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Subject area: Insurance

Schemes: the creditors’ perspective

Timothy Goodger

First published by Elborne Mitchell LLP,, 22 October 2020

In part one of a two-part article on schemes of arrangement and portfolio transfers, partner Tim Goodger provides a reminder why creditors’/policyholders’ interests must not be overlooked.

Schemes of arrangements are not new as a means of restructuring a company. They have become commonplace in the insurance industry as a means by which long tail books of business in run-off might be closed quicker than running them to the full-term of a run-off. Similarly, the use of portfolio transfers has become commonplace particularly in the context of Brexit as well as the reorganisation and reorientation of businesses.

These two processes require the time and expense of accountants, actuaries and lawyers, as well as an applicant incurring a lot of management time to ensure that the proposal stands the test of the Court’s review. The Court relies upon experienced independent experts to have immersed themselves in the facts and figures to prepare detailed reports. These are with a view to informing the Court about the effect of the scheme not only on creditors/policyholders that might be subject of the scheme or the transfer but also on the applicant itself. In the case of a portfolio transfer, that extends to the expert assessing the impact of policyholders that remain with the transferor and those that are already with the transferee. There have been a series of recent applications in which the Court has made that quite clear.

What has been clear for many years for each process is that the Court will not rubber-stamp applications brought before it to obtain approval to convene creditors meetings or sanction a scheme.

Connected with this is a side to schemes which is not necessarily always appreciated. Creditors have a right to express their views: the statutory provisions allow for this. Indeed, the English Courts have given Practice Directions such that concerns may be canvased at an early stage and if necessary brought to the Court’s attention by the applicant. This is an express obligation: the applicant cannot and should not seek to brush these concerns aside and carry on regardless. Equally, a creditor does not have the luxury of doing and saying nothing yet attempt to object to the scheme or transfer at a late stage. Although creditors are invited by notices to make known to the applicant any concerns/objections that creditor may have about a scheme, some do not do so. This might be for a variety of reasons such as the creditor:

  • has insufficient internal resource, for example little time or little capability to assess the impact of a scheme;
  • does not appreciate the need to act;
  • takes the view there is little point in objecting to the scheme because (wrongly) the creditor assumes there is little it can do to either stop or even question the process (it often being seen like a juggernaut without brakes)
  • has a concern there is a costs risk is making its points;
  • fears exercising its rights. This is the fear of retribution that may be reaped by an applicant that succeeds in its scheme, but yet on the way has been inconvenienced and incurred additional costs because they have had to explain the concerns to the Court and how the applicant, as well as the independent expert, have addressed them.


However, for creditors not to exercise the right to express views about a scheme is foregoing the fundamental right and safety net given to creditors by statute and Court practice direction. And, more than that, if they don’t speak up in time the right to do so is lost. Once the Court has given its approval creditors cannot then complain about the imposition of adverse terms or outcomes. That said, it remains possible for creditors to make application to the Court if the operation or implementation of the scheme is contrary to the scheme document or contained in the relevant Court order and potentially representations or assurances given by the applicant in Court.

That said, the insurance market must appreciate that the fear of the process as a runaway juggernaut does exist. Those bringing applications to Court must do so properly, not seeking to manoeuvre creditors or seeking to deny them a voice, or not disclosing concerns of creditors which ought properly to be brought to the Court’s attention. In short, they should not pay lip service to statutory obligations and judicial guidance.

Further, applicants should be careful of failing to adhere to their own express statements that a creditor’s position or contractual arrangements will not be impacted by a scheme. Such practice casts a shadow over the statutory tools which are there to assist commerce.

Last, scheme applicants also need to have regard to now increasingly complex issues where schemes are subject to the law of England & Wales but the law of an underlying contract which is to be subject of statutory novation conferring certain rights on the creditor, including rights of recourse against the transferor. This requires separate consideration to overcome reservations that foreign counterparties may have about a scheme and its overall impact.

Overall, transparency and engagement with creditors and the Court is key, not least because those making applications have duties to the Court. Applicants may well wish to expedite the process, but creditors need enough time to marshal information and to assess the impact of a scheme. It does not serve the market and it risks tarnishing the process if there are applicants who pursue a rushed timetable or who consider it an insult to be challenged or inconvenienced by having to explain or justify how the rights of a particular creditor or class of creditor have been addressed.

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