The Scottish Court of Session, Inner House, has reversed a ruling of its Outer House refusing to approve a scheme of arrangement under the UK Companies Act of 2006.

A scheme of arrangement is a reorganization device through which a company may compromise its creditors’ claims with the approval of at least three-quarters of its creditors. A scheme of arrangement generally involves three stages. First, there must be a judicial application for an order summoning a meeting of creditors. Second, the scheme proposals are put to the meeting and are approved (or not) by the requisite majority. Finally, if the scheme is approved at the meeting, there must be a further application to the court for sanction of the arrangement.

In Petition of Scottish Lion Insurance Company, Scottish Lion, in runoff since late 1994, proposed in 2008 a scheme of arrangement to terminate exposures under short- and long-tail policies. The scheme was opposed by U.S.-based creditors insured under general liability or general aviation insurance policies with Scottish Lion. The Outer House declined to approve the scheme, concluding that sanctioning the scheme smacked of “unreasonableness” to minority creditors, and asking rhetorically, “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?” The Inner House disagreed. Although the court acknowledged that insureds who were being required to accept current estimated values in lieu of their contingent claims may “possibly with other arguments, win the day,” it concluded that such circumstance alone was not so overwhelming a factor against the sanction. The case was remitted to the Outer House for further proceedings.