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WASHINGTON, DC, September 15, 2009 — The Outer House of the Scottish Court of Session in Edinburgh on September 10 handed down an opinion favorable to policyholders that addressed significant issues related to solvent schemes of arrangement put forward by London Market insurance companies. The opinion followed argument on the Petition of The Scottish Lion Insurance Company Limited for sanction of a solvent scheme of arrangement under section 899 of the Companies Act 2006. The Scheme had been opposed on fairness and other grounds by policyholder Creditors Goodrich Corporation, ExxonMobil Corporation, Textron, Inc., ITT Corporation, and Zapata Corporation (collectively the “Opposing Creditors”), which are represented by Covington & Burling LLP in connection with this and other proposed solvent schemes.
In his opinion, Lord Glennie rejected Scottish Lion’s contention that the Opposing Creditors have no right to challenge the decision of the Scheme Chairman that the statutory majorities had properly been attained, and held that Opposing Creditors were entitled to raise issues concerning the valuation of claims for voting purposes.
Lord Glennie also addressed the fundamental question of whether it can “ever be fair to sanction a ‘solvent’ scheme of arrangement in the face of continuing creditor opposition to having their occurrence cover compulsorily terminated.” On this issue, Lord Glennie stated that he “respectfully agreed with” the reasoning of a prior court ruling refusing to sanction the solvent scheme in the matter of British Aviation Insurance Co., and held that "there is no reason, apart from the wishes of its shareholders, why the Company should not continue with run-off ...." He noted that if any Creditors "wish to enter into a commutation agreement with the Company, they can do so without the participation of any of the other creditors. But if they do not wish to do so, why should they not be left in a position in which they presently find themselves? In other words, in a situation where the Company is sound financially, why should one group of creditors who might wish to enter into a commutation agreement with the Company be entitled to force other creditors to participate against their will?"
Lord Glennie concluded that an insurer petitioning for approval of a solvent Scheme should be required, as part of its burden of proof, "to place before the court averments and supporting material justifying the proposition that in the particular case, notwithstanding that it is a solvent scheme, the minority should be bound by the decision of the majority" of Creditors that allegedly voted in favor of the proposed scheme. Whether the statutory voting majorities were in fact achieved by Scottish Lion is another contested issue in the case and was not resolved by the court's ruling.
The Court put the case out By Order to allow the parties a further opportunity to consider the court’s opinion and determine whether such a showing could be made in the case of Scottish Lion.
Mr. James McNeill QC, and Ms. Jane Munro appeared for the Opposing Creditors in the Scottish proceedings, instructed by Mr. Gavin Henderson of Simpson & Marwick in Edinburgh. The transatlantic Covington team was led by William Greaney, a Washington based partner and included DC partners Benedict Lenhart and Patricia Barald, and associates Shara Boonshaft and Joshua McKarcher, London partner Anne Ware, and New York of counsel Susan Johnston.