Markel CATCo Reinsurance: Good reminder of Bermuda`s effective and versatile scheme of arrangement

Markel CATCo Reinsurance: Good reminder of Bermuda`s effective and versatile scheme of arrangement

As the sun sets on 2022, a judgment of the Supreme Court for Bermuda delivered on 25 February 2022: In the matter of Markel CATCo Reinsurance Fund Limited and CATCo Reinsurance Opportunities Fund Limited, serves as a good reminder of the efficacy and versatility of Bermuda’s scheme of arrangement regime. Section 99 of the Companies Act 1981 (“CA”) continues to be employed for the purpose of insurance and re-insurance funds incorporated in Bermuda, to achieve, amongst other variations, an early cut-off of policyholder/creditor claims and/or an alternative to formal winding up of insolvent funds.

Markel CATCo Reinsurance Fund Limited and CATCo Reinsurance Opportunities Fund Limited (“the Scheme Companies”), comprising both a private and public reinsurance fund, were acquired in 2015 by Markel Corporation and managed by Markel CATCo Investment Management Ltd (the “fund manager”), all of whom, formed part of the larger corporate group structure. Investors would invest capital in the Scheme Companies who would in turn subscribe for shares in another related group company acting in the capacity ofreinsurer, Markel CATCo Re Ltd, which in turn used the subscription capital to write fully collateralized catastrophic risk reinsurance contracts with cedants who paid premiums to the Reinsurer.

In 2017 and 2018, the catastrophic risk reinsurance market suffered debilitating losses. In 2019, the CATCo group refrained from allowing further investment in the Scheme Companies and initiated a run-off of the business which resulted in returning approximately USD2.3 billion to investors. However, the group`s ability to return monies to investors became impaired through the subsequent lodging of civil claims in the USA, accompanied by a real threat of further claims, all premised on certain alleged fraudulent and/or negligent misrepresentations made by the Scheme Companies, its fund manager and former CEO.

Considering the far reaching indemnity provisions agreed to in the suite of management agreements in favour of the former CEO and related affiliates, which indemnities incorporate the funding of any indemnified parties` costs of litigation, the board of directors of the Scheme Companies reached the conclusion that, irrespective of the Scheme Companies seeking to defend these existing civil claims, the costs involved in litigating these claims and the potential liability should an adverse judgment be made, would render the Scheme Companies insolvent.

The Scheme Companies made use of the Bermuda practice of appointing provisional liquidators for the purpose of implementing the proposed scheme. In the Court`s judgment authorising and convening a meeting of creditors towards voting on the proposed scheme, it dealt with two noteworthy aspects. First, the Court approved and confirmed that “it is well established that the fact that a creditor`s claim is contingent, disputed and/or has not yet been asserted does not prevent a creditor from being bound by a scheme of arrangement”. Furthermore, the fact that the Scheme Companies do not consider that any investor claims would likely succeed, does not disqualify such possible claims from being classified as “contingent” particularly considering that in accordance with the English judgment in Re Lehman Brothers and the Bermuda judgment in Re Noble, the following would apply:

• The scheme jurisdiction would be engaged based on some circumstance, no matter how remote, in which the scheme creditors could become creditors of the Scheme Companies.
• Since the scheme creditors are all investors in the Scheme Companies and in light of the potential way in which claims may be pursued, the test is satisfied.
• By voting on the proposed scheme, the scheme creditors will confirm that they consider themselves to have a claim.
• It is important to adopt a broad approach to contingent claims when proposed scheme creditors have a real economic interest.

Second, as part of being required to consider whether Part VII of the CA 1981 allowed for the release of certain third-parties from potential liability vis a vis contingent creditor claims (as part of the proposed scheme plan) the Court approved of the submissions on behalf of the Scheme Companies and found that the contemplated releases were fundamentally necessary in order to avoid ricochet claims and secure the additional funding of the Markel Corporation. In this regard, the Court accepted and confirmed the following:

• In accordance with Re Lehman Brothers (Europe) (No.2) [2009] EWCA Civ 1161 and Re APP China Group Ltd [2003] Bda LR 50 – the releases were necessary and integral to the proposed scheme, considering Markel Corporation`s conditional funding related to the releases and the potential ricochet claims which fell outside of the relevant indemnities.
• That for purposes of justifying a third party release, the Bermuda court would likely consider and follow the position in Singapore, in light of Kawaley J`s statement in Re Contel Corporation Limited [2011] Bda LR 12 that “Singapore law provisions relating to schemes of arrangements are substantially similar to those under Bermuda law”.
• Therefore, the court found persuasive the Singaporean Court of Appeal`s recognition in Pathfinder Strategic Credit LP v Empire Capital Resources Pte Ltd [2019] SGCA 29 of the “sufficient nexus” test detailed in the Australian case of Re Opes Prime Stockbroking Ltd [2009] FCA and the judicial statement in Pathfinder that: liabilities of a primary obliger can be properly released in a scheme even in the absence of a ricochet claim adding that there was a practical attraction in the “sufficient nexus” test.
• Consequently, in applying the “sufficient nexus” test, all of the potential investor claims arise out of the investments made by the scheme creditors in the Scheme Companies and such claims are therefore likely to arise out of similar facts and relate to statements made prior to the scheme creditor investing capital into the Scheme Companies.

Conclusion

This judgment serves as another illustration that the Bermuda courts in applying section 99 of the CA, whilst drawing on a variety of commonwealth authorities, are fully equipped to assist large multinational reinsurance and related companies in either restructuring or compromising with creditors and/or members and facilitate, where necessary, a global settlement of any potential claims with certainty and finality. MJM Limited`s Dispute Resolution department, in co-ordination with its Corporate department, have expert knowledge and a wealth of experience in advising on all issues dealt with in this blog post.