Different Rights Require Different Classes – Schemes Of Arrangement

Re 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) (the Scheme). Hildyard J found that where the appropriate comparator to the scheme was a solvent run-off of the company, creditors with incurred but not reported (IBNR) claims had rights which were so uncertain and contingent that they could not form a single class of voters alongside creditors whose claims had accrued. Accordingly, two classes of creditors were appropriate for voting purposes. In delivering his judgment, Hildyard J also expressed some concern on how creditors were adhering to the Practice Statement on Schemes of Arrangement. He reminded creditors that unless they had good reasons for doing so, creditors should raise and properly develop and argue any concerns on class composition at the first court hearing and should not be tempted to reserve their position on class issues until the sanction hearing.

Background

Stronghold is an insurance company with a long-tail business exposure, particularly in asbestos pollution and health hazard liabilities. It has been in run-off since 1985. Stronghold's regulators, the PRA and the FCA (the Regulators), ruled that it no longer met the minimum capital requirements imposed by Directive 2009/138/EC (Solvency II) and requested that Stronghold produce an exit plan to end its run-off. Stronghold proposed the Scheme because a capital injection, sale, transfer or liquidation were all not considered viable or reasonably practicable. The purpose of the Scheme was to settle or compromise all of Stronghold's outstanding obligations, known as a cut-off and estimation scheme. Trade creditors and creditors whose claims had been previously agreed but had not been paid were not included in the Scheme.

Stronghold submitted that the Scheme would provide creditors with a number of benefits that might not be available to those creditors in a liquidation, namely that the Scheme would use a market-driven estimation methodology in calculating claims and there was no assurance that a liquidator would adopt such an approach in assessing the correct amount for any liquidation proof.

In considering the Scheme, Hildyard J applied a two-stage test. The first stage focuses on rights: if there is no difference in the...