Exit by Solvent Scheme or Exit by Solvent Scheme or Part VII TransferPart VII Transfer

Juliette StevensJuliette Stevensandand

Paul BugdenPaul Bugden

Exit by solvent schemeExit by solvent scheme

Juliette StevensJuliette Stevens

What is a Solvent Scheme?

• An arrangement or compromise between a company and its creditors under Section 425 of the Companies Act 1985

• A mechanism to value all insurance liabilities, both present and future

• Payment in full

• Types of scheme

Scheme Applications

• UK companies

• Portfolios of business

• Pools

• Foreign companies

• Lloyd’s syndicates

• Captives, P&I clubs and mutuals

Preparation for a Scheme

• Timetable

• Books and records

• Commutations (inwards and outwards)

• Strategy for dealing with major cedants

• Scheme design

= Initial preparatory steps

Scheme Timetable

• Months 1 to 5 - policyholder identification, scheme planning, drafting, liaising with key policyholders, reinsurers and the FSA

• Month 6 - application to Court for leave to convene creditors meeting

• End of month 7 - creditors meeting

• Month 8 - Court sanctions scheme

• Month 11 - bar date for submitting claims

• Months 11 to 13 - agreement of claims

• Months 13 to 15 - adjudication of any disputed claims

• Month 15 - payment of claims

• Month 16 - scheme terminates and surplus distributed to shareholders

Steps to effect Scheme

• Court controlled process

• Application for leave to convene meeting of creditors

• Meeting of creditors

• Court sanction

• Companies House

Disadvantages of a Scheme

• Bar date

• Estimation

• Excluded liabilities

Exit by Part VII TransferExit by Part VII Transfer

Paul BugdenPaul Bugden

Part VII Transfers

• Introduced by FSMA 2000. Part VII

• Key Requirements:

• (i) Court Approval

• (ii) Independent Expert’s Report

• Other Requirements:

• (i) Advertisements

• (ii) Notices

Role of Expert

• Guidance

• - WASA (Justice Park)

• Must be independent

• Scheme Report to show no adverse effect on

- transferor’s policyholders

- transferee’s existing policyholders

Role of the FSA

• Closely involved throughout - approves expert

- consults with other regulators

- approves Scheme Report

- assesses whether it supports Scheme

regulatory objectives

conclusion of Scheme report

policyholder objections

- issues/obtains certificates

- receives all evidence

- can be heard by court

Role of the Court

• Must be satisfied

- certificates issued (by Regulator)

- transferee has necessary

authorities

• “In all the circumstances of the case, it is

appropriate to sanction the Scheme”

- likely to sanction if

Scheme supported by FSA/expert

no valid policyholder objections

Possible Timetable

Planning Stage: Agree deal, chooselawyers/expert

varies

Time fromAction Date

Preliminary FSA meeting 1-2 weeks

Draft of Scheme document, notices etc 4-6 weeks

Expert produces Scheme report 8-12 weeks

FSA approves report 12-16 weeks

Court application for Directions 16-17 weeks

Notices. (FSA notifies EEA regulators) 16-18 weeks

FSA issues certificates 28-31 weeks

Final application to court 31-32 weeks

Advantages of Schemes

• True finality - liabilities are extinguished

• Economically advantageous - more likely to create a surplus for distribution

• Closing off unlimited guarantees

• Earlier payment and certainty - creditors will get immediate cash

• Run-off costs - the savings achieved can be passed on to policyholders

• More flexibility and scope for innovation

• Variation of policy terms

• Implementation - straightforward and consensual

• Not as heavily regulated as business transfers

• Available to all foreign companies if there is a sufficient connection

Advantages of Transfers

• No complex documentation.

• No voting procedure involved.

• No administration, once transfer approved.

• Reinsurers can be bound.

• Transfers between EEA States possible.

• Short time to finality.

• Dissolution.

• Covers compulsory liabilities policies

Schemes/Transfers Compared

Scheme• Foreign company must

have sufficient connection

• Liabilities are extinguished

• Can cover part or all of liabilities

• Can vary policy terms

• Does not bind reinsurers

• Policyholders have to vote in favour

• Regulatory input is moderate

• Documentation is lengthy and fairly complex

• Costs - tend to be front end loaded but savings are made on run-off costs

Business Transfer• Foreign Transferor must be

FSA authorised

• Liabilities are transferred

• Can cover part of all of liabilities

• Cannot vary policy terms

• Binds reinsurers

• Policyholders do not vote

• Is more heavily regulated e.g. notification requirements

• Documentation is more concise and straightforward

• Costs - disbursements tend to be high e.g. policyholder notification requirements and independent expert