Jersey Unreported Judgments

Companies - application to the court to sanction the Jersey Scheme.

[2018]JRC224

Royal Court

(Samedi)

5 December 2018

Before     :

J. A. Clyde-Smith, Esq., Commissioner, and Jurats Blampied and Thomas

IN THE MATTER OF THE REPRESENTATION OF AIG EUROPE LIMITED (FIRST REPRESENTOR), AMERICAN INTERNATIONAL GROUP UK LIMITED (SECOND REPRESENTOR) AND AIG EUROPE SA (THIRD REPRESENTOR)

AND IN THE MATTER OF AN APPLICATION PURSUANT TO ARTICLE 27 OF AND SCHEDULE 2 TO THE INSURANCE BUSINESS (JERSEY) LAW 1996

Advocate S. M Gould for the Representors.

judgment

the COMMISSIONER:

1.        On 12^th November, 2018, the Court sanctioned a Scheme ("the Jersey Scheme") to transfer the whole of the general insurance business carried on in and from within Jersey by the first representor ("the Transferor") to the second representor ("the UK Transferee") and the third representor ("the European Transferee") under Article 27 of and Schedule 2 to the Insurance Business (Jersey) Law 1996 ("the Insurance Law"). 

2.        The Jersey Scheme is in parallel with the much larger scheme ("the UK Scheme") which has now been sanctioned by the English High Court for the reasons set out in the judgment of Snowden J of the 25^th October, 2018, (In Re AIG Europe Limited and others [2018] EWHC 2818 (Ch)).  The application was novel, in the sense that the overall scheme is driven not by commercial reasons within the control of the companies concerned, but to be prepared for Brexit. 

3.        The AIG Group is one of the world's largest insurance companies, and has for many years operated in Europe through the Transferor, which is an English company based in the city of London.  From London and through a network of licensed branches in 26 European countries, the Transferor has written a substantial amount of consumer and commercial insurance, and re-insurance business.  At any one time, the Transferor has had about 5.9 million consumer policies and 726,000 commercial policies in force, with gross premium written as at 30^th November, 2016, of about £4.9 billion.  The Transferor currently has total assets of about £16.7 billion, and has made technical provisions for its liabilities (including risk margin) of about £12.1 billion. 

4.        Each of the representors is an indirect, wholly owned subsidiary of AIG International Holdings GmbH, a limited liability company incorporated in Switzerland, which is itself an indirect wholly owned subsidiary of the ultimate global parent company, American International Group Inc., a public company incorporated in the United States of America. 

5.        In the European economic area, ("EEA"), the Transferor has relied on its European Union ("EU") "passporting" rights to sell its policies, service its policy holders and to establish branches under the supervision of a single prudential regulator in the United Kingdom.  The existence of these passporting rights has been central to its pan European business model, and the AIG Group has concluded that in the light of the notice given by the UK that it will leave the EU at the end of March 2019, and the current uncertainty that any exit deal struck between the UK and the EU will preserve passporting rights, it must now restructure its operations without further delay, in order to ensure that the group can continue to service its existing business and write new business after Brexit.  

6.        In general terms, this will be achieved by the Transferor transferring the UK and non-EEA business to the UK Transferee, which will operate from London, and transferring the remainder of its business and its network of European branches to the European Transferee, which will be able to operate its business across mainland Europe after Brexit, entitled to the benefit of the EU's bilateral treaty with Switzerland.  The Transferor will cease to exist when the reorganisation comes into effect, which is expected to be on 1^st December, 2018. 

7.        Under the UK Scheme the Transferor has sent out over 2.4 million communication packs, 1.4 million e-mails and 39,000 texts to its policyholders throughout the UK and mainland Europe.  The Transferor's "strategic partners", through which it conducts business, also sent over 5 million notifications to policyholders on its behalf.  That campaign elicited 10,498 responses, of which only 13 raised objections to the UK Scheme.  None of the objectors appeared at the hearing before the High Court.  Those objections were considered by Snowden J at paragraphs 77 - 82 of his judgment, and none were found to be of substance. 

8.        One feature of the UK Scheme (and of the Jersey Scheme) is that the Financial Services Compensation Scheme ("FSCS") provides compensation in respect of a non-payment by reason of insolvency under contracts of insurance written by a UK authorised insurer where the risk or commitment is situated in an EEA state.  Luxembourg has no equivalent compensation Scheme.  The holders of policies transferred to the UK Transferee will continue to be able to access the FSCS.  The loss of access to the FSCS was of particular concern to a Mr Lombardi, an Italian policyholder.  

9.        Snowden J referred at paragraph 54 of his judgment to the independent actuary's assessment that the risk of the European Transferee becoming insolvent was extremely remote and in the light of the numbers involved, his view was that the loss of access to the FSCS would not amount to any material adverse prejudice to policyholders transferring to the European Transferee.  He went on to say this at paragraph 58:-

"Moreover, and picking up the general point I made earlier, any extremely remote possibility of prejudice in this regard must be balanced against the risk of material prejudice that policyholders in the position of Mr Lombardi would face if the Scheme is not put into effect and [the Transferor] is unable to service their policies in Italy and the rest of the EU after Brexit.  In that regard, I also do not accept Mr Lombardi's characterization that the Scheme was a matter of choice for [the Transferor] rather than a reasoned response to the uncertainties of Brexit and a desire to provide continuity of service to its policyholders.  In my judgment any remote risk of prejudice to policyholders in Mr Lombardi's position from loss of access to the FSCS is vastly outweighed by these more immediate advantages of the Scheme."

10.      One novel question raised by the UK Scheme is whether it was possible for the High Court to sanction a Scheme under which the transfer in question was to be achieved in part by an order under section 112(1)(a) of the Financial Services and Markets Act 2000 ("FSMA") (the equivalent of paragraph 9 of Schedule 2 of the Insurance Business Law) and in part by means of a cross border merger under regulation 6 of the Companies (Cross-Border Mergers) Regulations 2007 and Chapter II of Title II of the Codified Directive (EU) 2017/1132.  The purpose of using the cross-border merger was to maximise the prospect of recognition of the transfer in overseas jurisdictions which the High Court was advised may more readily recognise and enforce any transfer in accordance with the principles of universal succession under an EU cross-border merger.   The Transferor also hoped that the more complex combined process would allow for tax neutrality to be achieved. 

11.      Snowden J concluded that there was no reason why the concept of a "transfer" in section 112(1)(a) of the FSMA should have any special or restricted meaning and there was no policy reason why it should not be possible to use any method of transfer of a business recognised by English law, which would include a transfer of assets and liabilities by means of a cross-border merger, adding this at paragraph 35:-

"25     I am fortified in that conclusion by the evidence in the instant case that the use of an EU cross-border merger may have advantages for EEA policyholders in terms of the recognition of the transfer of their policies to [the European Transferee] in accordance with the universal succession provisions of Article 131 of the Directive, rather than merely being achieved under the domestic provisions of section 112 FSMA.  That legitimate advantage for the benefit of policyholders is in no way diminished by the separate and understandable desire of the AIG Group to ensure that the transfer of policies to [the European Transferee] takes place in a tax neutral way under the revenue laws of the other European jurisdictions involved."

12.      The issue does not arise as a matter of Jersey law, because neither the Transferor nor the European Transferee are Jersey registered companies, but in our view, the position would be the same under Jersey law.  

13.      The effect of Brexit upon the discretion of the Court in applications such as this was considered by Snowden J at paragraphs 42-46 of his judgment, which are worth setting out in full:-

"42     Before turning to consider the evidence and the question of whether it is appropriate to exercise my discretion to sanction the Scheme, and in light of the objections received from some EEA policyholders who plainly would prefer there to be no change whatever to their policies, I should say something in general terms about the Scheme and the particular circumstances of Brexit.

43       In their evidence to this Court, the Regulators have indicated that although the outcome of the Brexit negotiations between the EU and the UK remains unclear, they have required [the Transferor] and the independent expert to consider as fully as possible the potential implications and risks to policyholders associated with the UK's withdrawal from the EU in the context of the proposed Scheme.  The regulators have also indicated that notwithstanding the uncertainty, they have expected full consideration to be given to 'possible mitigations and solutions to minimize any policyholder detriment arising from the Scheme'.  That approach is obviously entirely appropriate.

44       That said, in considering whether the protections for policyholders are sufficient, it should be borne in mind that the current background is not the one that has often been considered in the past, where the independent expert, the regulators and the Court are considering a transfer of insurance business which is being undertaken by the company concerned for entirely commercial reasons within its own control.  The current situation is different.

45       The evidence of [the Transferor] is that the uncertainty over the Brexit negotiations means that if it delayed further and did nothing, there is a real risk that substantial numbers of policyholders would be materially prejudiced in the event of a 'hard' Brexit by the loss of [the Transferor's] EU passporting rights, and a resultant inability of [the Transferor] to continue to service policies through its overseas branches or even pay policyholders' claims in other EU jurisdictions.  The concerns expressed by [the Transferor] seem genuine and reasonable, and in the absence of any objection or contrary evidence from the Regulators, I am not in a position to second-guess the directors of [the Transferor] in this respect.

46.      The consequence is that, in applying the tests in the authorities to which I have referred above, I must balance the risk of prejudice to a large body of policyholders in the EEA and Switzerland if the Scheme were not to be sanctioned, against any potential risk of prejudice to individual policyholders under the terms of the proposed Scheme.  In that regard, as was made clear by Evans-Lombe J in the AXA case, the fundamental question is whether the proposed Scheme as a whole is fair as between the interests of the different classes of persons affected.  The current uncertainty over Brexit means that there may be no perfect solution for the holders of the policies being transferred to the European Transferee, and the possibility that some individual policyholders or groups of policyholders may be adversely affected in certain respects does not mean that the Scheme necessarily has to be rejected by the Court.  It is also worth reiterating that it is not my function to produce what, in my view, is the best possible Scheme; as between different Schemes, all of which the Court might deem fair, it is the directors' choice which [the Transferor] should pursue."

14.      The reference to the AXA case is to Re AXA Equity & Law Life Assurance Society Plc and AXA Sun Life Plc [2001] 1 All ER (Com) 1010 at 1011 to 1012 in which Evans-Lombe J summarised the approach of the English courts under section 111 of the FSMA, which in turn follows the approach adopted by the English court under the Insurance Companies Act 1982, an approach which this Court has in the past followed by reference to the judgment of Hoffman J in the case of In re London Life Assurance Limited (21st February 1989) unreported.  The summary of Evans-Lombe J provides helpful guidance to this Court and we therefore set it out as follows:-

"(1)     The 1982 Act confers an absolute discretion on the court whether or not to sanction a scheme but this is a discretion which must be exercised by giving due recognition to the commercial judgment entrusted by the company's constitution to its directors.

(2)       The court is concerned whether a policyholder, employee or other interested person or any group of them will be adversely affected by the scheme.

(3)       This is primarily a matter of actuarial judgment involving a comparison of the security and reasonable expectations of policyholders without the scheme with what would be the result if the scheme were implemented.  For the purpose of this comparison the 1982 Act assigns an important role to the independent actuary to whose report the court will give close attention.

(4)       The FSA by reason of its regulatory powers can also be expected to have the necessary material and expertise to express an informed opinion on whether policyholders are likely to be adversely affected.  Again the court will pay close attention to any views expressed by the FSA.

(5)       That individual policyholders or groups of policyholders may be adversely affected does not mean that the scheme has to be rejected by the court.  The fundamental question is whether the scheme as a whole is fair as between the interests of the different classes of persons affected.

(6)       It is not the function of the court to produce what, in its view, is the best possible scheme. As between different schemes, all of which the court may deem fair, it is the company's directors' choice which to pursue.

(7)       Under the same principle the details of the scheme are not a matter for the court provided that the scheme as a whole is found to be fair.  Thus the court will not amend the scheme because it thinks that individual provisions could be improved upon.

(8)       It seems to me to follow from the above and in particular paras (2), (3) and (5) that the court, in arriving at its conclusion, should first determine what the contractual rights and reasonable expectations of policyholders were before the scheme was promulgated and then compare those with the likely result on the rights and expectations of policyholders if the scheme is put into effect."

This Court similarly has an absolute discretion whether or not to sanction a scheme under the provisions of Schedule 2 of the Insurance Business Law.

15.      The role of an independent actuary under Jersey law (paragraph 3 of Schedule 2 of the Insurance Business Law) or of an independent "expert" under English law (but invariably an actuary) is central to any application for a transfer, and in this case, the independent actuary, in his report considered that the UK Scheme was a viable strategy by the AIG Group to maintain activities across Europe following Brexit and provides assurance for policyholders that their insurer will be able to settle claims in line with regulatory rules following Brexit.  In the absence of the UK Scheme and in the event of a hard Brexit, he said there would be material concerns if the ability of the Transferor to meet its Solvency Requirements and settle claims in line with regulatory rules. 

16.      In his supplemental report, he maintained his opinion that under the UK Scheme (and the Jersey Scheme), the UK (and Jersey) transferring policyholders and the European (and Jersey) transferring policyholders will not be materially adversely affected.  In respect of the latter, there were four scenarios which he said might make it necessary for him to produce a second supplementary report, all of which have been adequately addressed in the second witness statement of Christopher David Seymour Newby, a director of the Transferor. 

17.      The Jersey Scheme is intended to transfer the general insurance business carried on from or within Jersey by the Transferor on the same terms as the UK Scheme.  We understand there are some 1,000 policyholders who fall within the Jersey Scheme, some of whose policies will transfer to the UK Transferee and others to the European Transferee. 

18.      The Court was satisfied that all of the requirements of paragraph 4 of Schedule 2 of the Insurance Business law, subject as directed by the Court, had been met, and the Jersey Financial Services Commission had no objections to or specific comments on the Jersey Scheme.  Pursuant to paragraph 7 of Schedule 2, both the UK Transferee and the European Transferee are authorised by the Jersey Financial Services Commission to carry on general insurance business.  The Jersey Comptroller of Taxes had confirmed that no implications arose for Jersey policyholders in relation to Jersey tax as result of the Jersey Scheme, and the independent actuary was satisfied that there were no adverse tax effects on policyholders.  No Jersey policyholder had written in objecting to the Jersey Scheme and no policyholder had attended the hearing. 

Discretion

19.      The AIG Group is taking action to re-structure its operations to ensure that the Group can continue to service its existing business and write new business post Brexit and in the light of the uncertainty of any deal that might be struck between the UK and the EU. Due recognition has to be given to the commercial judgment entrusted to the directors, whose concerns, as Snowden J said, seem genuine and reasonable.  It was not for the Court to second-guess that judgment. All of the requirements of the Insurance Business Law had been met. The independent actuary had confirmed that the interests of the policy holders would not be adversely affected. No objection to the Jersey Scheme had been taken by the regulators and there had been no objections taken by any policyholder. 

20.      We endorsed the balancing exercise undertaken by Snowden J as set out above, and his conclusion that the UK Scheme, and it follows the Jersey Scheme, is fair between the interests of the different classes of persons affected. 

21.      We therefore sanctioned the Jersey Scheme. 

Authorities

Insurance Business (Jersey) Law 1996. 

In Re AIG Europe Limited and others [2018] EWHC 2818 (Ch). 

AXA Equity & Law Life Assurance Society Plc and AXA Sun Life Plc [2001] 1 All ER (Com).