Vol 1 (2004) - Issue 3

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Gibraltar Insurance Insolvency: Provisional Liquidation

The last 2 years have seen substantial growth in the number of insurance companies set up in Gibraltar and now writing business across the EU including the UK. This article describes the use of provisional liquidators as an efficient insolvency procedure for insolvent insurance companies under Gibraltar law.

Provisional liquidation

There is no concept in Gibraltar law of administration or rehabilitation proceedings whereby a debtor can effectively freeze the rights of creditors.
The effect of appointing a provisional liquidator in Gibraltar pursuant to Section 165 of the Companies Ordinance (CO) is the same as under the UK – the appointment of a provisional liquidator results in a mandatory stay of proceedings being brought against the company (except by leave of the court and subject to such terms as the court may impose).
The appointment of a provisional liquidator by the court may be made at any time after the presentation of a winding-up petition (Section 171 (2) CO) and before the making of a winding-up order (Section 171 (2) CO). The court may limit and restrict his powers by order appointing him (Section 171 (3) CO).
As in England, the court’s power to stay any pending action or proceedings on the appointment of a provisional liquidator when coupled with a Scheme of Arrangement allows an insurance company to preserve the status quo whilst an agreement with creditors is negotiated. In the English case of Re English and Amercian Insurance Mr Justice Harman stated that the procedure is

all part of the developing practice of the court of using a petition by the company for its own winding up as the basis for the appointment of provisional liquidators. That practice has been developed to mitigate the difficulties caused by the fact that administration procedures are not available in respect of insurance companies and is a practice which several of the Chancery judges have dealt with and approved of. It seems to me a useful practice and I do not wish in any way to cast any doubt or discredit upon it. It is a good system, particularly in cases such as this where there is a hope that in the future there will be a scheme of arrangement under Section 425 of the Companies Act 1985.

In insurance insolvency cases, Gibraltar follows English law practice and a Gibraltar court is unlikely to regard provisional liquidation as repugnant if it is intended to achieve a more efficient insolvency mechanism than an immediate liquidation.

Appointment of provisional liquidator

Although provisional liquidation is intended as an interim measure, the provisional liquidator can remain in office for a number of years, during which time the petition is adjourned. A provisional liquidator’s powers are derived from the court order appointing him. The draft order will invariably request the widest powers possible (akin to those of an administration) to manage the company and to take over the preparation and implementation of a Scheme of Arrangement. These powers are likely to be granted by the court.
It is also likely that the application to court will be made after consultation with the Gibraltar regulators (the Financial Services Commission) and the application should state that the regulators, having been consulted, raise no objection to the application. When an insurance company faces severe financial difficulties the regulators have few choices. The shareholders may not be willing (or indeed able) to restore the financial soundness of company through the injection of further capital, whilst the issuance of Notice of Requirements by the regulators requiring the company to substantially reduce the amount of premium written will not protect the company from its creditors and may worsen rather than improve the financial position of the company. As a result, provisional liquidation may be the only sensible option for all concerned whist an independent insolvency practitioner takes control of the business of the company to protect its assets from dissipation and safeguard the rights of policyholders. If the company’s business can continue in future with reliable income from which to meet claims and therefore without prejudicing current and future policyholders, the company may successfully complete a run-off.