Another Scheme of Arrangement

  • Anonymous
  • unspecified
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Posted: Thu, 14/05/2009 - 01:00

I thought depositors might be interested at his stage in what happened in another recent SoA, in this case that of Equitable Life. The full report of the European Parliament into Equitable Life is available here:

Here is what it says about their Scheme of Arrangement. Those who still support our bank's proposed SoA, read it and weep.

  1. The Compromise Scheme

The Compromise Scheme is dealt with exhaustively in Part IV of the report. However, given its relevance for the situation of aggrieved policyholders, certain aspects of it will be revisited below with particular emphasis on the concerns expressed by policyholders.

Section 425 of the UK Companies Act 1985 enables a company to put into effect 'a compromise scheme of arrangement' between the company and its members or its creditors or any class of them, subject to the consent of interested parties and of the court. The scheme becomes binding if it is approved by a majority in number representing three-fourths in value of the creditors or class of creditors or members or class of members and by the court (see ES 3(3)). ELAS devised such a scheme with the intention of stabilizing the with-profits fund by reducing exposure to GARs and, at the same time, eliminating the risk of legal action against ELAS for mis-selling on the basis of alleged failure to disclose the GAR risk to prospective non-GAR policyholders. In practice, it was proposed that GAR policyholders would get an increase of 17.5% in their policy value in exchange for giving up their rights to a guaranteed annuity rate. At the same time, non-GAR policyholders were offered an increase of 2.5 % in policy values(4) in return for giving up their right to pursue claims, either by legal action or through the Financial Ombudsman Service.

According to ES 3(5), the Scheme was the result of an extensive consultation process involving policyholders and regulators and was developed under intense publicity. EMAG called it a "massive consultation process that was just cosmetic PR window dressing" (WE 75). In ES 3 it is also emphasised that there was a certain degree of time pressure because a payment of £250 million by Halifax was conditional upon a compromise becoming effective by 1 March 2002. Hence, "the time available for the completion of the development and the approval of the scheme was much shorter than a scheme of such complexity would normally require" (ES 3(6)).

The Scheme finally met with the approval of an overwhelming majority of each class(7) of Equitable's policyholders. It is notable that Mr Justice Lloyd rejected the suggestion that overseas policyholders should be treated as a separate class for the purposes of voting for the compromise agreement.(8) Nor were the with-profits annuitants treated as a separate class. The compromise scheme took legal effect on 8 February 2002 after approval by the High Court. The Society estimates that when the Compromise Scheme took effect, "there were still close to a million people with an interest in the with-profits fund", although a significant number of policyholders had left during 2001 (WE 47(9)).

Equitable's Board claimed at the time that the Scheme involved "fair value compensation to GAR policyholders based on a ‘realistic estimate’ of the value of their legal rights given up ..., it apportions the compensation to different GAR policyholders in accordance with their rights; it reduces that compensation by the value of any possible claim for compensation given up by the non-GAR policyholders and the compensation takes the form of a proportionate increase in GAR policyholders’ policy values in both guaranteed and non-guaranteed form" (WE 29(10)). By contrast, representatives of policyholders claimed that the scheme was "inequitable"(11) and that it "deliberately obfuscated and discounted legal advice [indicating] that policyholders without [GAR] had a strong case for mis-selling"(12). In particular, EMAG considers in WE-CONF 16 that the first across-the-board cut in values of 16% in July 2001 - which in its view was not only a result of the lost GAR case and a fall in stock markets but also (to a large extent) a consequence of a decade of over-bonusing by ELAS - fell unfairly upon more recent non-GAR policyholders, who had not previously benefited from over-bonusing as did pre-1990 (predominantly GAR) policyholders. As outlined under point II.3., Mr THOMSON (H8) took a different view: "The reason for applying reductions at a flat rate was to achieve greater fairness to all policyholders. That decision was taken by the board having considered a range of options with the appointed actuary". Mr BOSWOOD in his opinion (WE 76(13)) supports the view of EMAG that the flat-rate cut failed to take into account the over-bonusing to early policyholders. EMAG believes that the Compromise Scheme had given ELAS an opportunity to rectify the situation. Instead, the scheme proposed GAR uplifts of 17.5% against non-GAR uplifts of 2.5%. In his report, Lord PENROSE declines to comment on the fairness of the Compromise Scheme (WE 16(14)).

Moreover, policyholders told the committee that the increases in policy values were not guaranteed: "Within a matter of weeks, the 2.5% increase magically turned into a 4% reduction" (Mr WEIR, H2), so policyholders "lost their rights to redress in return for an uplift which turned out to be a cheque that bounced" (Mr BELLORD, H2). Indeed, after the uplift in policy values had been credited on 1 March 2002, the Society announced a further cut of 4% on 15 April 2002, which more than eliminated the 2.5% uplift credited to non-GAR policyholders just six weeks before. The with-profits annuitants suffered a similar experience, as the Society reduced the Overall Rate of Return by 4% subsequent to the approval of the agreement. Therefore, some policyholders expressed doubts as to the legal validity of the compromise agreement (see for instance oral statement by Mr WEIR, H2 and Mr SCAWEN, WE 23(15)).

In response, Mr THOMSON claimed that the Society had set out all details of the Compromise Scheme in the accompanying documents. "The uplifts are very clearly set out in the Scheme documents and had both guaranteed and non-guaranteed elements. Market movements meant that we had to reduce non-guaranteed bonus subsequently. That risk was clearly identified in the documents..." (WE-CONF 5(16)). However, Professor BLAKE suggests in WE 29(17) that the information provided to policyholders by the Board in connection with the Compromise Scheme Proposal was inadequate. Among other things, he criticised that "most of the information concerning the status of the fund was out of date, there was virtually no information on what was going to happen to the fund after [the compromise scheme would take effect and it] was not clearly spelled out what ... policyholders were foregoing by voting for the [scheme]" (WE 29(18)). Mr SCAWEN also claims that the full state of the Society's finances had not been disclosed. Otherwise, with-profits annuitants would "surely not have accepted the offer" (WE 23(19)). EMAG criticised that "the Compromise documentation did not address the over-bonusing, the benefit derived from it by GAR policyholders, the unfair nature of the 16% policy value cut to non GAR policyholders [and] the possibility of a compensating adjustment in favour of non-GAR policyholders" (WE-CONF 16).

Moreover, EMAG comments in detail on the second cut in policy values of 15 April 2002, which more than eliminated the uplift credited to non-GAR policyholders. As stated above, ELAS argued that this had become necessary due to "market movements". EMAG contends that the market fell by about 6% (equivalent to a 3% fall in Equitable Life's asset values) between July 2001, when the 16% cut was introduced, and April 2002, when the second cut was made. However, "all of this fall happened before the Compromise Scheme was published in December 2001 [and] there was no further significant market fall before the policy value cut in April 2002" (WE-CONF 16). EMAG considers that by failing to explain to non-GAR policyholders that, without an immediate surge in the stock market, a further policy value cut would be required, ELAS may have deliberately misled policyholders. In contrast, Mr. THOMSON insisted in H8 "that the markets carried on falling after the Compromise Scheme was through in February 2002 and the board had no choice but to reflect those changes in market values in the non-guaranteed benefits." Mr BOSWOOD (WE 76(20)) agrees with EMAG's assessment and suggests that "this is something which ought to have been mentioned to those, including the court, from which approval for the scheme was sought". He thus thinks it is possible that "those responsible deliberately concealed information which they knew to be relevant to the scheme". In view of the above, EMAG asked the FSA to investigate the issue. The latter however refused to do so with reference to its discretion (WE-CONF 16).

Mr THOMSON responded to allegations that the compromise documentation had been inadequate by underlining that the scheme was sanctioned by the High Court. He quoted the judge as follows (H8): "I am in no doubt that it is a scheme such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve. I am also satisfied that neither on account of any inadequacy of information or otherwise in the procedure, nor in respect of any of the substantive points made to me, is there the slightest reason to suppose that it is not a proper scheme which having been approved by the requisite majorities of the various classes ought to be sanctioned by the Court. I will so order."

Policyholders in general criticised the fact that the FSA recommended policyholders to accept the compromise or even promoted it.(21) "The FSA was party to the rush to push the majority of the members of the Equitable to sign up to a flawed compromise, led on by insinuations that, if the compromise were not agreed, The Equitable would collapse, and by the suggestion (which has not been realised) that, if it were agreed, the fund would return to stability. ... Those who did not go along with the compromise that was endorsed by the FSA and withdrew their funds appear likely to end up better off than those who remained. In view of its unequivocal endorsement of the compromise, this should be embarrassing to the FSA, since it is supposed to protect the policyholders' reasonable expectations.(22)"

In his statement before the committee, Mr STRACHAN (H4) commented on the FSA's involvement in the compromise: "The Compromise Scheme was undertaken as part of an independent court process under the Companies Act. In that particular process, the FSA had no formal statutory role". In WE 37 the FSA points out that it "nevertheless encouraged Equitable to go beyond what was required by the Companies Act to ensure that policyholders' interests were protected as far as possible, particularly through the appointment of an independent actuary to opine on the fairness of the proposals". Furthermore, the FSA "reviewed and assessed the Compromise Scheme proposals being put to Equitable Life's with-profits policyholders to ensure that the interests of all policyholders had been properly taken into account" (WE-CONF 8). In doing so, the FSA took account of the following considerations: "Firstly, that a successful compromise scheme would, in principle, offer the best prospect of stability for Equitable Life and its policyholders. The second – which concerns the fairness issues – was an assessment as to whether there was a fair exchange for the rights and the claims of each group affected. The third consideration was that there should be clear and comprehensive information provided to policyholders and, fourthly, we took account of the independent actuary’s assessment of the proposal" (Mr STRACHAN, H4). The independent actuary stated in his report that "from an actuarial point of view the terms of the Scheme have been established in a fair and reasonable way" (WE-CONF 9(23)). Policyholders, however, alleged that the actuary failed to address a number of important issues, which would have been important for policyholders' understanding of the proposal (see WE-CONF 16) and furthermore questioned his independence from ELAS (see WE 75).

In its assessment of the compromise scheme (WE 67) the FSA concludes as follows: "The FSA is content that, in relation to the relevant groups of guaranteed annuity rate (“GAR”) and non-GAR policyholders, the level of increase to policy values is a fair offer in exchange for the GAR rights and potential mis-selling claims that would be given up. While there are variations from person to person, within each relevant group, we are content that there are no categories of policyholder within the groups who would receive disproportionately greater or lesser benefits". The FSA furthermore suggests that, "the scheme of arrangements was in policyholders' interests and was an appropriate way of removing the uncertainties that were adversely affecting the firm; accordingly we saw no reason to make representations to the court, which had final responsibility for the decision" (WE-CONF 8).

ES 3(24) does not comment on the fairness of the Compromise Scheme but rather points out its advantages in general: "Firstly, it provided certainty for the parties concerned, shielding policyholders (and Equitable) for extensive and costly litigation. Secondly, it met with the approval of the regulator (FSA), the majority of members, and the court. Thirdly, it enabled a deal with Halifax plc to materialise under the best possible terms. Fourthly, it seems preferable to other alternatives, such as the winding-up of Equitable." The authors of ES 3 express their view that "on balance, an aggrieved policyholder is more likely to get satisfaction through a system of collective satisfaction, such as the Compromise Scheme, than through individual recourse to legal remedies", without further elaborating on this point.

In summary, evidence suggests that the primary aim of the Compromise Scheme of Arrangement, which took legal effect on 8 February 2002 after it had been approved by the requisite majority of policyholders and sanctioned by the High Court, was to remove legal uncertainties and liabilities from Equitable Life and thereby stabilise the fund. The Scheme, however, did not serve to compensate policyholders for losses they had incurred through the 2001 reduction in policy values, which was caused by a number of particular circumstances at Equitable, including the Society's practice during the 1990s of paying excessive bonuses. In particular, the uplifts in policy values granted to non-GAR policyholders, who in exchange waived their right to pursue claims, were more than eliminated by subsequent cuts. Numerous accounts suggest that the Society may have been aware at the time it proposed the scheme that the uplifts in policy values could not be sustained under normal circumstances. However, it failed to communicate this to policyholders, who may well have voted against the scheme, had they been made aware of the full state of the Society's finances. The committee concludes that the eventual result of the Scheme was such that all remaining policyholders lost their right to pursue claims against the Society while their losses continued to increase.

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Is it relevant just because it's an SOA?

  • chris watson
  • 23/10/08 31/03/10
  • a depositor
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  • Thu, 14/05/2009 - 15:17

The summary states:

"...evidence suggests that the primary aim of the Compromise Scheme of Arrangement, which took legal effect...after it had been approved by the requisite majority of policyholders and sanctioned by the High Court, was to remove legal uncertainties and liabilities from Equitable Life and thereby stabilise the fund."

I'm no expert, as you know, but I don't believe 'we' are policyholders wishing to stabilise a fund are we?

Are we not depositors figuring out the best way to liquidate a bank?

I think it is bleeding obvious to anyone that the IoM will attempt/have skewed the SOA in their favour (basically because 'they can' and we appear to have no 'rights' to stop them) and that those who wish to get paid back within a guaranteed timeline will vote for it. But to imply "here is another SOA which was 'bad' ergo our one has to be 'bad' too, read and weep" is the same logic as saying "this car ran over my cat therefore so will this other car, sob". It's possible, maybe probable, but doesn't necessarily make it 'so'.

Wouldn't it be more useful to trawl for a successful SOA to use as a working example and state "this is what is missing from ours", and go to work (with the media etc) on that basis, rather than hold up "here's another crap one prepared earlier"?

Or are you implying no successful SOA exists?

Only one way

  • rapata
  • 13/10/08 03/08/09
  • a depositor
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  • Thu, 14/05/2009 - 15:19

there is only one way to liquidate a bank, its called LIQUIDATION. Anyone who has doubts about the SOA should read the above, if I had been considering the SOA, which I had not, it would certainly change my mind.