• Solvent schemes of arrangement harder to pass without unanimous agreement

The recent Scottish Lion Insurance case in the Scottish courts could make it harder, but not impossible, for insurers to close funds in run-off warns City law firm Reynolds Porter Chamberlain LLP (RPC).

The judgment in Scottish Lion Insurance Limited, which will be influential on the UK courts, decided that if there was failure to reach unanimous agreement on a proposed solvent scheme of arrangement then the scheme might be refused by the court unless it was implemented to overcome a specific problem.

Vivien Tyrell, Restructuring and Insolvency Partner at RPC, commented: "The judgment in the Scottish Lion case will make insurers worried that they will not be able to close run off funds. Solvent schemes of arrangement are the most important tool in the kit box when it comes to freeing up capital by closing a fund in run off."

"Insurers are particularly concerned because some commentators have suggested that this judgment means it will be impossible to close run off funds without unanimous agreement from creditors, but the judgment does leave the door open to closing run off schemes even in the face of creditor opposition."

"The judgment suggests that if there is any opposition to the scheme then it will only be approved if it is used to overcome a specific problem. The problem could either be one that damages the interests of creditors or one that makes the run off fund difficult or impossible to administer."

"Sometimes the problem will be easy to demonstrate, for example if there are too many small claims to administer effectively and the scheme presents a streamlining and early payment of the claims."

Vivien Tyrell says that in circumstances where an appropriate problem cannot be demonstrated to the court the new case could make it difficult for insurers trying to close a run-off fund.

Vivien Tyrell: "The judgment handed down in this case does seem to imply that if no problem can be demonstrated and there is opposition to the scheme the court will reject it. Any insurer facing these circumstances is now likely to hesitate before presenting the court with a scheme."

"Insurers are going to be disappointed with this judgment. They will see it as undermining legislation that was designed to introduce creditor democracy for voluntary schemes of arrangement, so that a small percentage of creditors wouldn't have the power to derail a scheme favourable to the vast majority."

"Insurers will be worried that the opposition of just one creditor could now put a spanner in the works and prevent them closing down a scheme in run off."