Re the Copenhagen Reinsurance Company (UK) Limited and another (2016) EWHC 944 (Ch)
What are the key take-aways from this case?
The Copenhagen Re case was an application to the Court to sanction a scheme for the transfer of insurance business ("transfer scheme") pursuant to Part VII Financial Services and Markets Act 2000 ("FSMA 2000"). In the main, Snowden, J's ruling is a restatement of the well-recognised grounds upon which the Court will exercise its discretion to sanction a transfer scheme. The ruling nevertheless goes further, in that it is the first occasion where the Court has had to consider how to deal with the effect of a transfer scheme upon guarantees given by the transferor's parent company in respect of policies written through the Institute of London Underwriters ("ILU"). Snowden, J held that he had the power under Section 112(1)(d) FSMA 2000 to modify the guarantees given to the ILU by Copenhagen Re's parent. The effect of the modification was that the original guarantee remained in place but on terms that the guaranteed obligations were modified by the court to become those of the transferee under the scheme, Marlon Insurance Company Limited ("Marlon").
How did the issues arise?
The case arose out of a transfer scheme to transfer the entire insurance business of Copenhagen Re to Marlon. Copenhagen Re was in run-off and had ceased writing new business in December 2000. Copenhagen Re was a wholly owned subsidiary of Marlon and both were members of the Enstar Group. Enstar's business model is to acquire and manage insurance and reinsurance businesses. The transfer scheme provided for the transfer of Copenhagen Re's entire insurance business to Marlon.
A transfer scheme, when proposed, must be publicised to the policyholders it affects. Part VII also lays down a number of additional safeguards for the policy holders whose business is being transferred. In this case, the scheme transferred the business and policies of Copenhagen Re to Marlon. The safeguards include the appointment of a suitably qualified independent expert, approved by the PRA and FCA as regulators. In addition the court must sanction the transfer scheme before it can become effective. The hearing before Snowden J was the sanction hearing.
What were the legal issues the court had to decide?
Copenhagen Re had written business through the ILU. The ILU was an association of insurers offering marine and aviation insurance in the London insurance market between 1884 and 1997. The ILU provided members with a central accounting and settlement system. From about 1965, the ILU required a parent company guarantee as a pre-condition to allowing members to write policies under its auspices. Copenhagen Re's original shareholders had provided such guarantees prior to Copenhagen Re's acquisition by Enstar. Those guarantees had remained in place, rather than being replaced by new Enstar guarantees. When Copenhagen Re informed its original shareholders of the proposed transfer of its business to Marlon, and proposed that the guarantees be amended so that they would continue to cover policyholders following the business transfer, the original shareholders rejected the proposal and later objected to the Court in relation to language in the draft Court order that would achieve that effect. In sanctioning the scheme, the Court rejected this objection and modified the guarantees so that they applied to Copenhagen Re's business following the transfer to Marlon.
What were the main legal arguments put forward?
Snowden J gave consideration to whether, as in the case of outwards reinsurance, section 112(1)(a) FSMA 2000 was relevant, but noted a difference here: outwards reinsurance is an asset of the transferor company (and therefore covered by 112(1)(a)); a guarantee between two third parties is not.
Snowden, J held that section 112 (1)(d) FSMA 2000 was a widely drafted provision, giving the court extensive powers to facilitate the implementation of the scheme that it had sanctioned. Despite accepting the independent experts' view that the security provided by the transferee would be at least as good as that provided before the transfer, in Snowden, J's view the proposed scheme could only be "fully and effectively carried out" if the guarantees remained in place as obligations of Copenhagen Re's original shareholders to support Marlon's assumption of liability under Copenhagen Re's policies
To what extent does this judgment clarify or extend the law in relation to transfer schemes (eg, relating to third party guarantees)?
The actual decision to sanction the Copenhagen Re transfer scheme is not new law. In sanctioning the transfer of Copenhagen Re's business to Marlon, Snowden, J applied the well-trodden principle that a Part VII transfer scheme did not have to be the best or indeed the only scheme available to Copenhagen and Marlon. It was only necessary to show that the scheme as a whole was fair as between the interests of the different classes of policyholder. Snowden, J ruled that the transfer scheme met that test.
In reaching that view, Snowden J drew comfort from the independent expert's conclusion that the scheme did not adversely affect the claims handling service and costs of claims of administration which Copenhagen Re policyholders would respectively face and receive. Snowden, J also relied upon the expert's "clear conclusion" that neither the transferring policy holders of Copenhagen Re nor Marlon's current policy holders would be adversely affected by the scheme on account of having to rely on Marlon's covenant to pay as against the covenant to pay of Copenhagen Re.
Snowden, J's decision to modify the guarantee in the manner summarised above is the most novel aspect of his judgement. Although pragmatic, Snowden, J's approach is also consistent with the line he has taken towards schemes of arrangement under Part 26 Companies Act 2006. It is clear from the Copenhagen Re judgement that Snowden, J laid great weight upon the quality of the evidence and the support for the transfer scheme shown by the PRA.
What practical lessons arise?
The major lesson from Copenhagen Re is the importance the courts continue to place upon the quality of supporting evidence and levels of disclosure when considering both transfer schemes and schemes of arrangement under Part 26 Companies Act 2006. In the earlier case of Re Indah Kiat International Finance Company BV  EWHC 246 (Ch), Snowden, J adjourned a convening hearing for a scheme of arrangement under Part 26 Companies Act 2016 on the basis that he was not satisfied with the quality of the supporting evidence and levels of disclosure. That adjournment, like the approval of the guarantee modification in the Copenhagen Re transfer scheme showed pragmatism, in that Snowden J did not, as he might have done, reject theIndah Kiat convening application out of hand.
It is true that a scheme of arrangement under Part 26 Companies Act 2006 is a very different animal to an insurance business transfer scheme under Part VII FSMA 2000. Nevertheless, in their focus upon the need for well-reasoned evidence and full disclosure, these two different rulings are consistent in their approach and outcome.