Under Part 26 of the Companies Act 2006, it is open to a solvent company to enter into an arrangement or compromise with its creditors or members. Over the past 10-15 years such solvent schemes have been implemented in M&A and restructuring transactions and have proved increasingly popular in the insurance market, permitting insurers to crystallise their contingent liabilities. For a scheme to be binding, the insurer must first obtain the consent of a specific majority (50% in number, 75% in value) of its creditors (or classes of creditors) at a meeting and then seek the court’s sanction.

The schemes are controversial, not least for the manner in which the claims of IBNR creditors are valued. IBNR creditors are policyholders with potential claims where the event giving rise to liability has already taken place, but where no claim has yet been reported to the policyholder or made against the policy. Given their uncertain liability, it is this class of creditors to whom continuing insurance cover is often the most valuable. The claims of IBNR creditors are however often heavily discounted, in circumstances where replacement cover is unavailable.

After satisfying the first requirement, in 2008 the Scottish Lion Insurance Company Limited (Scottish Lion) petitioned the court for sanction of its scheme, which was opposed by five of its policyholders. On a preliminary issue, the Outer House of the Court of Session in Scotland dismissed Scottish Lion’s petition, holding that the existence of a “problem to be solved” (in the sense of an adverse situation facing the company and its creditors) was a precondition to its sanctioning an opposed scheme. The implication of the Outer House’s decision (which has persuasive authority in England) was that the courts would never sanction a solvent scheme in the face of creditor dissent.

The decision of the Outer House has now been overturned on appeal in Scottish Lion Insurance Company Limited v (First) Goodrich Corporation and Others [2009] CSIH 6, the Inner House finding in essence that it was not appropriate to be dealt with as a preliminary issue.

While much has been made of the Inner House’s judgment, it does little to affect the status quo ante that a court will very rarely (if ever) sanction an opposed solvent scheme. As previously, insurers will no doubt continue to seek to eliminate creditor opposition before seeking the court’s sanction. This may be done by buying off objectors or by carving out difficult areas from a scheme’s operation.