Hawk Insurance Company Ltd, Re

Factual and Procedural Background

The appeal arises from the refusal by Mrs Justice Arden on 21 December 1999 to grant the court's sanction under section 425(2) of the Companies Act 1985 to a scheme of arrangement proposed between Company A (in provisional liquidation) and its creditors. Company A, incorporated in 1964, engaged in insurance underwriting but ceased writing new business in 1976, continuing only to handle claims in run-off. The company was insolvent by 1994, with liabilities exceeding assets. In December 1995, Company A presented a petition for winding-up on grounds of inability to pay debts, leading to the appointment of provisional liquidators due to restrictions on administration orders for insurance companies.

The provisional liquidators, after consulting with an informal creditors' committee, proposed a scheme of arrangement to pay creditors a proportion of their valid claims. This scheme was approved unanimously by scheme creditors at a meeting in December 1999, and no creditor opposed the application for court sanction. However, Mrs Justice Arden refused to sanction the scheme on jurisdictional grounds related to the classification of creditors.

Legal Issues Presented

1. Whether the court has jurisdiction under section 425(2) of the Companies Act 1985 to sanction a scheme of arrangement when the scheme creditors may not constitute a single class for the purposes of statutory approval.
2. How to determine if creditors form a single class or multiple classes for the purpose of convening meetings and sanctioning schemes under section 425.
3. The application and interpretation of the test from Sovereign Life Assurance Company v Dodd regarding the classification of creditors in schemes of arrangement.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Court's Reasoning and Analysis

The court analysed the statutory framework of section 425 of the Companies Act 1985, which involves a three-stage process: (1) the court orders meetings of creditors or classes of creditors to be summoned, (2) creditors approve the scheme by the requisite majority at those meetings, and (3) the court sanctions the scheme if satisfied of proper procedure and fairness.

The central legal question was whether the scheme creditors formed a single class or multiple classes for the purpose of convening meetings and sanctioning the scheme. The judge below had held that the scheme creditors did not constitute a single class, primarily due to the scheme’s provisions that weighted admitted claims differently for distribution purposes, thereby creating competing interests among creditors.

The Court of Appeal reviewed the authoritative test from Sovereign Life Assurance Company v Dodd, which requires that a class be confined to persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest. The court emphasised that the test must be applied by analysing both the rights to be released or varied and the new rights given under the scheme.

Upon detailed examination of the scheme’s provisions, particularly the valuation and weighting of claims arising from insurance and non-insurance contracts, the court found that the differences in claim valuation reflected the necessity of making a "just estimate" of contingent or uncertain claims rather than differences in the fundamental rights of creditors. The weighting provisions related to distribution mechanics rather than substantive rights, and thus did not create distinct classes of creditors.

The court further noted that the scheme was proposed as an alternative to winding-up, where all creditors would have claims subject to valuation and admission procedures. The rights of non-insurance creditors and insurance creditors with various claim types were essentially the same in a winding-up context, differing only in the need for estimation of contingent claims.

The court expressed concern about the existing practice of deferring class determination until the sanction stage, which can lead to wasted time and expense, and suggested that the practice merits re-examination. However, it did not criticize the judge below for adhering to current practice.

Ultimately, the court concluded that the scheme creditors constituted a single class and that the court had jurisdiction to sanction the scheme under section 425(2).

Holding and Implications

The appeal is allowed.

The court held that the scheme creditors formed a single class for the purposes of section 425 of the Companies Act 1985, and therefore the court had jurisdiction to sanction the scheme of arrangement. The previous refusal to sanction the scheme on jurisdictional grounds was overturned.

The direct effect is that the scheme may be sanctioned without convening separate class meetings, facilitating an efficient winding-up of Company A’s affairs. The court noted no broader precedent was set beyond affirming the proper application of the established creditor class test and highlighting the need to reconsider procedural practice regarding class determination timing.