England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMPANIES COURT (Ch)

THE FINANCIAL SERVICES AND MARKETS ACT 2000
THE COMPANIES (CROSS-BORDER MERGERS) REGULATIONS 2007

		Royal Courts of Justice Rolls Building, Fetter Lane, London EC4A 1NL
		25 October 2018

MR JUSTICE SNOWDEN :

1. This case concerns the reorganisation of a major insurance company to prepare for Brexit by transferring its European business from London to Luxembourg.

Background

2. The AIG Group is one of the world's largest insurance groups. For many years it has operated in Europe through the first Applicant company, AIG Europe Limited ("AEL" or "the Company"), which is an English company based in the City of London. From London and through a network of licensed branches in 26 European countries, AEL has written a substantial amount of consumer insurance and commercial insurance and reinsurance business, the overwhelming amount involving risks located in the UK and the rest of the EEA. At any one time AEL has had about 5.9 million consumer policies and 726,000 commercial policies in force, with gross premium written as at 30 November 2016 of about £4.9 billion. AEL currently has total assets of about £16.7 billion and has made technical provisions for its insurance liabilities (including risk margin) of about £12.1 billion.
3. In the EEA, AEL has relied on its EU "passporting" rights to sell its policies, service its policyholders and to establish branches under the supervision of a single prudential regulator in the UK. The existence of these EU passporting rights has been central to the Company's pan-European business model. The AIG Group has concluded that in 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 AEL's operations without further delay in order to ensure that the Group can continue to service its existing business and write new business across the UK and the rest of Europe after Brexit.
4. In general terms, this will be achieved by AEL transferring the UK and non-EEA business written by its UK offices to a new English company, American International Group UK Limited ("AIGUK"), which will operate from London under the supervision of the Financial Conduct Authority ("FCA") and Prudential Regulation Authority ("PRA") (together "the Regulators"). AEL will then transfer the remainder of its business and its network of European branches to a new Luxembourg company, AIG Europe SA ("AESA"). AESA will be supervised by the Commisariat aux Assurances ("CAA") in Luxembourg, will be entitled to EU passporting rights and to the benefit of the EU's bilateral treaty with Switzerland, and will therefore be able to operate its business across mainland Europe after Brexit. AEL itself will cease to exist when the reorganisation comes into effect, which is expected to be on 1 December 2018.
5. Because this scheme ("the Scheme") includes transfers of insurance business by AEL to AESA and AIGUK, it requires the approval (sanction) of this Court pursuant to sections 104 and 111 of Part VII of the Financial Services and Markets Act 2000 ("FSMA").
6. In addition to the sanction of the Court, as is conventional, the operation of the Scheme requires an order from this Court under section 112 FSMA to give effect to the transfer of the UK and non-EEA insurance business to AIGUK. However, AEL intends that the transfer of the EEA and Swiss business to AESA will be achieved by an EU cross-border merger between the two companies (the "Cross-border Merger").
7. A Part VII FSMA scheme which involves an EU cross-border merger is novel. AEL could achieve the transfer of the EEA and Swiss business and the dissolution of AEL by orders under section 112 FSMA. But its object in using a cross-border merger is to maximise the prospect of recognition of the transfer of the EEA and Swiss business in overseas jurisdictions, which (it is advised) may more readily recognize and enforce a transfer in accordance with the principles of universal succession under an EU cross-border merger than under section 112 FSMA. In addition, AEL hopes that the more complex combined process will allow for tax neutrality to be achieved.
8. AEL accordingly seeks the certificate of this Court under Regulation 6 of The Companies (Cross-Border Mergers) Regulations 2007 (the "CBM Regulations") that it has completed the necessary pre-merger steps for the Cross-border Merger. Under Chapter II of Title II of the codified Directive (EU) 2017/1132 relating to certain aspects of company law ("the Directive"), the final approval of the Cross-border Merger will be given by the authorities in Luxembourg.

The Scheme

9. The Scheme document is divided into a number of sections. Section 1 contains definitions which do the job of identifying the assets, liabilities and business to be transferred and to whom they are to be transferred. The essential definitions identify the "Transferring UK Business" to be transferred by AEL to AIGUK as comprising the "Transferring UK Insurance Policies", the "Transferring UK Assets", the "Transferring UK Liabilities" and the "Transferring UK Employees".
10. The key concept is the definition of "Transferring UK Insurance Policies" which excludes any insurance or reinsurance policies that were issued by AEL through or on behalf of any of its branches in the EEA (other than the UK) and Switzerland, but otherwise includes (a) that part of insurance policies relating to UK risk issued by or on behalf of AEL, (b) that part of insurance policies relating to non-EEA risk issued by or on behalf of AEL, and (c) that part of any reinsurance policies issued by or on behalf of AEL (other than relating to risk in Argentina and Venezuela). In broad terms the "Transferring UK Assets" and "Transferring UK Liabilities" are those assets and liabilities which are attributable to the Transferring UK Business. The assets to be transferred include the relevant part of any outwards reinsurance contracts covering the Transferring UK Insurance Policies. The "Transferring UK Employees" are those who are wholly or mainly assigned to work on the Transferring UK Business.
11. There are a similar set of definitions making up the "Transferring European Business" to be transferred to AESA. In essence this comprises all of the business of AEL other than the Transferring UK Business.
12. Section 2 of the Scheme sets out an overview and the sequence of completion of the transactions which are timed to follow each other on the "Completion Date" which is anticipated to occur on 1 December 2018. It provides that the Transferring UK Business shall be transferred to AIGUK by orders made under section 112(1) FSMA, and thereafter the Transferring European Business shall be transferred to AESA in accordance with Article 131 of the Directive on completion of the Cross-border Merger between AEL and AESA.
13. Section 3 of the Scheme is divided into two parts dealing respectively with the transfer of the Transferring UK Business and the transfer of the Transferring European Business. It contains provisions for the continuity of references and rights, proceedings, complaints, collection of premiums and mandates, data etc. It also contains a provision under which AESA will give an undertaking to the court to abide by the applicable dispute resolution procedures in the FCA Handbook in relation to the Transferring European Business. This includes, in particular, an undertaking by AESA to abide by the decisions of the Financial Ombudsman Service ("the FOS") in cases where the FOS has jurisdiction to entertain a complaint in relation to any policy transferred to AESA after the completion of the Scheme.
14. Section 4 of the Scheme contains provisions to deal with the way in which policies of insurance which were not written by an EEA or Swiss branch of AEL, and which relate to risks located in both the UK and EEA will be "split". Although each of AIGUK and AESA will have separate responsibility for the relevant risks transferred to them, policy limits and deductibles will be aggregated between the two new policies, and policyholders of such "split" policies will have rights against both companies following the completion of the transfers so as not to be any better or worse off in respect of such contractual terms after the Scheme takes effect. This provision does not apply to inwards reinsurance policies where AEL is the reinsurer, but there are similar provisions dealing with outwards reinsurance policies which cover the insurance policies which are to be "split" between AIGUK and AESA .
15. Section 4 also includes various miscellaneous provisions for the reversal of the accidental transfer of a policy, asset or liability to the wrong transferee, and relating to the completion, costs and governing law of the transaction.

The terms of the Cross-Border Merger

16. The draft terms of the Cross-border Merger were entered into between AEL and AESA on 21 February 2018. They essentially track the terms of the Scheme so far as relevant and also include additional matters required by the CBM Regulations.

The Legal Framework

Part VII Transfers

17. Section 104 FSMA provides that no insurance business transfer scheme is to have effect unless an order sanctioning it has been made under section 111(1).
18. Sections 105(1) and 105(2)(a) FSMA provide in relevant part,

"(1) A scheme is an insurance business transfer scheme if it-

(a) satisfies one of the conditions set out in subsection (2);

(b) results in the business transferred being carried on from an establishment of the transferee in an EEA State; and

(c) is not an excluded scheme.

(2) The conditions are that -

(a) the whole or part of the business carried on in one or more member States by a UK authorised person who has permission to effect or carry out contracts of insurance ("the transferor concerned") is to be transferred to another body ("the transferee")."

It is clear on the facts of the instant case that the Scheme is not an excluded scheme within section 105(3), and so I do not set those provisions out.

19. Section 111(1) sets out the conditions which must be satisfied before the court may make an order sanctioning an insurance business transfer scheme. The conditions are that all of the necessary certificates and authorisations have been obtained from the relevant authorities (section 111(2)) and that the court considers that, in all the circumstances of the case, it is appropriate to sanction the scheme (section 111(3)).
20. Section 112 then provides,

"(1) If the court makes an order under section 111(1), it may by that or any subsequent order make such provision (if any) as it thinks fit -

(a) for the transfer to the transferee of the whole or any part of the undertaking concerned and of any property or liabilities of the transferor concerned;

(b) for the allotment or appropriation by the transferee of any shares, debentures, policies or other similar interests in the transferee which under the scheme are to be allotted or appropriated to or for any other person;

(c) for the continuation by (or against) the transferee of any pending legal proceedings by (or against) the transferor concerned;

(d) with respect to such incidental, consequential and supplementary matters as are, in its opinion, necessary to secure that the scheme is fully and effectively carried out."

21. The approach to the exercise of the Court's discretion under section 111 is now well established. It follows the approach adopted under the predecessor of Part VII FSMA, namely Schedule 2C to the Insurance Companies Act 1982. The principles were conveniently summarised by Evans-Lombe J in Re AXA Equity & Law Life Assurance Society plc and AXA Sun Life plc [2001] 1 All ER (Comm) 1010 at 1011-1012 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."

22. The role of the "independent actuary" under the 1982 Act is now fulfilled under section 109 FSMA by a report from an "independent expert" (invariably an actuary) and the role of the FSA is now fulfilled by the FCA and PRA together. The approach of the Court to the report of the independent expert and the views of the Regulators was described by Briggs J in Re Pearl Assurance (Unit Linked Pensions) Limited [2006] EWHC 2291 (Ch) at paragraph 6,

"6. Notwithstanding that detailed perusal of a proposed Scheme both by an independent expert and by the [Regulators] are conditions precedent to the exercise of the court's discretion to sanction it, the discretion remains nonetheless one of real importance, not to be exercised in any sense by way of rubber stamp…. The relevant principles are concisely summarised in the following passage from the judgment of Mr. Justice Rimer in Re Hill Samuel Life Assurance Limited [1998] 3 All ER176, at177:

"Ultimately what the court is concerned with is whether the scheme is fair as between different classes of affected persons, and in arriving at a conclusion as to whether or not it is, amongst the most important material before the court is material which the Act requires to be before it, namely the report of an independent actuary as to his opinion on the scheme.""

23. The width of the Court's powers under section 112(1)(d) was considered by Lindsay J in Re Norwich Union Linked Life Assurance Limited [2005] BCC 586 at paras 11-12, and by myself in The Copenhagen Reinsurance Company (UK) Limited [2016] Bus LR 741 at paragraphs 41-43. In Copenhagen Re I stressed that the power under section 112(1)(d) should be exercised bearing in mind that a primary purpose of Part VII FSMA is the protection of policyholders, and that the power to secure that a transfer scheme is "fully" carried out indicates that the court has the jurisdiction to go beyond the bare minimum without which the independent expert would withdraw his support for the scheme.

Cross-border Mergers

24. Article 119(2) of the Directive defines a (cross-border) merger as,

"an operation whereby (a) one or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to another existing company, the acquiring company, in exchange for the issue to their members of securities or shares representing the capital of that other company …."

25. The relevant parts of Article 121 provide as follows,

"1. Save as otherwise provided in this Chapter,

…

(b) a company taking part in a cross-border merger shall comply with the provisions and formalities of the national law to which it is subject….

2. The provisions and formalities referred to in point (b) of paragraph 1 shall, in particular, include those concerning the decision-making process relating to the merger and, taking into account the cross-border nature of the merger, the protection of creditors of the merging companies, debenture holders and the holders of securities or shares, as well as of employees as regards rights other than those governed by Article 133 [employee participation]. A Member State may, in the case of companies participating in a cross-border merger and governed by its law, adopt provisions designed to ensure appropriate protection for minority members who have opposed the cross-border merger."

26. The requirements for a cross-border merger are set out in Articles 121-130 of the Directive. These include the provision in Article 129 that the Member State to whose jurisdiction the company resulting from the cross-border merger is subject shall determine the date on which the cross-border merger takes effect. The consequences of the cross-border merger are then dealt with by Article 131, which provides,

"1. A cross-border merger carried out as laid down in subpoints (a) and (c) of point (2) of Article 119 shall, from the date referred to in Article 129 have the following consequences:

(a) all the assets and liabilities of the company being acquired shall be transferred to the acquiring company;

(b) the members of the company being acquired shall become members of the acquiring company;

(c) the company being acquired shall cease to exist."

27. In the UK, the Directive is given force by the CBM Regulations. Regulation 6 provides that a UK merging company may apply to the court for an order certifying that the company has completed properly the pre-merger acts and formalities for the cross-border merger. The requirements include the adoption of draft terms of merger (Regulation 7), the preparation and circulation of a report by the directors explaining the effect of the merger on members, creditors and employees (Regulation 8), and (where appropriate) the holding of meetings of members and/or creditors and (Regulations 11-15). The provisions for completion of the merger set out in Article 131 of the Directive are replicated in Regulation 17.
28. The approach of the Companies Court to the grant of a pre-merger certificate in cases of "outwards" cross-border mergers, where one or more of the transferor companies is a UK company, has recently been outlined by the Chief Registrar, ICC Judge Briggs, in a Practice Note dated 4 October 2018. That Practice Note includes the following,

"Such a merger cannot proceed without a certificate from the High Court certifying that the pre-merger steps in relation to the UK merging company have been properly completed. The final decision to approve the merger is reserved to the member state whose laws govern the transferee company.

In such a case, an applicant may (where appropriate) seek an order from the Court summoning a meeting or meetings of members and/or creditors of the UK merging company under Regulation 11; and the applicant will seek an order certifying that the pre-merger acts and formalities required of the UK merging company have been properly completed under Regulation 6(1).

…

At the hearing of an application, the Court will consider the question of creditor and employee protection. Creditors for this purpose may include any party who is owed a debt (including prospective and contingent debts), employees, policyholders, those who have pension rights and others. The evidence should address the position of creditors of the UK merging company, the effect of the merger upon them (including issues arising from the UK's departure from the European Union, if any), and any proposals to protect their interests."

Jurisdiction

Combination of Part VII FSMA and a cross-border merger

29. The first novel legal question raised by this case is whether it is permissible for the Court to sanction an insurance business transfer scheme under Part VII FSMA where the transfer of the insurance policies in question is to be achieved in part by an order under section 112(1)(a) FSMA and in part by means of a cross-border merger under the Directive and CBM Regulations. I have no doubt that this is permissible.
30. Section 104 FSMA provides that an insurance business transfer scheme shall not have effect unless it is sanctioned by the court under section 111(1), but FSMA does not provide that the order of the court sanctioning the scheme under section 111(1) is itself sufficient to transfer the relevant business or otherwise to give effect to the contents of a scheme. Were that so, there would be no need for the express powers of transfer and other matters set out in section 112.
31. Further, the definition of an insurance business transfer scheme in section 105 FSMA is in terms that refer simply to a "transfer" of insurance business from one entity to another (section 105(2)(a)), and require that the scheme should have the "result" that the business transferred is carried on from an establishment of the transferee in an EEA State (section 105(1)(b)). There is no indication in the language of the statute that section 105(2)(a) should be read restrictively so as to exclude schemes that involve the transfer of the insurance business in question to more than one transferee entity. Nor is there any indication that the concept of a "transfer" should have any special or restricted meaning.
32. The existence of the duties and actual or contingent liabilities of an insurer under its insurance contracts means that it will not generally be possible to achieve the transfer of an insurance business by a simple assignment. The express statutory powers to transfer assets and liabilities in section 112 FSMA are plainly designed to overcome that problem, and that mechanism is doubtless the one that the legislature must have envisaged would ordinarily be used.
33. However, I see no basis in the language of FSMA or any policy reason why it should not be possible to use any other method of transfer of a business which is recognised by English law to achieve the same result. That would, in my judgment, include a transfer of assets and liabilities by means of a cross-border merger under the Directive and CBM Regulations. The essential policy of Part VII FSMA is not infringed by such a transfer, since the means by which the interests of policyholders and other interested parties are protected is by the requirement for the scheme to be sanctioned by the Court under section 111 before it can take effect; and in deciding whether to exercise its discretion to sanction the scheme, the Court can obviously have regard to the manner in which the transfer of policies is to take place.
34. In short, I consider that the transfer of rights and liabilities of AEL that will occur on the effective date set for the Cross-border Merger by the authorities in Luxembourg in accordance with Articles 129 and 131 of the Directive is a means by which, subject to sanction under section 111(1) FSMA, a relevant transfer of that insurance business can lawfully be carried into effect under Part VII FSMA. The use of the Cross-border Merger also does not in any way limit or restrict this Court from considering whether or not to sanction the Scheme under section 111.
35. 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 AESA 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 AESA takes place in a tax neutral way under the revenue laws of the other European jurisdictions involved.

Ancillary orders under section 112(1) FSMA

36. The issue also arises as to whether, and if so, to what extent, I can make ancillary orders under sections 112(1)(c) and (d) FSMA in relation to (i) the transfer of business to AIGUK and (ii) the transfer of business to AESA.
37. As I have indicated, the Scheme provides for the transfer of policies to AIGUK to take effect under section 112(1)(a) FSMA. AEL also seeks an order under section 112(1)(c) making provision for the proceedings by and against it in respect of the policies transferring to AIGUK to be continued by or against AIGUK. There is plainly no difficulty in making such an order.
38. There is also intended to be a similar continuity of proceedings in respect of the policies transferring to AESA as a result of the Cross-border Merger. Surprisingly there are no express provisions in the Directive or the CBM Regulations expressly dealing with the continuity of legal proceedings in the event of a cross-border merger. I anticipate that a purposive interpretation of Articles 119(2) and 131(1)(a) of the Directive and the equivalent provisions of the CBM Regulations would enable such a result to be implied, but to put matters beyond doubt (at least so far as English law is concerned) I see no reason why I should not be entitled to make an order under section 112(1)(c) FSMA in relation to the continuation of proceedings and claims by and against AESA. That is because the condition to the Court's power to make an order under section 112(1)(c) is simply that it should have made an order sanctioning the transfer scheme under section 111(1); and for the reasons that I have explained, I consider that the definition of a transfer scheme which is capable of being sanctioned under section 111(1) can include a transfer of assets and liabilities as a result of a cross-border merger. Put another way, provided that the scheme in question falls within section 111(1), the availability of the power under section 112(1)(c) does not depend upon the making of an order under section 112(1)(a).
39. A similar point can be made in relation to the order that I am asked to make under section 112(1)(d) giving effect to the provisions of the Scheme which are not otherwise carried into effect under section 112(1)(a) or (c) or under the Cross-border Merger. Provided that the order relates to the scheme to be sanctioned under section 111(1), I do not see that there is any objection to making such an order in the general form sought.
40. In that regard, as indicated above, one particular feature of the Scheme is that where existing policies cover risks in both the UK and EEA, those policies should in effect be subject to a "split" transfer so that AIGUK and AESA will have separate responsibility for the relevant risks transferred to them on the terms of the original policies, but policy limits and deductibles will be aggregated between the two new policies so that policyholders will not be any better or worse off in respect of such contractual terms after the Scheme takes effect. I see no reason in principle why such provisions should not work if given effect by an order made under section 112(1)(d) FSMA, and such an order is plainly necessary to ensure that the Scheme is fully and effectively carried out.
41. A similar point can be made in relation to the provisions in the Scheme relating to the outwards reinsurance contracts covering any insurance policies which are to be "split". It is plainly necessary to give full effect to the Scheme for the relevant parts of such outwards reinsurance contracts to be transferred to the appropriate transferee and to make provision for aggregate policy limits and deductibles to be maintained. I see no reason why that cannot be achieved by an order under section 112(1)(d) FSMA. The evidence indicates that relevant reinsurers were given notice of the Scheme proposal, but none raised any objections or appeared before me.

Discretion: the effect of Brexit

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 AEL 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 AEL 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 event of a "hard" Brexit by the loss of AEL's EU passporting rights, and a resultant inability of AEL to continue to service policies through its overseas branches or even pay policyholders' claims in other EU jurisdictions. The concerns expressed by AEL 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 AEL 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 AESA, 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 AEL should pursue.

The Reports of the Independent Expert

47. The independent expert in this case is Mr. Steve Mathews, a Managing Director of Willis Towers Watson's Insurance Consulting and Technology Division ("the Independent Expert"). Mr. Mathews is a Fellow of the Institute and Faculty of Actuaries. He has considerable experience in the general insurance industry, and (as is required) his appointment has been approved by the PRA. The Independent Expert produced a detailed report in February 2018 in which he examined the effect of the Scheme upon AEL's policyholders, together with a supplementary report in September 2018 which took account of information not available at the time of the original report. His reports have been seen and considered by the Regulators.
48. In his reports, the Independent Expert has considered the likely effect of the Scheme on the policyholders whose policies are to be transferred to each of AIGUK and AESA. He has considered the effect in terms of the security of their contractual rights (primarily the solvency and prudential regulation of AIGUK and AESA, but including access to compensation schemes), together with factors which might affect service levels (such as changes in claims handling, conduct regulation and access to ombudsman schemes).

Solvency and prudential regulation

49. In relation to solvency, the Independent Expert has produced a careful analysis of the liabilities and assets to be transferred to each of AIGUK and AESA, and has concluded, for reasons that I find entirely persuasive, that the Scheme will have no material adverse effect upon the transferring policyholders. Both AIGUK and AESA will have a surplus of assets over liabilities which meet (or in the case of AESA exceeds) their own target financial resources and which in both cases comfortably exceed the regulatory capital requirements of the recast EU Solvency II Directive (2009/138/EC) ("Solvency II"). The Independent Expert has also concluded that the prudential regulation of AESA by the CAA in Luxembourg will be of equivalent standard to that currently provided by the PRA, since they both operate under a harmonized approach under Solvency II.
50. The Independent Expert has identified that by reason of the different split of direct insurance and reinsurance business to be transferred to AIGUK (79% direct/21% assumed reinsurance) and AESA (94%/6%) as opposed to AEL (88%/12%), reinsurers who are transferred to AESA will have a relatively larger proportion of direct policyholders ranking ahead of them when assets of the insurer are allocated to creditors in an insolvency. However, because of the enhanced solvency margin of AESA referred to above, he concludes, in my view justifiably, that the likelihood of material prejudice to reinsurers is extremely remote, since the risk of insolvency of AESA is extremely remote.

Access to compensation schemes

51. At present, the Financial Services Compensation Scheme ("FSCS") provides compensation in respect of non-payment by reason of insolvency under contracts of insurance written by a UK authorized insurer where the risk or commitment is situated in an EEA state. Luxembourg has no equivalent compensation scheme.
52. The holders of policies transferred to AIGUK will continue to be able to access the FSCS. However, the Independent Expert has observed that unless AESA is a "relevant person" for the purposes of the policyholder protection part of the PRA Rulebook (in which case policyholders may retain access to the FSCS), policyholders whose policies are transferred to AESA will lose access to the FSCS. The Independent Expert has prudently assumed that such designation will not occur, and that the holders of policies transferred to AESA will therefore lose access to the FSCS if the Scheme becomes effective. He does, however, note that some AESA policyholders whose policies were written though local branches in the EEA (such as Ireland and Spain) may have access to local compensation schemes in those jurisdictions in the event of insolvency of AESA, but that others might not.
53. The Independent Expert's evidence is that on the (fanciful) assumption that AESA were to become insolvent immediately following the proposed Scheme coming into effect, 13% by claims reserve value of the total policies to be transferred to AESA would be affected. However, this would reduce substantially to 0.6% after one year and to 0.3% after two years. This 0.3% is a very small proportion of AESA's policyholders and almost entirely relates to extended warranty (e.g. white goods) business.
54. Overall, given his assessment that the risk of AESA becoming insolvent was extremely remote and in light of the numbers involved, the Independent Expert was of the view that loss of access to the FSCS would not amount to any material adverse prejudice to policyholders transferring to AESA.
55. The loss of access to the FSCS was a particular concern for one Italian policyholder (Mr. Lombardi) who engaged in extensive correspondence with AEL concerning his accident insurance and professional liability policies which are to be transferred to AESA under the Scheme. Mr. Lombardi did not agree with the assessment of the Independent Expert that there would be no material prejudice to him in this respect. Mr. Lombardi argued that he should not be forced to accept any loss of compensation arrangements or any increased risk of prejudice arising from insolvency because of the Scheme. He also described AEL's decision to propose the Scheme as a choice rather than a necessity.
56. The approach of the Court to issues such as this has been considered in a number of cases. In Re Royal & Sun Alliance Insurance plc [2008] EWHC 3436 (Ch) at para. 11, David Richards J said,

"… in approaching this application I shall be concerned to see whether there is any material adverse effect on the position of policyholders in any of the three groups to which I have referred. The word "material" is important. The court is not concerned to address theoretical risks. It might be said that a transfer of business from a very large company to a large company involved a reduction in the cover available to the transferring policyholders, but assuming that the transferee is in a financially strong position it matters not that the level of cover in the transferee is less than that in the transferor. What the court is concerned to address is the prospect of real, as opposed to fanciful, risks to the position of policyholders."

57. It seems to me that this observation is entirely apposite in the instant case. Given the Independent Expert's assessment of the financial strength of AESA and the substantial margin with which its surplus assets will exceed the necessary Solvency II requirements, I consider that the prospect that AESA will default on its obligations so as to bring access to a compensation scheme into play is not a real risk, but is remote in the extreme.
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 AEL 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 AEL, 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.

Service levels and conduct regulation

59. UK policyholders transferring to AIGUK will receive the same levels of service from the same staff before and after the Scheme takes effect. Where policyholders purchased their policies through branches of the AEL in the EEA, they will also continue to receive the same levels of service through those branches after the Scheme becomes effective, when those EEA branches and employees are transferred to AESA.
60. For policyholders who bought policies in the UK covering risks in the EEA and Switzerland, whose policies will be transferred to AESA, the evidence is that AESA intends to establish a branch in the UK which, subject to consent from the UK Regulators, will jointly employ with AIGUK individuals who can provide the necessary support functions and conduct underwriting and claims handling. The Independent Expert is of the opinion, which seems to me to be reasonable and which is not disputed by the Regulators, that this will mean the continued provision of a materially similar level of service to such policyholders after the Scheme as they currently receive.
61. So far as conduct regulation is concerned, the general rule is that conduct regulation is performed by the insurance regulator in the country in which the risk is located and/or from which the business is being carried out. As such, for holders of policies being transferred to AIGUK and those who bought their policies through a branch of AEL in the EEA, there will be no change to the identity of the regulator responsible for conduct regulation before and after the Scheme.
62. That may also be the position for policyholders with risks in the EEA who are to be transferred to AESA but whose claims are to be serviced by a branch of AESA to be established in the UK, subject to the conduct regulation of the FCA.
63. In addition, the Independent Expert has concluded that even if the claims of such policyholders were to be serviced by AESA from Luxembourg, broadly speaking the Luxembourg conduct regulation regime administered by the CAA places an equivalent obligation of loyalty and good faith upon insurers in dealing with their policyholders as the obligations of fairness to customers under the FCA Handbook. The FCA has not carried out a comparative analysis of the UK and Luxembourg conduct regimes, and accordingly neither agrees nor disagrees with this opinion. However, having regard to the fact that the Scheme is not commercially motivated but is designed to avoid the uncertainties and risks of AEL not being able to service policyholder contracts, the FCA does not object to the Scheme on this basis.
64. For these reasons, the Independent Expert concludes that policyholders transferring to AESA will not be materially prejudiced by the loss of any services and protections as regards conduct of business. I agree with that conclusion.

Ombudsman services

65. The position as regards access to ombudsman services is more complicated.
66. If an insurer and a policyholder cannot resolve a complaint, they may be able to use an ombudsman service. In the UK, eligible policyholders (mainly consumers, micro enterprises, small charities with an annual income of less than £1 million and trusts having a net asset value of less than £1 million) can have recourse to the FOS in respect of activities carried out from an establishment in the UK. The FOS provides an English language service and is able to make a speedy decision applying a fairness test rather than being restricted to application of legal rules. The FOS decision is also legally binding on the insurer. The FOS service will continue to be available to policyholders transferring to AIGUK.
67. Policyholders whose policy was written from a branch of AEL in the EEA and which covers risk in the UK do not currently have an automatic right of recourse to the FOS. However, where those contracts are governed by English law, AEL has "opted-in" (submitted) to the voluntary jurisdiction of the FOS under DISP 2.6.4(1) of the FCA Handbook. AESA intends (having notified the CAA) to continue to opt-in to the voluntary jurisdiction of the FOS under DISP 2.6.4(1) in respect of these policies, so that policyholders in this position will experience no change after the Scheme comes into effect.
68. In addition, to supplement this opt-in and to overcome a concern on the part of the FCA that AESA will not be subject to the FCA's overall supervision after the Scheme, AESA will also give an undertaking to the Court to comply with the relevant provisions of the DISP rules in the FCA Handbook and any valid decision of the FOS in respect of any matters falling within its compulsory or voluntary jurisdiction after the Scheme becomes effective.
69. Policyholders whose policy was written from an EEA branch of AEL covering risks outside the UK were not covered by the compulsory or voluntary jurisdiction of the FOS before the Scheme, and that will not change after it comes into effect. When their policies are transferred to AESA, such persons will gain access to the ombudsman services in Luxembourg (see below) in addition to any available ombudsman services in the jurisdiction in which the branch is located.
70. The only potentially adverse change of position relates to policyholders whose policies were issued in the UK to cover risks in the EEA. The relevant part of these policies will be transferred to AESA by the Cross-border Merger. It is material to note that there is no history of any complaints to the FOS from policyholders in this group.
71. If complaints relate to acts or omissions occurring prior to the Scheme becoming effective, policyholders will continue to have access to the FOS. That will also be the case in respect of complaints relating to any policies which continue to be serviced in the UK through the branch which AESA intends to establish here.
72. However, if complaints arise in respect of activities in relation to such policies which are not carried out in the UK, the policyholders will not have access to the FOS after the Scheme becomes effective. Such policyholders will instead have access to two ombudsman services in Luxembourg, namely the independent National Consumer Ombudsman Service and the Luxembourg Insurance Mediator (together "the Luxembourg Ombudsman Services"). These organisations provide multi-language dispute resolution services, but are not able to make legally binding determinations. If AESA refused to abide by a solution proposed by the Luxembourg Ombudsman Services, the disappointed policyholder would have to seek a judicial resolution in the courts, relying upon the determination of the Luxembourg Ombudsman Services as persuasive evidence in support of his case.
73. AEL has informed the Independent Expert that the total volume of premium written in respect of policies falling into this last category is about 0.35% of its annual premium income. The Independent Expert has concluded that this very small volume of affected policies, coupled with the fact that there could still be recourse to the Luxembourg Ombudsman Services, means that the policyholders transferring to AESA (as a whole) will not be materially adversely affected by the Scheme in this respect. The FCA does not see any reason to object to the Scheme on this basis, and I agree with both these assessments.

The views of the Regulators

74. The Regulators have each been consulted by AEL in the course of formulation of the Scheme. They have also reviewed the communications to policyholders by AEL. Although the Regulators were not represented at the hearing before me, they have each filed detailed evidence commenting upon various aspects of the Scheme and have confirmed that they do not have any objection to it.

The views of objecting policyholders

75. AEL sent out over 2.4 million communication packs, 1.4 million emails and 39,000 texts to its policyholders concerning the Scheme. AEL'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 Scheme. None of the policyholders concerned appeared at the hearing, but I have reviewed each of those communications.
76. The objections were also helpfully reviewed and common issues identified by the Regulators, who commented on them in an annex to the PRA's second report. The issues identified were as follows.

Loss of FSCS protection

77. I have already considered the potential impact of loss of access to the FSCS above.

Loss of insurer identity

78. One long-term policyholder (Ms. Edwards) lamented what she thought were a number of reorganisations that the AIG Group had undergone. She stated that she felt that the company to which her policy was to be transferred was not the company that she had originally done business with, she did not want her life to be affected by Brexit if it were avoidable, and she did not want "to be part of a scheme that is based in the USA." In fact, Ms. Edwards had originally taken out her policy with the UK branch of a US insurer, and it had only been transferred once to AEL in the UK. There had, however, been several changes of name of her insurer.
79. I accept the views of the Regulators that Ms. Edwards' sense of annoyance over the historical and intended changes to her policy does not amount to any tangible material prejudice to policyholders. Her policy will be transferred to AIGUK which will still be a UK regulated company in the AIG Group. I also agree with the FCA's observation that this Scheme is being undertaken by AEL to enable the AIG Group to be able to continue to service other policyholders after Brexit rather than though commercial choice.

Tax issues

80. Two policyholders objected that the Scheme was being carried out (by what they wrongly described as an American company) to reduce payment of tax in the UK. As I have explained, the Scheme is the result of a desire to ensure continuity of service of policyholders after Brexit rather than to avoid tax. Moreover, although the AIG Group hopes that using the Cross-border Merger will be tax neutral in other European jurisdictions, it also has potential benefits for policyholders in terms of recognition. None of these matters supports a conclusion that the Scheme is unfair or materially prejudicial to policyholders.

Ongoing litigation

81. One policyholder in Italy (Casanova di Chiatri SpA) was concerned about the effect of the Scheme on an outstanding claim which it has against AEL. The Scheme contains provisions for proceedings by and against AEL to be continued by and against AIGUK and AESA respectively, and for the reasons that I have set out above, I am satisfied that the order that I am asked to make under section 112(1)(c) FSMA together with the general provisions prescribing the effect of the cross-border merger of AEL and AESA under the Directive will have the desired effect to preserve the continuity of the proceedings so that no material prejudice will be suffered by this policyholder.

No cancellation of policies

82. One policyholder in Northern Ireland (Mrs. Fee) objected to the Scheme after being misinformed by her broker that her policy would be cancelled following Brexit. This was obviously wrong: the purpose of the Scheme is precisely the opposite – namely to ensure continuity of service for policyholders after Brexit. Mrs. Fee's policy will be transferred to AIGUK.

Formalities and authorisations in relation to the Scheme

83. Part VII FSMA and the various regulations made pursuant to section 108(1) FSMA in relation to the transfer of insurance businesses contain a number of procedural requirements. These were considered by ICC Judge Barber on 5 March 2018. I am satisfied that the relevant requirements and the ICC Judge's order have all been complied with.
84. I am also satisfied by the evidence of the PRA (i) that the necessary certificates of (margins of) solvency required by section 111(2)(a) FSMA have been issued by the PRA in respect of AIGUK (on 15 October 2018) and by the CAA in respect of AESA (on 26 September 2018); (ii) that AIGUK and AESA have the necessary authorisations to carry on the business to be transferred to them in the UK and Luxembourg respectively as required by section 111(2)(b) FSMA; and (iii) that the necessary notifications have been given to the regulators in the other relevant jurisdictions in which AEL has carried on business and in which AIGUK and AESA will have branches, and the prescribed time has elapsed without objection.

Conclusion in relation to the Scheme

85. For the reasons that I have set out above, I consider that the Scheme is entirely fair as regards the different groups of policyholders and does not cause them any material prejudice. In my judgment the requirements in section 111 FSMA for sanction of the Scheme have been met, and it is appropriate for me to make an order to that effect. I shall also make an order under section 112 giving effect, where required, to the transfer of assets and liabilities to AIGUK, to the continuation of legal proceedings and other claims against both AIGUK and AESA, and to the other provisions of the Scheme.
86. In accordance with the recent practice established in the recent bank ring-fencing cases such as Re Lloyds Bank plc [2018] EWHC 1034 (Ch) at [250]-[256] I shall make an order in abbreviated form appending a summary of the essential terms and effect of the Scheme.

The Pre-merger Certificate

87. I am also satisfied on the evidence that the express requirements of the relevant CBM Regulations have been complied with in respect of AEL. In particular, the directors' report has been duly prepared and publicised, the provisions as to the treatment of employees have been observed, and the Company held a meeting of its shareholders to approve the merger in accordance with the order of ICC Judge Barber dated 5 March 2018.
88. AEL did not seek, and ICC Judge Barber did not require AEL to hold, a meeting of its creditors to approve the Cross-border Merger with AESA. That is entirely understandable given the nature of AEL's business and the detailed evidence (including the Independent Expert's reports) as to AESA's financial position and solvency after the merger. I have no doubt that the interests of creditors of AEL (whether they be policyholders or other creditors) will not be materially prejudiced by the Cross-border Merger.
89. I therefore consider it appropriate to issue a certificate under Regulation 6 that AEL has complied with the necessary pre-merger requirements.

Filing of documents

90. That concludes the matters which I have to decide. However I wish to make some brief observations on one aspect of the procedure in this case.
91. As is apparent from the analysis above, this was a complex and substantial matter involving some novel points. The evidence and relevant documents filled four lever arch files, and the reports of the Independent Expert and the Regulators were detailed and required careful study.
92. The hearing in this matter had been arranged well in advance for Thursday 18 October 2018. At that stage, the estimate given to the Court Listing Office was for a short hearing with limited pre-reading. It was only when a hard copy of counsel's Skeleton Argument was lodged on Wednesday 17 October 2018, i.e. the day before the hearing, that it became apparent that the estimated time required for pre-reading was in fact 5-6 hours, and that the hearing estimate had also increased significantly to 3 hours. Counsel's clerk very properly drew this to the attention of the Court Listing Office and apologies were rightly offered, but it was entirely fortuitous that I was not in court and was able to be diverted from other work to pre-read and hear the matter, albeit to the detriment of other litigants waiting for a judgment to be written.
93. This is not the only case in recent weeks where pressure has been put on the Court and the lists in this manner. As Briggs J made clear in the Pearl Assurance case (above) and as has been emphasised by other Judges on numerous occasions, the Court is not a "rubber-stamp" for schemes of this (or any other) type. That means that the Judge needs to be given adequate time for pre-reading and for the hearing. In a substantial matter of this nature, counsel and solicitors must ensure that the Court Listing Office is informed well in advance of the true extent of the matter so that a suitable Judge can be assigned and given sufficient pre-reading time in his or her schedule. The hearing bundles and skeleton argument must also be lodged well in advance and certainly no later than two clear days before the hearing as required by paragraph 21.77 of the Chancery Guide. Whilst this Court will always do what it can to accommodate the business needs of its users, as the Chancery Guide makes clear, parties who do not assist in this way may find their hearings adjourned or taken out of the list until adequate time can be found.