Vol 7 (2010) - Issue 3

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Majority Rule in Schemes of Arrangement: Scottish Lion Insurance Company Limited v Goodrich Corporation and others [2009] CSIH 6 P1981/08

Introduction
Schemes of arrangement under Part 26 of the UK Companies Act 2006 ('Part 26') are a useful and flexible means by which companies and creditors can reorganise businesses and debts when it is not practicable to get all involved to agree or in situations where it is impracticable to transfer relevant businesses or carry out certain corporate actions. A scheme will almost inevitably involve someone’s rights being adjusted in some way without their consent and it is for that reason that a majority in number representing three-fourths in value of each class of creditors or members affected must approve a scheme and that the scheme must then also be sanctioned by the court.
Schemes were initially introduced in 1870 for insolvent companies, and insolvent schemes have proved very useful during the financial crisis from which we will hopefully be starting to emerge shortly. Schemes were extended to solvent companies in 1907 and have been used for a variety of purposes since, including for mergers and, as in this case, to wind down insurance companies which have ceased to write new business.
Concerns have been expressed about the potential difficulties caused in using schemes for business restructuring by the decision of Lord Glennie at first instance in this case in September last year ([2009] CSOH 127) that there required to be a 'problem requiring a solution' before sanction would be given to a scheme of arrangement approved by the relevant majorities under Part 26. On 29 January the Inner House of the Court of Session (the Scottish appeal court) reversed Lord Glennie's decision, in Scottish Lion Insurance Company Limited v Goodrich Corporation and others [2009] CSIH 6 P1981/08 ('Scottish Lion'), removing this threshold requirement for a solvent scheme.

Facts
Scottish Lion concerned a solvent insurance and reinsurance company which was in run-off, having ceased to write new business in 1994. Much of the remaining business to be administered was long-tail occurrence insurance under which claims, for example in relation to asbestosis, could be made many years after expiry of the period covered under the relevant policies.
A 'cut-off' scheme of arrangement was proposed under which, broadly, policy holders would receive in exchange for cancellation of their policies amounts calculated with reference to the estimated value of their potential future claims under the policies. Separate meetings of policyholders were held under Part 26 in relation to known reported claims and 'incurred but not reported' (i.e. unknown) claims and the approval of the scheme by the required majorities by number and value of claims in each meeting was reported to the court, with a view to the scheme being sanctioned by the court and thus become binding also on dissenting policyholders.
Though it was argued that the scheme benefited policyholders in that payments would be made to them early and without discounting, certain policyholders who had voted against the scheme objected to it being sanctioned on the basis that the scheme, in effect, transferred back to them the risks that they had sought to insure in the first place in a situation where Scottish Lion would otherwise continue to be able to meet claims as they were later made and where the insurance in question was no longer available in the market. The scheme was also said to be for the benefit of the Scottish Lion shareholders rather than the policyholders, with the shareholders to take surplus assets following a later winding up.