Business transfer schemes - insurance companies - power of transferee to merge unit-linked funds - variation of contractual rights of policyholders - discretion - sanction - independent expert's report


In the matter of (1) Pearl Assurance (Unit Linked Pensions) Ltd (2) Pearl Assurance (Unit Funds) Ltd (3) London Life Linked Assurances Ltd (4) NPI Ltd: Ch D (Companies Ct): (Mr Justice Briggs): 14 September 2006



The applicants (P) applied for an order sanctioning a scheme for the transfer of the entire long-term insurance business carried on by three subsidiaries of Pearl Group to another group subsidiary. The business rationale for the scheme was that the four companies were all closed to new business so that their fixed costs per policy would increase over time and the consolidation of their businesses into a single company would lead to cost savings in the longer term.



The scheme in paragraph 16.4 also gave the transferee company (N) the power to close, amalgamate or restructure its unit-linked funds in the future when it became too small to manage cost-effectively. Policyholders objected to the scheme on the basis that this aspect would make it easier for N to reduce the choice of funds available. It emerged at the hearing that some but not all of the policies affected by the scheme already contained a contractual power enabling the relevant issuing company to make such changes to its linked funds structure.



Held, the conferral on N of a power to amalgamate linked funds and change investment objectives would involve a unilateral variation of the contractual rights of those policyholders whose policies did not already permit such steps to be taken. Part VII of the Financial Services and Markets Act 2000 gave the court jurisdiction to bring about a variation of policyholders' contractual rights that went beyond the mere substitution of the transferee of the relevant business for the transferor as the obligor under the relevant policy.



The report of the independent expert on the scheme, which concluded that it was fair and reasonable, was based on the assumption that no proposal for the merger of linked funds or for changes in investment objectives would be approved by N's board unless it was permitted by the relevant policy terms and conditions. However, the scheme appeared to confer a wider power.



Before the court exercised its discretionary power to vary contractual rights beyond what was necessary for the substitution of one obligor for another under the relevant policies, the fact that a proposed scheme was intended to bring about the exercise of such a power ought properly to be brought home to policyholders and the Financial Services Authority (FSA). Save for the inclusion of that power, the scheme was one that ought to be sanctioned as a matter of discretion because the business rationale was compelling, and the objections to the scheme came nowhere near to shifting the balance against an order sanctioning the scheme. There was a real prospect that savings would ensue and there was no obvious countervailing disadvantage.



Accordingly, the court sanctioned the scheme, subject to the proviso that the power in paragraph 16.4 of the scheme document should not be exercised if and to the extent that it would be contrary to the terms and conditions of the policies of affected policyholders without a further application to the court supported by further evidence from the expert, and evidence that the power to act inconsistently with policyholders' contractual rights had been brought sufficiently to their attention and to the attention of the FSA.



Application granted.



Robert Hildyard, Gregory Denton-Cox (instructed by Freshfields Bruckhaus Deringer) for the applicants.