The Copenhagen Reinsurance Company (CopRe) asked the UK High Court to make an Order sanctioning the intra-group transfer of the whole of its (re)insurance business to the Marlon Insurance Company (Marlon). Each of CopRe and Marlon wrote US excess and surplus lines insurance, and each of them maintained an excess and surplus lines trust fund in New York. The purpose of the transfer was to simplify the structure of the Enstar group. If the transfer was sanctioned, CopRe would be dissolved without winding up.
The Court had to resolve three legal issues before it could decide whether to sanction the transfer of CopRe’s business, or not:
- Did the Court have the power to vary the terms of two guarantees, in the face of objections by the guarantors?
- Did the Court have the power to make an Order affecting the CopRe New York excess and surplus lines trust?
- Was it appropriate to dissolve CopRe, without winding it up?
The Guarantors’ objections:
Before Enstar acquired CopRe in 2009, it was part of the Danish ALM Brand group; and a member of the Institute of London Underwriters (the ILU). During that period, each of two ALM Brand companies gave a guarantee for the benefit of policyholders of policies issued through the ILU. Under the guarantees, if CopRe was unable to make a full payment to a policyholder, the ALM Brand guarantor would pay the balance due. The guarantees were governed by English law; one had a jurisdiction clause in favour of arbitration in London, and the other had a jurisdiction clause in favour of the English Courts.
CopRe asked the Court to vary the terms of the guarantees, so that references to CopRe would become references to Marlon, and the relevant policies would still have the benefit of the guarantees, when CopRe’s business was transferred. The ALM Brand guarantors objected to this, arguing that modification of theguarantees wasn’t “necessary to secure that the scheme is fully and effectively carried out” (per section 112(1)(d) of the Financial Services and Markets Act 2000 (FSMA)), so the Court didn’t have the power it needed to make the Order sought. This seemed right because the Independent Expert had indicated that, if the guarantees weren’t amended, that wouldn’t affect his opinion about the effect of the scheme on the transferring policy holders. In response, the ILU, which supported CopRe’s application, said that “it regards itself as under an obligation to … beneficiaries of [the] guarantees … to preserve the benefit of the guarantees [and] the proposed court order would achieve [that] result “. The ILU added that it was “‘concerned that, at the eleventh hour in a process in which ALM Brand companies have no other commercial interest, they should seek to prevent the benefit of the guarantees … from continuing to be available to … ILU policyholders“.
CopRe invited the Court to regard the guarantees as materially the same as outwards reinsurance, which is routinely transferred as part of a Part VII transfer scheme (see section 112(1)(a) of FSMA, and Re Wasa International (UK) Insurance Co  1 BCLC 668). But the Court refused: “there is an obvious legal difference between the transfer of the benefit of the transferor company’s rights under a reinsurance contract … (which is an asset of the transferor …) and the variation of the terms of a guarantee between two third parties [the ALM Brand companies on the one hand, and the ILU and the relevant policyholders, on the other], (which is not…). The former is covered by section 112(1)(a): the latter is not“. This must be right. The relevant section provides that “If the court makes an order [sanctioning an insurance business transfer], it may by that … order make such provision (if any) as it thinks fit … for the transfer … of the whole or any part of the undertaking concerned and of any property or liabilities of the transferor concerned…” (emphasis supplied).
However, the Court went on to find that: “Section 112 FSMA is a broad section that provides the court with extensive powers to facilitate the carrying out of the scheme which it has sanctioned, and in section 112(1)(d) to make orders that are supplementary to the scheme to that end. In this case, the Scheme is for the transfer to Marlon of the whole of CopRe’s insurance business. The writing of policies with the benefit of the … guarantees was an integral part of that business, and doubtless enhanced the ability of such policies to be sold … (and … indirectly benefited the ALM Brand group). The continued existence of the … guarantees was also an integral part of the commercial benefits conferred upon relevant policyholders … and … it was part of their legitimate expectations that such … guarantees should continue to be available. In such circumstances, it seems to me an entirely natural use of language, and in accordance with the overall purpose of Part VII FSMA … to conclude that the Scheme would not be fully and effectively carried out if the benefit to policyholders of the … guarantees associated with their policies was lost as a result of the transfer … “.
This might also be right – but it’s harder to be sure that it really is. This is because section 112(1)(d) of FSMA provides that “If the court makes an order [sanctioning an insurance business transfer], it may by that … order make such provision (if any) as it thinks fit … with respect to such incidental, consequential and supplementary matters as are, in its opinion, necessary to secure that the scheme is fully and effectively carried out ” (emphasis supplied). The Court’s reasoning shows why it thought it was desirable to make the Order sought, to enable the scheme it had sanctioned to be “fully” carried out. But it’s difficult to see how the Court satisfied itself that it was “necessary” to make the Order as well. That said, Part VII of FSMA does depend on the relevant authorities and the Court doing all they reasonably can to protect policyholders’ interests. It is probably therefore reasonable to suppose that the Court will always strain to make an Order of this type, unless there are very good reasons for not doing so – and they were not apparent in this case.
The CopRe Trust:
CopRe invited the Court to make an order that would amend the instrument governing the CopRe US trust, so the trust applied to, and its assets were available to support, Marlon’s obligations under the relevant transferring policies. If the Order was made, the funds in the CopRe trust would be combined with the funds in the Marlon trust, and Marlon’s obligations under its excess and surplus lines policies would be supported by one trust, not two.
Having been quite bullish about the extent of the powers available to it under section 112(1)(d) of FSMA on the guarantees issue, the Court now described itself as “a little concerned about relying on this very general provision” for this purpose, especially as the trust instrument provided that it could only be amended with the consent of “the parties” (including the 3rd-party trustee), and the prior consent of the NAIC. Still, in for a penny, in for a pound:
- the potential claims protected by the trust were small, when compared with those covered by the scheme as a whole;
- the independent expert didn’t seem concerned about the trust proposals;
- the trust was only a backstop, if Marlon couldn’t meet its obligations (notwithstanding its financial strength); and
- the Court was satisfied that any potential difficulties in relation to the trust would not cause material prejudice to policyholders or deprive the Scheme of its overall utility;
So it made the Order requested. Some of this reasoning seems self-contradictory, and peripheral; but that doesn’t necessarily mean the Court wasn’t entitled to make the Order it chose to make. Either way, the UK Courts may now regard themselves as free (or freer) to make Orders that affect US excess and surplus lines trusts in other cases, in what might well turn out to be more material ways. What’s less clear is how the US authorities will react if and when these Orders become material from a US perspective as well.
The dissolution of CopRe:
“In circumstances in which the Scheme provides for all of CopRe’s business to be transferred to Marlon, … there is no reason for CopRe to continue in existence after the Scheme has become effective and all of CopRe’s assets and liabilities have been transferred. But if there are no assets or liabilities and CopRe’s regulatory permission has been cancelled, a winding up would serve no useful purpose. I therefore agree that it would be appropriate for CopRe to be dissolved without being wound up once the Scheme has taken effect and its authorisation has been withdrawn“.
The Court’s judgment is available here.