Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2012] CSOH 5
P1981/08	OPINION OF LORD GLENNIE in the Petition of THE SCOTTISH LION INSURANCE COMPANY LIMITED Petitioner; for an order under Section 896 of the Companies Act 2006 and for sanction of a Scheme of Arrangement under Section 899 of the Companies Act 2006 ­­­­­­­­­­­­­­­­­________________

Petitioners: Howie QC, Delibegovic-Broome; Morton Fraser LLP

Respondents: Weir QC, Munro; Simpson & Marwick, WS

Noters: Lord Davidson of Glen Clova QC; Dundas & Wilson, CS

13 January 2012

Introduction

[1] This is a further chapter in the petition by The Scottish Lion Insurance Company Limited ("the Company") for sanction of a scheme of arrangement ("the scheme") under s.899 of the Companies Act 2006 ("the 2006 Act"). The petition is opposed by five creditors of the Company ("the respondents").

[2] The question at issue on this occasion is one of further procedure. Should the issues be resolved by allowing the parties to continue in the same manner as if it were a fully contested action, with fully developed pleadings, recovery of documents, and deployment of witnesses (both factual and expert)? Or should the court return to its remit to the reporter to enquire into and report to the court upon the facts and circumstances set forth in the petition and the regularity of the present proceedings, before hearing such legal (and possibly other) argument as might arise on the issues identified by his report? The respondents argue for the former (or at least a modified version of it); while the Company argues that, in the circumstances as they are now shown to be, the latter course is appropriate.

Procedural history to date

[3] Before turning to the competing considerations, I should set out briefly the procedural history of the matter to date. This is only intended as a summary. The details of the scheme and the issues between the parties, together with a more detailed account of the procedural history, can be gleaned from earlier Opinions in this case, namely: my Opinion of 10 September 2009 (reported at 2010 SLT 100) dealing with certain preliminary issues; the Opinion of the Inner House on one of those issues, delivered by the Lord President (Hamilton) on 29 January 2010 (2010 SC 349); my Opinion of 8 July 2010 (unreported, [2010] CSOH 87) in relation to a claim by the noters for privilege; and the Opinion of the Inner House on that question, delivered by Lord Reed on 8 March 2011 (reported at 2011 SC 534).

[4] The petition was presented on 9 December 2008.

[5] On 15 December 2008 I made an order in terms of s.896 of the Companies Act 2006 for the holding of two separate meetings of creditors for the purpose of considering the scheme, one meeting being of creditors with non-IBNR claims and the other of creditors with IBNR claims. At the date the order was made, it was perceived by the petitioners that these constituted the only two distinct classes of creditors for the purposes of considering the scheme. Such meetings of creditors are an essential pre-condition of the court's jurisdiction to sanction the scheme: in terms of s.899 of the Companies Act 2006 the court's power to sanction the scheme only arises if a majority in number representing 75% in value of the class of creditors present and voting either in person or by proxy at those meetings agree to the scheme.

[6] The meetings of creditors were held on 2 March 2009.

[7] On 23 April 2009, the chairman of the meeting reported to the court, in accordance with the interlocutor of 15 December 2008, that the requisite majorities both by number and by value had been obtained amongst each class of creditors.

[8] On 29 April 2009, on the application of the Company, I made an order for advertisement of the petition and for the lodging of answers by anyone claiming an interest.

[9] The respondents, who are scheme creditors with both IBNR and non-IBNR claims, lodged answers both objecting to the scheme and challenging the way in which the votes were valued for voting purposes.

[10] The details of their contentions on both fronts are summarised in the earlier Opinions to which I have referred and I need not repeat them here. The issue as to the values to be attributed to votes cast in each class, and the impact which the adjustments to such values (which were carried out by the chairman of the meeting and the Independent Vote Assessor ("IVA")) had on the achievement of the requisite majorities, is shown starkly in paras.[28] and [29] of my Opinion of 10 September 2009. For present purposes, however, it is of greater importance to note their objections to the scheme itself. Their contention is that occurrence-based coverage represents a valuable and irreplaceable business asset, the benefit of which they would prefer to retain, not least because "replacement occurrence-based coverage is no longer available on any insurance market at any price". The value of scheme liabilities, especially in regard to IBNR claims, is likely to be so heavily discounted under the scheme that they will receive little if any compensation for being deprived of the protection which their purchase of occurrence-based coverage has given them. They say that their "overarching objection" to the scheme is that it amounts to a

"... confiscation of their valuable rights, for which they have paid substantial premiums, for no or wholly inadequate compensation". (Answers para.8.3)

They elaborate on this in answer 6.2. The scheme amounts to "a confiscation of their rights":

"... If the Scheme is sanctioned, it will have the effect of compulsorily transferring the risks assumed by the Company (in return for the payment by Scheme Creditors of substantial premiums) back to policyholders, thereby depriving them, for little if any compensation, of the measure of finality and certainty their purchase of occurrence-based coverage had given them."

In answer 13 they say that

"... the Scheme is fundamentally unfair. It involves the confiscation of valuable, and irreplaceable, insurance cover purchased by Scheme Creditors at substantial premiums."

The pleadings were developed to focus these issues.

[11] Schemes of arrangement frequently attract no opposition. It was, however, clear from the outset that this was not such a case, albeit the full extent of the objections (and in particular those relating to the valuation of the votes cast for and against the scheme at the creditors' meetings) was not then known. Accordingly, when the matter first came before the court a four-day hearing was "pencilled in" for 7 July 2009 and the ensuing three days. At a By Order hearing on 22 June 2009 the court was told that a fully contested hearing could not take place on those days, in part because of the work required to focus the issues in relation to valuation of votes at the meetings and to gather evidence to be adduced at a proof on the point. It was decided, however, that those dates could be used effectively to resolve at debate two issues identified in parties' notes of argument lodged in advance of the By Order hearing.

[12] That debate was heard on 7-9 July 2009. My decision in favour of the respondents on both points and dismissing the petition was issued on 10 September 2009. The Inner House reversed that decision on one of the points in January 2010. My interlocutor dismissing the petition was recalled.

[13] In the meantime, the respondents had sought to recover documents relating to the valuation of creditors' claims for voting purposes, in order to be able effectively to present their case that the adjustments made to the voting figures were illegitimate. [14] On 10 July 2009, I made an order for recovery of documents, the order containing a number of provisions agreed between the petitioner and the respondents which were designed to address issues of confidentiality. Amongst other things, those provisions allowed redaction from the documents of such information as might reveal the identity of the creditor referred to in the document. That order was varied on 25 August and 7 September 2009 to adjust certain of the detailed provisions for production of the documents; and also to allow the noters (other creditors who had supported the scheme and who had entered the process for this specific purpose) to raise claims for privilege and confidentiality in respect of their documents.

[15] This process was interrupted in September 2009 by my decision on the points argued at debate (see para.[12] above), and only resumed some time after the decision of the Inner House in January 2010.

[16] Thereafter, pursuant to an order made on 28 May 2010, the noters fleshed out their claim for privilege in a Summary Note. That claim was met by a contention that any privilege had been waived. I heard argument on the question of waiver.

[17] On 8 July 2010 I held that any legal professional privilege in the documents had been waived by virtue of their having been disclosed for the purpose of valuing the votes cast at the statutory meetings. The Inner House upheld my decision on that point on 8 March 2011.

[18] That decision, which related to waiver of privilege, did not formally decide any issues relating to confidentiality. This is, of course, a separate issue from that of privilege. It might have been thought, however, that the decision on waiver of privilege, combined with the measures already put in place to protect confidentiality and the comments in the Opinion of the Inner House on that question, would have resolved the confidentiality issue too. That proved not to be the case. The noters continued to resist disclosure on grounds of confidentiality.

[19] A previous interlocutor had remitted the question of recovery of documents, and in particular any claims to commercial confidentiality, to a commissioner. In the ordinary course, a commissioner would hear the argument on confidentiality and report to the court, which would then hear argument on any disputed matters. It was agreed, however, that in the present circumstances that course would simply lead to duplication of expense, and that it would be more expeditious for court to appoint itself as commissioner and hear the arguments on confidentiality. This was done.

[20] A hearing took place on 19 and 29 July 2011. The arguments were detailed and wide-ranging. However, at the end of the hearing I was asked to delay producing a decision on the issue because a point had arisen which might dispense with the need to do so.

[21] That point had been trailed in previous hearings. It was mentioned by the Inner House in para.[48] of its Opinion of 29 January 2010, and also in para.[42] of its Opinion of 8 March 2011. The respondents had then indicated that they proposed to amend their answers to add a contention that the claims of certain creditors had been agreed (whether for voting purposes or as to the amount payable in respect of the claim) in advance of the creditors' meeting; that those creditors whose claims had been so agreed formed one or more separate classes for voting purposes; and that there should have been separate meetings of creditors falling within such classes. As the point has developed, the respondents' argument is that when the creditor entered into an agreement as to the value of its claim, it ceased to be a Scheme Creditor and became instead the holder of an Unpaid Agreed Claim, which the Scheme provides shall be administered outwith the Scheme. Such creditors should not have been admitted to vote on the scheme at the creditors' meetings at all. Alternatively, they should not have been admitted to vote in the IBNR class. I shall refer to this new issue as the "class issue".

[22] When the point was raised before me in July 2011, there was some uncertainty as to whether or not a Minute of Amendment raising the class issue had been lodged. But both parties were at that time in agreement that the issue was a live one and was of critical importance because, if the respondents' contention was correct, there would not have been valid statutory meetings of the correct classes of creditors in terms of s.896 of the Act, and the court would not have jurisdiction under s.899 to sanction the scheme.

[23] Although anxious to avoid further delay, the petitioners suggested that the class issue could be resolved at debate, their argument being that the respondents' arguments on this point were irrelevant (wrong in law). They did not wish to proceed with this issue hanging over them unresolved. As Mr Howie QC put it, while protesting that the respondents' point was a bad one: if the petitioners were going to lose on this point, they would prefer to lose quickly and cheaply (those expressions being used, given the history of this case, in a relative sense). The respondents opposed this course, contending that the point was "fact sensitive".

[24] I concluded that the petitioners were entitled to seek to have the class issue debated - it was their petition, the consequences of delay would be particularly felt by them, and if they wished to take the risk that another perceived short cut should turn out to be a blind alley, that was a matter for them. I appointed the debate to take place on 8 November 2011.

[25] However, just before that date the petitioners indicated that they no longer wished to have the class issue determined in this way. The reason, they said, was that there were a number of facts requiring to be resolved first.

[26] As a result, the hearing on 8 November 2011 was used as an occasion for a discussion about further procedure. The respondents submitted that the class issue could be resolved by a preliminary proof on the point. The petitioners, for their part, suggested that the court should revert to a process by which the matters in issue should be dealt with in the first instance by a remit to the reporter. The reason given by the petitioners for this proposal was that there had been a material change of circumstances. It could now be said that, although they still had title to oppose the petition, the respondents could no longer show that they had any substantive or practical economic interest in doing so. In those circumstances, while the court still had to be satisfied that it should sanction the scheme, and in particular that it had jurisdiction to do so, it would be wrong to allow the respondents to insist that these matters be dealt with by way of proof (whether of the whole matters or by way of preliminary proof on the class issue), which would only lead to further delay and expense, rather than by the route of the remit to the reporter. Further delay was potentially prejudicial to the success of the petition.

[27] Before turning to identify the alleged change of circumstances and consider the competing arguments, I should at this stage identify certain features of the procedure to date that flow from the above.

Summary of relevant procedural features of the litigation to date

[28] The first point to make at this stage is that a reporter was appointed by the court in its order of 15 December 2008. In para.13 of the interlocutor of that date, the court appointed Mr David Bennett WS

"... to enquire into and report to the court upon the facts and circumstances set forth in the petition and the regularity of the present proceedings."

Mr Bennett is a solicitor who has acted as reporter in respect of numerous schemes of arrangement. He is independent of the parties in this case. As was pointed out in para.[19] of the Opinion of the Inner House of 8 March 2011, the wording of the interlocutor appointing him is the standard form of wording used in a case such as this, and enables the scope and depth of the investigation carried out by the reporter to reflect the requirements of the particular case. At the time of his appointment, the full extent of the opposition to the petition was, of course, unclear. It was known that a number of creditors (not limited to the present respondents) objected to the scheme on its merits. But it was not known - and could not have been known, since the meetings had not by then been held - that there would be an objection to the validity of the meetings of creditors or as to the results of the voting. Nor was it known that any of the issues raised would require recovery of documents or anything in the nature of a fully contested proof. Any question of allowing a proof lay in the future. It follows, with respect to the suggestion to the contrary in para.[19] of the Opinion of 8 March 2011, that the remit to the reporter in the interlocutor of 15 December 2008 was a general remit of the standard kind.

[29] I am informed that the reporter duly embarked upon an examination of the facts and circumstances set out in the petition and the regularity of the proceedings. He has not yet reported. I understand that he took the view, which was understandable in the circumstances, that he should suspend his consideration of the matter pending the resolution of the other steps which I have described in the preceding paragraphs.

[30] The second point to make is that the appointment of the reporter has to some extent been overtaken by events. In its interlocutor of 22 June 2009, the court granted warrant to cite witnesses and havers. As was pointed out at paras.[18] and [30] of the Opinion of the Inner House dated 8 March 2011, that implies the allowance of a proof, though not necessarily on every issue (see also para.[1] and [18]). The intention at the time was, as I recall, that the issues relating to voting and the valuing of votes be dealt with in this way. I do not think that it was necessarily the intention of the court or of the parties that every aspect of the petition should require formal proof. Clearly, however, the allowance of proof to any extent cuts across the remit to the reporter. To the extent that the matters covered by the remit are to be dealt with by a proof, the role of the reporter will become one "of an informative character" (see para.[19] of the Opinion of 8 March 2011).

[31] The third point relates to the nature and, more particularly, the duration of the process by which the court sanctions or refuses sanction to a scheme of arrangement such as is presently before the court. In my opinion, it is clearly desirable that the decision whether or not to grant sanction to a scheme of arrangement should be made promptly, within a short time after the creditors have voted on it at meetings ordered under s.896 of the Act. That is implicit in the statutory provisions. The court acts on the basis of the views of the creditors expressed in the statutory meetings ordered under s.896. But matters are not frozen by the occurrence of such meetings. Events move on. Creditors at the time of the meetings may no longer be creditors a few months later; there may be new creditors emerging after the meetings; or creditors in one class might move into another class. If the sanction hearing under s.899 is to be informed by the votes of creditors at meetings held in terms of s.896, as it must be as a matter both of jurisdiction and of discretion, it would appear to be essential for the sanction hearing to take place at a time when the results of the meetings of creditors can be expected still to offer a reasonable guide to their views.

[32] In practice, this seldom gives rise to any difficulties. In a typical case there is no formal opposition to the petition; no answers are lodged, and the sanction hearing usually takes place no more than a few weeks after the court receives the report of the creditors' meetings. The process is a summary one. The reporter lodges his report with the court, with a copy to the petitioning Company, just before the hearing. In his report, the reporter will report upon the facts and circumstances set forth in the petition on the basis of his own investigations and enquiries and his own examination of the documents. He will also identify and offer his opinion on any issues which, in his view, might affect the regularity of the proceedings, including any issue going to jurisdiction, such as the composition of classes of creditors for the purposes of creditors' meetings under s.896 of the Act and the attainment of the majorities at such meetings required by s.899 ("a majority in number representing 75% in value"). In a case where a disgruntled creditor has raised an issue, the reporter will consider and report upon that issue too, whether or not that creditor has joined in the proceedings by lodging answers. The possibility of delay beyond this is likely only to arise in a case where an opposing creditor enters the process. Even then, in most cases the sanction hearing will usually take place without undue delay. The reporter will still report in the same way. Arguments about the fairness of the scheme can be raised at the sanctions hearing, usually without the need for evidence. So too can the class issues and the issue about the valuation of the votes cast at the meetings of creditors held under s.896. Indeed, as already indicated, at the time of the order appointing creditors' meetings to be held, a four day hearing was pencilled in for 7 July 2009 and the ensuing three days with a view to resolving all the issues and reaching a decision on whether to sanction the scheme.

[33] That, of course, was before it was appreciated that there would be a challenge to the reported results of the voting at the meetings of creditors. That issue, if played out as a full dress proof, has the potential to require extensive recovery of documents and expert analysis leading to a proof of perhaps two weeks duration, possibly more if (as has been suggested) the issues include issues of law and insurance practice in a number of different states in the United States. And before parties get anywhere near to having a full proof, there remain issues about recoverability of documents, with the noters, as I have indicated, continuing to oppose production of their documents on grounds of commercial confidentiality, and with the prospect of one or other party to that dispute wishing to take the matter further on appeal to the Inner House or elsewhere.

[34] It would, as the respondents suggest, be possible to split up the issues, and deal with the class issue by way of preliminary proof, thus shelving (for a time at least) the disputes about recovery of documents, that course itself would require some time for factual investigation before a preliminary proof could take place, and there would then be the prospect of an appeal against whatever decision I reached, which could (depending on the outcome) result in the matter coming back yet again to the Outer House for resolution of the remaining issues.

[35] This case has already been running for far longer than is desirable for a case of this sort. As matters stand, and if matters continue to be dealt with by the procedures adopted to date, it seems unlikely that there will be any decision on the petition for sanction of the scheme for a considerable time yet to come.

[36] The fourth point is expense. That is, of course, linked closely with the time taken to resolve these proceedings. But the anticipated investigations into the values attributed to different votes at the meetings of creditors, including the instruction of experts in different fields, means that the expenses likely to be incurred by all parties, both in getting the case to proof and in conducting the proof, are likely to be very high indeed.

Petition procedure and the role of the reporter

[37] Petition procedure in the Court of Session is very flexible. In a case where answers have been lodged, Rule of Court 14.8 provides as follows:

"14.8. Where answers to a petition have been lodged, the petitioner shall, within 28 days after the expiry of the period of notice, apply by motion for such further procedure as he seeks, and the court shall make such order for further procedure as it thinks fit." (emphasis added)

The flexibility of petition procedure is confirmed in para.[18] of the Opinion of the Inner House of 8 March 2011, where, after explaining the difference between proceedings by way of petition and proceedings by way of summons, the court went on to emphasise the wide discretion as to procedure enjoyed by the court:

"[18] In petition procedure, the court possesses a wide discretion, subject to any specific provision in the Rules of Court, to determine the form of procedure which is most appropriate in the circumstances (c.f. Tomkins v Cohen 1951 SC 22 at page 23 per Lord Keith). In relation to unopposed petitions, Rule of Court 14.9 provides that 'the court shall ... after such further procedure and inquiry into the grounds of the petition, if any, as it thinks fit, dispose of the petition.' In relation to opposed petitions, Rule of Court 14.8 provides that 'the court shall make such order for further procedure as it thinks fit.' The court's inquisitorial role in relation to petitions is also made clear by section 25(2) of the Court of Session Act 1988, in terms of which the court may make such investigation and require such assistance from professional persons as it thinks fit. Whether the petition is opposed or unopposed, the court may in particular remit to a reporter to carry out such enquiries on behalf of the court as may be necessary and report on his findings to the court. In some classes of petition there is invariably a remit to a reporter; and petitions for the approval of schemes of arrangement fall into that category (cf. Practice Note No 2 of 1976). Where the petition is opposed, the court may also order a proof (the allowance of proof being signified by the granting of a warrant to cite witnesses), or may order affidavits or allow a hearing on the petition and answers without evidence being adduced."

This is important. A proof, whether at large or confined to particular issues, is by no means the default position in petition procedure. Except where some other provision requires it, no party has a right to insist on a proof. Nor does any party have a right to seek to recover documents. The default practice in applications of this sort is to remit to a reporter to carry out enquiries on behalf of the court and to report to the court at the conclusion of his enquiries.

[38] Further analysis of the role of the reporter, under reference to the procedure in this case to date, is to be found in para.[19] of that Opinion:

"[19] In the present case, in terms of paragraph 13 of the interlocutor of 15 December 2008 the court appointed Mr Bennett 'to enquire into and to report to the Court upon the facts and circumstances set forth in the petition and the regularity of the present proceedings'. That is a standard form of wording, whose flexibility allows the scope and depth of the investigation carried out by the reporter to reflect the requirements of the court in the particular case. Mr Bennett is a solicitor who is independent of the petitioner and of PwC and has previously acted as a reporter in respect of numerous schemes of arrangement, including the scheme which was proposed by the petitioner in 2005 and subsequently withdrawn. As we shall explain, the Lord Ordinary has also allowed a proof on the petition and answers. In the circumstances, the remit to the reporter must be understood as being of an informative character (c.f. the discussion of different types of remit in Thomson and Middleton, Manual of Court of Session Practice, page 397; Maxwell, The Practice of the Court of Session, page 312): that is to say, the remit is designed to provide the court with independent information which, although not conclusive (see e.g. La Lainière de Roubaix v The Glen Glove & Hosiery Co Ltd 1926 SC 91), will assist it in carrying out its functions. That that was the Lord Ordinary's intention is confirmed by his Opinion dated 8 July 2010, at paragraph 24."

I have already expressed a slight reservation about the statement that the remit to the reporter must be understood, at the time it was made, as having been "of an informative character", since at the time of the remit there had been no decision to allow anything in the nature of a proof. With that one qualification, I respectfully agree with the description both of petition procedure and the role of the reporter.

[39] I would approach the question of procedure in the present case by asking: what is the most appropriate procedure in all the circumstances for achieving a fair and just resolution of the petition, having regard in particular to the nature of the application, the matters in dispute and the interests of the relevant parties.

[40] Although allowance of a proof on the voting issue was not, as I recall, a matter of any controversy, the absence of controversy and the allowance of a proof on that issue was, so it seems to me, inevitably influenced by the respondents' contention not only that the assessment of the result of the voting was illegitimate but also that, in addition, the effect of the scheme on them was confiscatory. That being so, or at least that being a matter of reasonable contention, it was accepted without question that the court should allow the respondents the fullest opportunity to put forward their case in opposition to the grant of sanction.

The alleged change of circumstances and its impact on procedure

[41] The change of circumstances which Mr Howie places before the court is this. In their answers to the respondents' Minute of Amendment as adjusted, the petitioners admit the respondents' averment that the Company

"... was sold in April 2010 to the National Indemnity Company, a subsidiary of Berkshire Hathaway Inc., an American corporation based in Omaha."

But they go on to add this:

"Explained and averred that replacement cover on the on the same terms to those of the several insurances with the Company of the 'irreplaceable' nature of which the respondents complain has been available to the respondents, but they have not availed themselves of it. The offer of replacement cover is and will be available to the respondents until 31 December 2011, on the following terms. The cover offered is by Tenecom Limited ('Tenecom'), a Berkshire Hathaway company. The cover would be provided by way of a novation agreement, whereby Tenecom would assume all the petitioner's rights and obligations under the respondents' policies and the petitioner would be released of the same. That would result in the respondents having the same cover as they currently have in place with the petitioner. Tenecom has a stronger balance sheet than the petitioner. The replacement cover would be at no extra cost to the respondents; no additional premium or any other charge would be payable either to the petitioner or to Tenecom. ..."

The petitioners then go on to give further details of Tenecom, referring to key personnel, to their latest audited accounts, to their re-insurance position and to their claims handling philosophy.

[42] The petitioners therefore now put in issue the contention which has been at the heart of the respondents' objection to the scheme from the outset, namely the contention that the effect of the scheme was confiscatory and would deprive the respondents of any like for like occurrence-based insurance cover, transferring back to them the risks which, by their payment of substantial premiums, had been assumed by the petitioners.

[43] The availability of alternative like for like cover at no additional cost to the respondents enabled Mr Howie to argue that, whereas the respondents might at an earlier stage have had a substantial economic interest in the outcome of the petition, now they had none. The position now was that, although, as creditors of the Company, the respondents clearly had title to oppose sanction of the scheme, they had no significant interest in the outcome. A party in that position, he argued, should not be entitled to insist on the disputed issue of the voting valuation being resolved by a full proof, accompanied by arguments about recovery of documents, when, given the delay inherent in it, such a procedure would by its very nature threaten to derail the possibility of the petition ever being successful. Petition procedure was sufficiently flexible to allow the court at this stage to revert to the "reporter route", with the possibility (albeit no more than that) that a full proof and related issues of recovery of documents will ultimately prove to be unnecessary. By the reporter route the important issues would still be considered fully; and there would remain scope for the respondents to continue to play a part at the sanctions hearing, or at any other stage when it appeared to the court that it was necessary or desirable that they should do so.

[44] I should explain that averments about the availability of replacement cover were first sought to be introduced into the petitioners' pleadings under reference to discussions between the parties about replacement cover which were alleged to have taken place sometime in 2010. The respondents objected to the introduction of those averments on the ground that such discussions took place on a without prejudice basis and, therefore, should not be referred to. The matter was discussed before me at the hearing of 8 November 2011 and again at a hearing on 11 December 2011. Mr Weir QC, for the respondents, submitted that if the petitioners sought to insist on referring to discussions in 2010 in relation to the offer of alternative cover, they should be ordered to set out in their pleadings their case on why the discussions could be referred to and there should then be a preliminary proof on the question of whether such discussions were conducted on a "without prejudice" basis. That course struck me as wholly undesirable. It also seemed to me to be unnecessary. In my view, the real question, for the purpose of the discussion, was whether replacement cover on a like for like basis at no extra cost to the respondents was now on offer. Save in so far as it might be relevant to arguments about expenses (costs), the court should not allow itself to be distracted by another point which was likely to lead to further delay and the risk of yet further satellite litigation. Accordingly, I suggested that the petitioners re-cast their pleading so as to set out their present case as to the availability of such replacement cover on such terms, omitting all reference to discussions in 2010, and they did this. It will, of course, be open to them to seek to refer to the disputed exchanges of 2010 should the point become live, and any argument about whether the discussions were or were not without prejudice can take place then. For present purposes, however, it seems to me that that is unlikely to be necessary.

[45] Mr Weir did not contend that the court had no power to accede to Mr Howie's motion at this stage. But he argued forcefully that it was not the appropriate course to take at this stage of the proceedings. He challenged Mr Howie's assertion that the respondents no longer had a substantial interest in the outcome of the petition; and he also submitted that, even if this was the case, the respondents should still be allowed to proceed by way of proof.

[45] As to the question of substantial interest, Mr Weir questioned whether the so-called replacement cover would be as valuable. There had been no assessment of Tenecom carried out by the respondents, actuarial or otherwise. Much of Tenecom's assets and sources of funding appeared to be in the form of re-insurance from unidentified companies, the value of which was uncertain. There was no indication of the value that Tenecom would place on the respondents' potential claims or, in any detail, what their claims handling approach would be now or in the future. Nor could the possibility of Tenecom itself being the subject of a scheme of arrangement be excluded. In some circumstances, these points might have provided a basis for saying that there was serious doubt about the replacement cover being offered, though many of them, such as those relating to future assets and their future claims handling approach might equally be asked of the petitioners themselves. Had the respondents sought more time to consider the adequacy of the offer of replacement cover, I might have acceded to that request, subject to being satisfied that that request was made in good faith and not for the purpose of delay. But no such request was made, nor was any explanation given as to the respondents' obvious lack of interest in investigating the position shown by their conduct to date. Mr Weir tentatively suggested that any proper enquiry into the adequacy of the replacement cover would be likely to take months, involving careful actuarial analysis of the position of Tenecom. On the information placed before the court, however, it is clear to me that, for whatever reason, the respondents are simply not interested in investigating the details of the replacement cover being offered. I noted Mr Weir's submission on behalf of his clients as being: we want to keep what we have got, and we are not interested in any alternative cover that might be offered. I read my note back to him and he confirmed that that was indeed his clients' position.

[46] Mr Weir argued in addition that, whatever the merits of the replacement cover on offer, it did not come free of charge to the respondents. He referred to the legal expenses incurred by the respondents in contesting the petition. Those expenses should be regarded as part of the price the respondents were being required to pay for the offer of replacement cover. The petitioners had refused to pay those expenses as part of their offer. To my mind there is nothing in that point. The question of legal expenses will be determined by the court in due course on the application of any parties who claim that an award of expenses should be made in their favour. The choice at this point for the respondents, in terms of insurance cover, is between their present cover with the petitioners, if the petition fails, some replacement cover (such as that on offer from the petitioners), or no future cover. Whichever they end up with, the expenses to date have been incurred already, and may or may not be recoverable from other parties as part of their legal expenses. Subject to the order of the court on expenses, the respondents' expenses are not payable by them only in the event that the offer of replacement cover is accepted. They are payable equally if the offer is refused and they keep their present cover or are left with a payment out of the scheme. In truth, the legal expenses incurred to date form no part of any price or consideration for the new cover being offered. They are entirely separate.

[47] In those circumstances, while I cannot make an informed judgment as to the adequacy of the replacement cover offered by the petitioners, the respondents have put forward nothing to justify their assertion, which has not been retracted, that the effect of the scheme continues to be confiscatory. On the contrary, on the material before the court, the position appears to have changed.

[48] Mr Weir advanced two other arguments. First, he argued that he had title, and therefore was entitled to insist on vindicating his opposition by a full enquiry on the evidence (by proof). There is no question but that his clients have title. They are creditors and are entitled to oppose. But, for reasons which I have already set out, that does not necessarily entitle them to have the disputed issues remitted to proof. Secondly, he argued that his clients had an interest, by virtue of their position in the market, both in testing the entitlement of an insurer to insist on a solvent scheme of arrangement (a matter of market interest) and in challenging the procedures by which the votes were valued for the purpose of the meetings of creditors. I agree. But it does not follow that they are entitled on that account and without more to insist on a proof of such matters. Petition procedure allows the facts to be ascertained and the issues to be brought before the court for determination in other ways.

[49] I am entitled to consider the question of procedure afresh, and the contrary was not argued. The present options appear to me to be these:

(1) to continue down the path of allowing a full proof on the disputed issues;

(2) to continue down that path in principle, but taking it in stages, the first stage being the allowance of a preliminary proof on the class issue;

(3) to go down the reporter route, asking him to complete his investigations and report to the court upon the facts and circumstances set out in the petition and answers and upon the regularity of the present proceedings, so that the court can then be addressed by interested parties at a sanctions hearing.

It seems to me that the first course will inevitably be prolonged and will, in all likelihood, become side-tracked (if not de-railed) by further issues about recovery of documents from the noters and satellite litigation in connection therewith. The second course is also likely to be prolonged and, depending on the outcome, is likely to involve further appeals. By contrast, the third course is likely to lead to a sanctions hearing within a few months. If at that stage it can be shown that further enquiry requires to be undertaken, so be it. If not, the legal and factual issues can be addressed on the basis of the reporter's report.

[50] None of the above seeks to minimise the importance of some of the issues raised. The class issue, for example, is clearly central to the question of jurisdiction and will require careful consideration. So will the valuation of votes cast at the meetings. This decision only lays down the procedure by which these matters may most conveniently be brought before the court for decision in a relatively efficient and non-fragmented way.

[51] Finally, I should note this. The petitioners' offer of replacement cover had a cut off date for acceptance. As I indicated to Mr Howie at the last hearing, my approach to the question of substantial interest and future procedure is predicated upon the respondents being given a reasonable opportunity of considering that offer even after the cut off date. What is reasonable will be a question of fact in all the circumstances. If the offer is unreasonably withdrawn in circumstances where the respondents wish to avail themselves of it, the court will be entitled, on an application by the respondents, to re-consider the question of procedure, either before the reporter has completed his remit or at the sanctions hearing itself.

[52] For the above reasons, I shall simply order the reporter to complete his remit and report to the court in accordance therewith.

[53] There were certain motions in respect of recovery of documents which were stood over to await my decision on procedure. I anticipate that they will no longer be insisted in at present. However, any party seeking any such orders is free to apply to the court by motion in the usual way.

[Since issuing this Opinion my attention has been drawn to my use of the words "alternative" and "replacement" in paras [44] to [47] in describing the cover said to be on offer to the Respondents. Lest there be any misunderstanding, I should make it clear that I did not intend thereby to draw any distinction between "replacement cover and "alternative cover" - the expressions were used synonymously.]