English Courts sanctioning Brexit Business Transfer Schemes

In order to be able to provide services post Brexit and post transition periods and temporary permissions, many former UK insurance companies have created European operations including EU regulated branches or entities or in case of Lloyd´s Syndicates and their Managing Agencies distribution and underwriting units including Service Company Coverholders.

In the recent Matter of Mercantile Indemnity Company Limited, on 16 June 2022, the High Court of England and Wales (please see [2022] EWHC 2223 (Ch), 2022 WL 02166535) sanctioned three business transfer schemes under the Financial Services and Markets Act 2000 s.111. The schemes allowed three UK insurance and reinsurance companies to transfer their policies to a Belgian company in their holding group, thus allowing their business to be conducted in the European Economic Area following Brexit.

The court emphasised that it was appropriate to sanction the schemes because they were not intended to serve a commercial purpose, but to ensure that a proper level of service could be provided to policyholders.

The applicant insurance and reinsurance companies applied for the sanction of the court for three business transfer schemes under the Financial Services and Markets Act 2000 s.111.

The first three applicants were insurance and reinsurance run-off companies incorporated in the UK. The fourth applicant (Alpha) was a composite insurance run-off company incorporated in Belgium. They were all part of the same holding group. Following Brexit, UK-based insurance undertakings were no longer able to exercise passporting rights to provide cross-border services and conduct business in the European Economic Area (EEA). For that reason, the first three applicants proposed to transfer their policies to Alpha so that those policies could be serviced in Belgium, as an EEA state. Three separate schemes were proposed, but they were approached as a single, unified transaction.

The key authority on the approach to the court's exercise of its discretion to sanction a scheme was Prudential Assurance Co Ltd, Re [2020] EWCA Civ 1626, [2021] 2 All E.R. (Comm) 1051, [2020] 12 WLUK 15, which set out guidance which the court needed to have primarily in mind. The process of evaluation depended on the nature of the particular transfer. It was unnecessary to show that the transfer would be beneficial to the policyholders and other interested parties affected: the test was whether it would have a material adverse effect on them, Prudential Assurance followed.

The court decided it was appropriate to sanction the transfer schemes for the following reasons:

• Most importantly, the schemes were not intended to serve a commercial purpose. The evidence made it clear that the schemes were required to ensure that following Brexit a proper level of service could be provided to policyholders. That need was dictated by external events. In the context of Brexit, the court might give a degree of latitude.
• The proposed schemes were the product of a reasoned commercial decision by the applicants to provide a proper level of service, they had been scrutinised in detail by an independent expert who had concluded that they would have no material adverse effect on policyholders or other interested parties. The regulators, both the Prudential Regulation Authority and the Financial Conduct Authority had no objections. The accepting company Alpha, being subject to the National Bank of Belgium´s oversight, also did not receive any negative feedback from the respective Belgian authority.
• Policyholders had been notified of the application and there had been no objections. A relatively small number of policyholders were affected. The scheme did not involve the transfer of a large insurance book.

This judgement presents an example of the courts taking into account all aspects – legal, regulatory as well as business interests – when assessing the validity of Brexit solutions - in this case the business transfer to a regulated EEA entity. Companies interested in pursuing a similar way in light of the recent developments about the validity of 3rd country solutions, secondments etc. should take all these aspects into account and reflect them in the respective applications to regulators and the courts.