Case No: 923 of 2015

Neutral Citation Number: [2015] EWHC 3077 (Ch) 
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
The Royal Courts of Justice 
Strand 
London 
WC2A 2LL

Wednesday, 1st July 2015

BEFORE:

MR JUSTICE NORRIS

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In the matter of 
SYNCORA GUARANTEE (UK) LTD

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MARTIN MOORE QC (instructed by Hogan Lovells International LLP) appeared on behalf of the Claimant

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Judgment
MR JUSTICE NORRIS:  

1.	Syncora Guarantee (UK) Ltd (“Syncora UK) is an English company.  It is a subsidiary of a New York company, Syncora Guarantee Incorporated (“Syncora Incorporated”).  Those companies are concerned in the field of financial guarantee insurance.  The scale of their business is somewhat differing.  

2.	Syncora UK has provided guarantees and credit enhancement products linked to debt instruments, but its scale of operation is relatively small.  It has given guarantees in relation to 14 underlying issues of financial instruments.  It currently has seven policy holders and 17 contracts of insurance.  It has no claims reserve but has admitted assets of some £77,000,000 and total liabilities of £18,000,000.

3.	In relation to Syncora Incorporated, it has admitted assets of US$1.2 billion.  It has a significantly lower number of policy holders and has reinsured 97 per cent of Syncora UK’s insurance business.  Both companies are in run-off.  That is to say, they are not accepting new business but are collecting premiums of existing contracts.

4.	Syncora Incorporated was severely hit by the 2008 financial crisis, but it has been stabilised through a series of commutation agreements with its financial counterparties and has restructured its obligations.  According to its December 2014 report, it faces potential liquidity mismatches between claims payments becoming due and recoveries relating to such claims, but is managing that risk.

5.	What is proposed by the directors of Syncora UK and Syncora Incorporated is that there should be an internal restructuring by the transfer of Syncora UK’s insurance business to Syncora Incorporated at its existing UK branch.  The commercial objectives of this internal restructuring are to simplify the operational structure, to manage capital more efficiently and to eliminate the costs of maintaining a separate UK entity whose business is in fact administered by a central services function within the Syncora group.  

6.	On the transfer the UK policy holders of Syncora UK will transfer to Syncora Incorporated, along with all of Syncora UK’s assets and liabilities.  The plan is then that Syncora UK will be dissolved.  The transfer will alter the party with whom a Syncora UK policy holder deals but will not alter the terms of that policy; in particular will not alter any provisions relating to the jurisdiction for dispute settlement.

7.	After the transfer Syncora UK policy holders will rank equally with Syncora Incorporated policy holders, whereas under the present structure they mark behind them by virtue of the reinsurance arrangements.  There will in the immediate future be no change in regulatory regimes, but in the near future there will be a change in the regulatory regime which supervises the interests of UK policy holders.  It will change from the Prudential Regulation Authority and Financial Conduct Authority in the UK to a New York regulator.  

8.	This commercial objective can only be achieved by a transfer under part 7 of the Financial Services and Markets Act 2000 as amended.  This involves obtaining the Court’s approval.  That approval can only be given on the conditions set out in section 111 of the 2000 Act, namely the court must be satisfied that the appropriate certificates have been obtained, that the transferee has the authorisation required and the court must consider that in all the circumstances of the case it is appropriate to sanction the scheme.

9.	I am satisfied on the evidence that all appropriate certificates have been obtained.  I am satisfied on the evidence that Syncora Incorporated has the authorisation required to conduct the business which is being transferred to it.  The question for me on this occasion is whether I am satisfied in all the circumstances of the case that it is appropriate to sanction the scheme.  If I do so decide, and I have indicated that I am so satisfied, then section 112 FSMA 2000 provides that I may make such incidental, consequential and supplementary orders as are, in my opinion, necessary to secure that the scheme is fully and effectively carried out.  In particular, under section 112(8) I may make an order for the dissolution or the winding up of Syncora UK.  

10.	Part of the material with which the court is provided under the statutory scheme is the report of an independent expert under section 109 of the 2000 Act.  I express my thanks for the through and well-reasoned report which has been prepared in the instant case by Mr Tippin.  The value of such reports of occasions such as this is well recorded in the authorities.  The material before the court is supplemented by the results of scrutiny conducted by the Prudential Regulation Authority and the Financial Conduct Authority.

11.	In the instant case the independent expert is of the view that the transfer will have no adverse effect upon policy holders in all likely circumstances.  The Prudential Conduct Authority has raised no issues in relation to the mechanics of the transfer and the Financial Conduct Authority has also expressed the view that the arrangements made are not such as to cause it to raise any objection.  

12.	There are, in the present case, no objectors.  The policy holders are a small group of informed participants in a specialised business and may be taken to have had full regard to their own interests in responding to the well-publicised proposals for the transfer.  Nonetheless, it is right to make two observations.  The first is to emphasise, as Briggs J did in Re Pearl Assurance [2006] EWHC 2291, that, notwithstanding that detailed perusal of the scheme by the independent expert and by the regulatory authorities are conditions precedent to the exercise of the court’s discretion, the discretion is nonetheless one of real importance and is not to be exercised in any sense as a rubber stamp to those regulator’s views.  Secondly, as David Richards J said in the somewhat different circumstances of a transfer involving general business with multiple small policy holders, the obligation of those involved in a scheme to scrutinise the effect of the scheme on policy holders is just as great where there are no objectors as in those cases where there are objectors.  

13.	With those considerations in mind, I have followed the familiar guidance in my approach to deciding that this is a transfer which it is appropriate to sanction.  In particular, I have asked myself whether a policy holder will be adversely affected by the scheme, recognising that this is primarily a matter of actuarial judgment involving a comparison of the security (and, in an appropriate case reasonable expectations) of policy holders without the scheme, with what would be the result if the scheme were implemented.  In reaching that view I have paid close attention to the views expressed both by the Prudential Regulatory Authority and by the Financial Conduct Authority.

14.	The thorough report of the independent expert identifies really three relevant constituencies with whom a court must be concerned.  They are (a) the Syncora UK policy holders (b) the Syncora Incorporated direct insurance policy holders and (c) the inward reinsurance policy holders of Syncora Incorporated other than Syncora UK.  In summary, the view expressed by the independent expert is that, as regards the Syncora UK policy holders, the expectation is that the overall expected economic outcome will largely improve for them as a consequence of the transfer.  This is because, although there is a marginal deterioration and the probability and all claims will be paid in full, this deterioration is offset by a significant improvement in the likely recovery in the event that impairment occurs.

15.	As regards the Syncora Incorporated direct insurance policy holders, the independent expert is of the view that the transfer will result in no significant change in the overall expected economic outcome.  That is because these policy holders are already exposed to most of the risks arising from Syncora UK because of the reinsurance arrangements.  Although the probability that not all claims will be paid in full increases as a result of the transfer, this again is offset by the additional financial resources available resulting from the incorporation of Syncora UK’s assets and liabilities.  

16.	So far as the inward reinsurance policy holders of Syncora Incorporated are concerned, the independent expert is of the view that this will result in no adverse change in the likelihood that all claims will be paid or in the overall expected economic outcome.  This is because they too are already exposed to most of the risks arising from Syncora UK and will benefit from the additional financial resources which are transferred into Syncora UK as part of the transfer.  

17.	In terms of non-financial impact, the independent expert has not identified any policy holder group or cohort that would experience a change in circumstances that would adversely affect them due to the administration of their policies.  There will be some change to the executive management and governance arrangements but the independent expert expresses the view that he is comfortable that this will not adversely impact the interests of policy holders. 

18.	The expert has tested his conclusions against a variety of alternative assumptions and his analysis indicates that his findings would be substantially the same under a range of alternative and more pessimistic views of future risk.  He has immediately before this hearing conducted the exercise again and remains of the views expressed in his report.

19.	I am wholly satisfied that I can place confident reliance on these conclusions.  I shall briefly advert to the methodology which the independent expert has applied in reaching his conclusions.  He adopted a six-step approach:- 

(1)	to consider the specific circumstances of each policy holder; 
(2)	to consider the management and governance framework in place and the future intentions of the Syncora Group; 
(3)	to compare the amount of financial resources available to meet policy holder claims in the event of the transfer proceeds with the financial resources available if the transfer does not proceed; (he undertook this comparison using three alternative measures of financial strength and he considered the change both in the absolute level of financial resources and the change in the ratio of financial resources available to existing liabilities and to ensured exposure).  
(4)	to compare the level of financial resource available to pay future claims with the estimates of potential future claims at different levels of confidence before and after the transfer.  (The function of this comparison was to compare estimates of the potential range of losses which could arise within each company due to the risk and uncertainties inherent within it).   
(5)	to compare the position of policy holders before and after the transfer under a variety of stress scenarios.  
(6)	as a final step, he then undertook further analysis, in particular the adoption of the more pessimistic assumptions to which I have referred.

20.	In conducting his authoritative analyses relating to claims-paying ability, I should record that the independent expert used two methods.  First, what he called “the right market practice method”, which is the measure adopted in the market to undertake the appropriate comparisons.  These are aimed at identifying the future free cash-flows which can be reasonably anticipated to be available to meet future claims (the object being to measure financial strength by reference to the ability of a company to meet future claims as they arise, rather than measuring the distributable assets from the perspective of a shareholder of the company).  As an alternative, the independent expert undertook a comparison according to “the run-off method”, a measure which follows existing market practice but which reduces claims-paying ability by the treatment of claims as paid in full together with an adjustment in the value of the investments in subsidiaries to zero (on the footing that investments in subsidiaries would not be assets available to meet claim obligations immediately). With this astute comparison, the independent expert reached the conclusions which I have summarised. 
 
21.	I see no reason to depart from the commercial view which has been reached by the directors as to where the best interests of the respective companies lie, the view of the independent expert that the proposed arrangements are unlikely adversely to affect any policy holder and the views of the regulators that the proposed arrangements have been properly considered, properly canvassed, properly communicated to the policy holders and give rise to no principled objection.

22.	In the circumstances I shall sanction a transfer.  In so doing, I will make the consequential orders contained in the draft order necessary to carry that transfer into effect, including making provision for the dissolution without winding up of Syncora UK upon completion of the transfer of its business to its parent company.