• Decision will be welcomed by insurers

The Scottish Appeal Court has allowed the appeal by Scottish Lion Insurance against the judgment of Lord Glennie on whether it would ever be fair for a court to sanction a solvent scheme in the face of creditor opposition, says City law firm Reynolds Porter Chamberlain LLP (RPC).

The Lords of the Scottish Appeal Court have dealt very clearly with the extreme concern which was engendered in the run-off market that any opposed solvent scheme would fail unless there was a problem being solved by the scheme. The status quo prior to Lord Glennie's earlier ruling prevails such that the predicted death knell for solvent schemes has not been sounded.

The judgment in Scottish Lion Insurance Limited, which will be influential on the UK courts, decided that Lord Glennie erred in dismissing Scottish Lion's petition seeking sanction at a hearing, prior to a formal sanction hearing, on a preliminary issue. In addition, the court held that his premise, that there had to be a problem needing to be solved in such cases, was wrong.

Vivien Tyrell, Restructuring and Insolvency Partner at RPC, comments: "In a nutshell the issue the Scottish Appeal Court had to decide was whether Lord Glennie in the court below was entitled to dismiss Scottish Lion's petition seeking sanction at a hearing on a preliminary issue. The preliminary issue had been whether an opposed solvent scheme could succeed in the absence of there being a problem which is to be solved by the implementation of the scheme. Lord Glennie had decided that such a scheme could not succeed and that therefore the petition should be dismissed."

"The Appeal Lords have now decided that Lord Glennie erred in dismissing the petition in that way and ruled that his premise, that there had to be a problem needing to be solved in such cases, was wrong."

Vivien Tyrell explains that the case will now go back to the lower court for the proper sanction hearing to take place.

Says Vivien Tyrell: "At that hearing, the Lords have made it plain, the question of fairness of the scheme is to be decided taking into account all relevant evidence which Scottish Lion and those opposing the scheme place before the court."

"The battle for Scottish Lion itself is therefore not over. The parties will be back in court to argue whether the scheme is fair to creditors. Matters to be covered still will include the opponents' arguments on calculating claims for voting purposes and whether the controversial 'all sums' approach to valuation should be applied."

Vivien Tyrell says that the Scottish appeal court have dealt very clearly with the concerns expressed by some in the run-off market that any opposed solvent scheme would fail unless there was a problem being solved by the scheme. (In some cases there is not an obvious "problem" which forms the basis of a solvent scheme. Also, one could have foreseen limitless arguments over what constituted a "problem").

Vivien Tyrell adds: "This extreme concern arose from Lord Glennie interpreting the Part 26 scheme legislation in what, in mine and many others' opinion, was a perverse way by purportedly writing into the legislation a further condition for schemes to comply with if they were solvent schemes and opposed. However, common sense has prevailed. Even the counsel acting for the opponents to the scheme in their submissions seem to have distanced themselves from this overreaching interpretation of Part 26. Lord Glennie's decision was always wrong. Had the appeal court found otherwise it would have raised a few eyebrows over the quality of the courts in Scotland. It didn't and it hasn't."