Court rejects Scottish Lion runoff planPosted On: Oct. 14, 2009 12:00 AM CST
EDINBURGH, Scotland—A Scottish court has rejected a proposed runoff plan for the Scottish Lion Insurance Co.
In a final ruling by Lord Glennie on Wednesday, the court said it would not sanction the so-called solvent scheme of arrangement, handing a victory to a group of U.S.-based policyholders opposing the plan.
Edinburgh-based Scottish Lion, which has been in runoff since 1994, had applied to the Scottish Court of Sessions to sanction the plan, which would have enabled the solvent insurer to shed its liabilities and wind up the company.
Schemes of arrangement are U.K. court-approved mechanisms that have become increasingly popular as part of the insurance runoff and restructuring business, but the approach often is controversial when applied to solvent insurers.
Last month, Lord Glennie issued an opinion in the case, ruling in favor of the policyholders. In his Sept. 10 ruling, the judge had instructed the parties to “consider the court’s opinion.”
It’s unclear whether Scottish Lion plans to appeal the ruling. Dan Schwarzman, a partner in the London office of PricewaterhouseCoopers L.L.P. and scheme adviser to Scottish Lion, could not be reached for comment.
An attorney for the policyholders said he was “very pleased” with the ruling. “We are satisfied that the judge agreed with our arguments,” said Ben Lenhart, partner with Covington & Burling L.L.P. in Washington.
Under U.K. law the English Companies Act 1985, scheme of arrangement advisers need the approval of at least 75% of creditors to proceed with the application for sanctioning.
But in his 34-page opinion last month, Lord Glennie said he did not think schemes of arrangement for solvent companies should be sanctioned unless creditors unanimously vote in favor of the proposals.
“In a situation where the company is sound financially, why should one group of creditors who might wish to enter into a commutation agreement with the company be entitled to force other creditors to participate against their will?” Lord Glennie wrote.
The policyholders—including Goodrich Corp., ExxonMobil Corp., Textron Inc., ITT Corp. and Zapata Corp.—all had either general liability or general aviation insurance policies with Scottish Lion. The companies argued the scheme was fundamentally unfair because it sought to terminate “decades of valuable occurrence coverage under valid and binding contracts in the absence of extraordinary circumstances.”
Legal experts said Judge Glennie’s earlier opinion was likely to lend greater bargaining power to other U.S.-based policyholders involved in solvent runoff plans.