CBL Insurance Europe Designated Activity Company, Re (Approved)

Factual and Procedural Background

The judgment concerns an application pursuant to s. 631(1) of the Companies Act 2014 by the Joint Liquidators of Company A, a designated activity insurance company in liquidation, seeking directions on complex legal questions arising during the winding up of the Company. Company A was a registered insurance undertaking authorised and regulated by the Central Bank of Ireland (CBI) to conduct non-life insurance business in Ireland and various European Union and European Economic Area countries. Financial difficulties led to the appointment of an Administrator by the CBI in early 2018 and subsequently to the appointment of Joint Liquidators in early 2020.

In February 2018, the CBI issued directions restricting Company A from disposing of assets and writing or renewing insurance contracts due to solvency concerns. The CBI petitioned for administration, and the High Court appointed an Administrator in March 2018. Following reports indicating insufficient reserves to meet all future claims, the CBI directed the Company to cease payments and preserve the status quo in December 2019.

In February 2020, the CBI petitioned for the winding up of Company A. The High Court made a winding-up order and appointed Joint Liquidators on 12 March 2020. On the same day, the CBI withdrew the Company's authorisation to carry on insurance business, except to the extent necessary for winding-up activities under supervision.

The Joint Liquidators notified known creditors of the winding up and the effects on insurance contracts, indicating that insurance claims arising from events occurring after the commencement of the winding up would generally not be provable in the liquidation. The Financial Services Compensation Scheme Limited (FSCS) in the UK and a Danish statutory body provided evidence and participated in the proceedings, raising issues regarding the admissibility and treatment of claims.

The Company’s insurance portfolio included construction-related credit and surety insurance, professional indemnity, property insurance, and travel bonding, with a significant number of long-tail policies, particularly in France, where claims notification periods could extend up to ten years. The winding up raised complex legal questions about the status and treatment of insurance contracts and claims under Irish law, the Solvency II Directive, the Solvency II Regulations, and related statutory provisions.

Legal Issues Presented

1. Whether insurance contracts to which the Company was a party at the commencement of the winding up cease to have effect or terminate as a result of the winding up and withdrawal of authorisation, and the date and legal basis for such termination.
2. How claims under insurance policies should be treated for the purposes of admissibility and proof of debts/liabilities in the liquidation, including the relevant date for determining provability and the application of s. 75(1) of the Bankruptcy Act 1988.
3. How claims relating to events occurring after the commencement of winding up should be treated in the liquidation.
4. The scope and interpretation of the term "insurance claim" under the Solvency II Regulations, particularly whether claims for return of unearned premiums arising from termination or discharge of insurance contracts in winding up qualify as "insurance claims" entitled to priority.

Arguments of the Parties

Joint Liquidators' Arguments

• No express statutory provision terminates insurance contracts on commencement of winding up; effect must be determined by common law.
• Insurance contracts terminated on 12 March 2020 by frustration due to supervening illegality following withdrawal of authorisation by the CBI.
• Claims admissible in liquidation governed by s. 75(1) of the Bankruptcy Act 1988, with the obligation incurred at the time the insured event occurs before the relevant date (date of winding-up order).
• Claims for unearned premiums are not "insurance claims" under the Solvency II Directive and Regulations and thus do not have absolute priority; this is supported by the EFTA Court judgment in Gable.
• Interpretation of statutory provisions should consider that claims arising after the relevant date are generally not provable.
• Reliance on common law principles and certain English cases supporting frustration and narrow interpretation of "obligation incurred".

Financial Services Compensation Scheme Limited (FSCS) Arguments

• Insurance contracts terminated on 12 March 2020 by repudiation (repudiatory breach) upon the making of the winding-up order, not by frustration.
• S. 75(1) of the Bankruptcy Act 1988 applies, but the relevant obligation is incurred when the insurance contract is entered into, not when the insured event occurs.
• Claims arising from insured events after the relevant date are provable contingent claims, subject to valuation by "just estimate" under s. 620 of the Companies Act 2014.
• Claims for return of unearned premiums arising on termination or discharge of insurance contracts in winding up are "insurance claims" under Article 268(1)(g) and Regulation 270(1) of the Solvency II regime and thus have absolute priority.
• The EFTA Court judgment in Gable was wrongly decided and should not be followed.
• Application of the "hindsight" principle from MacFarlane's Claim for valuation of contingent claims.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by noting that the effect of winding-up proceedings on insurance contracts is governed by Irish law, as per the Solvency II Directive and Regulations, and that no statutory provision expressly addresses the termination of such contracts on winding up. It found it implicit from the Directive and Regulations that insurance contracts cease to produce effects on a particular date, with the winding-up order being that relevant date.

Regarding the termination of contracts (Question 1), the court concluded that the contracts terminated on 12 March 2020, the date of the winding-up order and appointment of the Joint Liquidators, rather than the earlier petition date or the subsequent withdrawal of authorisation by the CBI. The court rejected the Joint Liquidators' frustration argument, finding the conditions for frustration were not met, notably because the event was not unexpected and the Company was at fault. Instead, the court held that termination occurred by repudiatory breach due to the Company’s insolvency and inability to fulfill contractual obligations.

On Questions 2 and 3 concerning admissibility of claims in the liquidation, the court held that ss. 619 and 620 of the Companies Act 2014 incorporate the law of bankruptcy, including s. 75(1) of the Bankruptcy Act 1988, into the winding up of insolvent companies. The court found that s. 75(1) applies and contains two limbs: the first limb concerning debts and liabilities arising from obligations incurred before the relevant date, and the second limb concerning claims for unliquidated damages arising from a "wrong" within the Civil Liability Act 1961.

The court analyzed the first limb and concluded that the relevant obligation is incurred when the insurance contract is entered into, not when the insured event occurs. Therefore, claims arising from insured events occurring after the winding-up order date are provable contingent claims. The court rejected a narrow interpretation requiring insured events to have occurred prior to the relevant date. The court endorsed the application of the "hindsight" principle from MacFarlane's Claim for valuation of such contingent claims.

Regarding the second limb, the court was skeptical about its applicability to insurance claims, noting the difficulty in treating the insurance company as liable for a "wrong" committed by another party under the policy. The court emphasized that liability must exist at the relevant date for claims to be admitted under this limb, requiring a complete cause of action. The court found the first limb to be the more natural basis for insurance claims in liquidation.

On Question 4, concerning the definition of "insurance claim" under the Solvency II regime and whether claims for return of unearned premiums arising from termination or discharge of insurance contracts in winding up qualify as such, the court sided with the FSCS. It held that such claims do constitute "insurance claims" within Article 268(1)(g) of the Directive and Regulation 270(1) of the Regulations, entitling them to absolute precedence over other claims with respect to assets representing technical provisions.

The court rejected the contrary interpretation advanced by the Joint Liquidators and distinguished the EFTA Court judgment in Gable, which it found unconvincing and not binding. The court reasoned that the EFTA Court gave undue weight to the second subparagraph of Article 268(1)(g) and failed to properly interpret the main provision. The court held that the second subparagraph supplements the definition to cover claims where the insurance contract was never concluded or was cancelled before winding up, but does not exclude claims arising from termination or discharge of contracts at the opening of winding up proceedings.

Overall, the court’s analysis emphasized the primacy of Irish law in the winding up context, the incorporation of bankruptcy law for proof of debts, the contingent nature of insurance liabilities, and the protective purpose of the Solvency II regime for insurance claims, including unearned premium claims.

Holding and Implications

DISPOSED OF

The court held that insurance contracts to which Company A was a party ceased to have effect or were terminated by repudiatory breach on the making of the winding-up order on 12 March 2020. Claims under such contracts are admissible in the liquidation under the first limb of s. 75(1) of the Bankruptcy Act 1988, with the "obligation incurred" being the date the contract was entered into, not the date of the insured event. Claims for unearned premiums arising from termination or discharge of insurance contracts on the making of the winding-up order are "insurance claims" under the Solvency II Directive and Regulations and thus have absolute priority with respect to assets representing technical provisions.

The decision clarifies the legal framework for the treatment of insurance contracts and claims in the winding up of an insolvent insurance undertaking in Ireland, applying Irish law in conformity with the Solvency II regime, and provides guidance on the interpretation of relevant statutory provisions including the Companies Act 2014, Bankruptcy Act 1988, and the Solvency II Directive and Regulations. No new precedent beyond the facts of this case is established, but the judgment resolves a number of complex and previously unconsidered questions for Irish courts in this context.