complied with, second, that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.

The court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting, but, at the same time, the court will be slow to differ from the meeting, unless either the class has not been properly consulted, or the meeting has not considered the matter with a view to the interests of the class which it is empowered to bind, or some blot is found in the scheme."

[10] In discussing the arguments advanced before him the Lord Ordinary said:

"[55] ... In the typical case, as [counsel for the respondents] submitted, the compromise or scheme of arrangement arises out of some difficulty or problem that needs to be addressed. A simple case is where the company is faced with financial difficulties. If it goes into liquidation, the creditors may get a very small dividend on their claims. If, on the other hand, they are willing to enter into a compromise or scheme of arrangement with the company, the company may get back on an even footing and they may recover more, albeit not their full claims. In such circumstances it is easy to see why the creditors must be required to act together and be bound by the majority. A dissenting minority should not be allowed to prevent a scheme coming into effect which is obviously for the benefit of the body of creditors as a whole. In such circumstances it is easy to see that the principle of 'creditor democracy', as it is often called, should normally prevail. The situations in Re Equitable Life Assurance Society [[2002] 2 BCLC 510] and Re Cape plc [[2006] EWHC 1446 (Ch)] were more complex, but they provide other illustrations of situations where creditor democracy is needed and will normally be respected.

[56] The examples are many and various, but it seems to me that the common thread is that the scheme is put forward in a situation where, as [counsel for the respondents] submitted, there is a problem requiring a solution; that it is in the interests of the creditors (or classes of creditors) as a body that a solution should be found and implemented; and...

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