Stronghold Insurance Company Ltd

JurisdictionEngland & Wales
CourtChancery Division
JudgeMr Justice Hildyard
Judgment Date31 Oct 2018
Neutral Citation[2018] EWHC 2909 (Ch)
Docket NumberCase No: CR-2018-008390

Neutral Citation Number: [2018] EWHC 2909 (Ch)

IN THE HIGH COURT OF JUSTICE

BUSINESS AD PROPERTY COURTS OF ENGLAND AND WALES

INSOLVENCY AND COMPANIES LIST (ChD)

7 Rolls Building Fetter Lane, London

EC4A 1NL

Before:

Mr Justice Hildyard

Case No: CR-2018-008390

Between:
In the Matter of Stronghold Insurance Company Limited
And in the Matter of the Companies Act 2006

William Trower QC and Adam Goodison (instructed by Clifford Chance LLP) for Stronghold Insurance Company Limited

Hilary Stonefrost (instructed by RPC Solicitors) for Allstate Insurance Company

Hearing dates: 9 & 17 October 2018

Judgment Approved

Mr Justice Hildyard

Issues

1

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.

2

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.

3

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:

Potential Creditor

Number

Policyholders with current claims reserves

49

Policyholders with only current fee reserves

71

Cedants with claims reserves

112

Cedants with no claims reserves but paid in the last five years

13

Total

245

4

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.

5

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.

6

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.

7

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.

8

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.

Context in which this Scheme is proposed

9

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.

10

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.

11

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)).

12

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.

13

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.

Scope and outline of the proposed Part 26 Scheme

14

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.

15

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.

16

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.

17

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

(1) Scheme Creditors will have their Scheme Claims valued and agreed or otherwise determined using an estimation methodology similar in its application to all Scheme Creditors (see paragraph [18] below);

(2) All Scheme Creditors will have the right to be paid in full in respect of their Scheme Claims in the ascertained amount (their “Ascertained Claims”);

(3) Scheme Creditors will be paid their Ascertained Claims in either USD or in GBP (each a “Relevant Currency”). Where a Scheme Creditor has Ascertained Claims in both Relevant Currencies, its Ascertained Claim will be paid in the Relevant Currency of its largest Ascertained Claim: and, in those circumstances, any Ascertained Claim in a currency other than such Relevant Currency will be converted into such Relevant Currency using the rate of exchange applicable as at 30 September 2018 in which the liability concerned was incurred. Where a Scheme Creditor's Ascertained Claims are in currencies other than a Relevant Currency such Ascertained Claims will likewise be converted into USD;

(4) If an Insolvency Event occurs, the Scheme makes provision for the potential difference in rights of Direct Insurance Creditors and Reinsurance Creditors at that stage: a vote is to be put to them in separate classes to determine whether (a) to implement a process which will thereafter recognise the priority rights of the Direct Insurance Creditors, or (b) to terminate the Scheme;

(5) Pending the implementation of the Scheme, all Scheme Creditors will be prohibited from taking any proceedings against the Company in pursuit of their Scheme Claims (save with the express consent of the Company).

18

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...

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    ...& General Insurance Co Ltd [2006] BCC 774, and the very recent decision of Hildyard J in Re Stronghold Insurance Company Ltd [2018] EWHC 2909 (Ch). 100 Accordingly, in my judgment, this is not a case in which the two groups of Scheme Creditors have any relevantly different rights again......
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    ...regards LGIM's approach to the Explanatory Statement. 38 In this context I would reiterate some observations of Hildyard J in Stronghold Insurance Company Limited [2018] EWHC 2909 (Ch). Although made in the context of a convening hearing on a creditors' scheme, the underlying thrust of the......
  • Sunbird Business Services Ltd
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    ...that on the second occasion I rejected their arguments on the class point). 31 In Stronghold Insurance Company Limited [2018] EWHC 2909 (Ch), Hildyard J dealt with arguments on class composition at a convening hearing. He also had the following comments on the conduct of a substantial cred......
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1 firm's commentaries
  • Different Rights Require Different Classes – Schemes Of Arrangement
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    • Mondaq UK
    • 10 December 2018
    ...Stronghold Insurance Company Limited [2018] EWHC 2909 (Ch) Mr Justice Hildyard, who continues to amass expertise on schemes of arrangements, recently ruled against convening a single meeting of creditors on a scheme of arrangement proposed by Stronghold Insurance Company Limited (Stronghold......

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