TO ALL POLICYHOLDERS, CREDITORS, BROKERS AND INTERMEDIARIES OF INDEPENDENT INSURANCE COMPANY LIMITED THIS LETTER IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION 23 January 2015 Dear Sirs Proposed Scheme of Arrangement for Independent Insurance Company Limited (in Provisional Liquidation) Independent Insurance Company Limited (the "Company") is proposing to implement a scheme of arrangement pursuant to sections 895 to 901 of the Companies Act 2006 (the "Scheme"). We are sending this letter to you because we believe you are, or may be, a creditor of the Company and that you may be affected by the proposed Scheme (a "Scheme Creditor"), or are acting on behalf of a Scheme Creditor. If you are an agent or intermediary acting on behalf of clients who are or may be Scheme Creditors, please forward a copy of this letter to those clients as soon as possible and/or provide us with their details. The purpose of this letter is to: (i) (ii) (iii) notify you that the Scheme is being promoted and to explain briefly the key features of the Scheme and what the Scheme is designed to achieve; give you notice of the Provisional Liquidators' intention to apply to the High Court at the Royal Courts of Justice, Strand, London WC2A 2LL, United Kingdom (the "Court") for permission for the Company to convene the necessary meetings of Scheme Creditors to consider and, if thought appropriate, approve the Scheme; and provide details of the composition of the classes of Scheme Creditors entitled to vote at such meetings. 1. BACKGROUND The Company was a substantial insurance company based in the UK with operations and/or assets situated in various jurisdictions around the World including Spain, France, the Netherlands, Malta, the Bahamas, the United States and the Republic of Ireland. On 13 June 2001, the Company ceased to write new business and went into run-off and on 17 June 2001 was placed into provisional liquidation. The Company is insolvent and unable to pay its creditors in full. The Provisional Liquidators are proposing the Scheme as a means of making dividend payments to creditors in respect of their claims against the Company ("Scheme Claims"). The realistic alternative to the Scheme would be a liquidation of the Company. This is considered a less attractive alternative to a PricewaterhouseCoopers LLP, 7 More London Riverside, London, SE1 2RT T: +44 (0) 20 7583 5000, F: +44 (0) 20 7212 7500, www.pwc.co.uk PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The registered office of PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH.PricewaterhouseCoopers LLP is authorised and regulated by the Financial Conduct Authority for designated investment business. 1
Scheme, for the principal reason that funds can be distributed to creditors earlier in the Scheme than would be the case in a liquidation of the Company. 2. KEY FEATURES OF THE PROPOSED SCHEME OF ARRANGEMENT 2.1. Bar Date The proposed Scheme is an estimation (or "cut-off") scheme under which all claims against the Company (other than claims which are or may in the future be eligible for compensation by the Financial Services Compensation Scheme (the "FSCS") (discussed further below)) must be notified by Scheme Creditors to the Company by the "Bar Date" (which will be the date falling 6 months from the date upon which the Scheme becomes effective) if they are to qualify for the payment of a dividend under the terms of the Scheme. A Scheme Creditor who fails for any reason to submit its Scheme Claim(s) to the Company before the Bar Date will be bound by the terms of the Scheme, but will lose any right to be paid a dividend under the Scheme in respect of that Scheme Claim(s). 2.2. Estimation of contingent claims Although a large number of claims made against the Company under its policies have been agreed, there are still significant numbers of contingent claims (i.e. claims which have yet to be made, or which have been made but not yet quantified), even after 13 years of run-off in the provisional liquidation. The proposed Scheme provides for the value of contingent claims submitted to the Company before the Bar Date to be estimated in accordance with the "Estimation Guidelines" contained in the Scheme (other than Scheme Claims which are or may in the future be eligible for compensation by the FSCS). Under the terms of the Scheme, the Company will attempt to agree the value of all Scheme Claims submitted to the Company before the Bar Date with Scheme Creditors. However, if this should not prove possible, disputed Scheme Claims will be referred to an independent adjudicator whose decision will be final and binding. 2.3. Unpaid Agreed Claims A large number of claims have already been agreed by the Company but have not been paid because the Company is insolvent. If the Scheme is approved, Scheme Creditors with such "Unpaid Agreed Claims" will be sent a pre-populated Claim Form by the Company with the details of the Unpaid Agreed Claims already calculated and shown on the Claim Form, and will be able to submit their claim(s) in the Scheme by signing and returning the pre-populated Claim Form to the Company, with or without modification, before the Bar Date. 2.4. Set-off and security interests As part of the process of agreeing Scheme Claims under the Scheme, an account will be taken of any amounts that are due from the Scheme Creditor to the Company. Amounts in respect of mutual credits, debits or other dealings will be set off in substantially the same way as would apply on a liquidation. Only the net balance (if any) payable by the Company will be treated as 2
a Scheme Claim, and if the set-off results in a balance being due to the Company, the balance will be payable by the Scheme Creditor. The Scheme will not affect the right of any Scheme Creditor to enforce any security over the assets of the Company (such as a letter of credit), but the value of any such security will be deducted from the Scheme Creditor's Scheme Claims. 2.5. Protected Policyholders The proposed Scheme contains special provisions which apply to policyholders whose claims under the Company's policies (including contingent claims) are or may in the future be eligible for compensation by the FSCS. The right of a policyholder (or the right of any person claiming through a policyholder, such as an employee) to claim compensation from the FSCS up to the statutory limit in respect of a claim under an insurance policy will not be affected by the Scheme and will continue to be available in the future once the Scheme has terminated and the Company has gone into liquidation. If the Scheme becomes effective, with effect from the Bar Date, the FSCS will take over on behalf of the Company the claims handling and settlement of all liabilities which may give rise to a claim that is eligible for compensation from the FSCS. Scheme Claims that are or may in the future be eligible for compensation by the FSCS will therefore not be estimated under the Scheme, and the Company will not pay any dividends in respect of those claims. The FSCS is a creditor of the Company in relation to compensation it has paid to policyholders during the course of the Provisional Liquidation where it has taken an assignment of those claims. In addition, if the Scheme becomes effective, the Company and the FSCS will estimate the FSCS's liability to pay compensation in respect of Protected Claims that may arise or are paid by the FSCS after the Bar Date, which will also be a Scheme Claim of the FSCS once agreed or determined. Further information on FSCS compensation is also available on the FSCS website (www.fscs.org.uk) or by calling the FSCS on 0800 678 1100. 2.6. Defence Costs "Defence Costs" are costs that have been incurred by the Company since June 2001 in the defence of claims made against its policyholders by third parties. In order to achieve fairness between all policyholders, the proposed Scheme contains provisions allowing the Defence Costs paid by the Company for the benefit of certain policyholders to be treated as an advance dividend and deducted from the amount of dividend otherwise payable under the Scheme to the policyholders concerned. However, the Scheme allows Scheme Creditors to opt out of this provision of the Scheme, provided that the Scheme Creditor in question is able to make a declaration to the Company and the Provisional Liquidators that: 3
the Scheme Creditor has not entered into any agreement with the Company, its agents or the Provisional Liquidators that Defence Costs paid or incurred in defending claims made under its policies would be treated as an advance payment under the Scheme and would be deducted from any dividends payable to it in such a scheme; and the Scheme Creditor has no knowledge of any other basis upon which the Company is entitled to treat such Defence Costs as an advance payment to it under a scheme of arrangement. 2.7. Estimated dividend The dividend payable to Scheme Creditors in the Scheme is estimated to be in the region of 10 to 15 pence in the pound. Certain creditors (such as ex-employees in relation to the preferential elements of their claims) who would receive payment in full on a liquidation of the Company, and the expenses of the Scheme, will be paid in full before dividend payments can be made. Dividend payments will be made in full and final settlement of Scheme Claims. 3. TYPES OF SCHEME CLAIMS Scheme Creditors include (but are not limited to) policyholders and other persons who have an insurance or reinsurance claim against the Company; those with a claim for the return of premium resulting from the cancellation of their insurance policy following the provisional liquidation of the Company; ex-employees who had their contracts of employment terminated by the Company and trade creditors (e.g. suppliers or service providers) who have claims for unpaid amounts against the Company. Types of insurance claim include: "Unpaid Agreed Claims", which are claims that have already been agreed by the Company but have not been paid by the Company; "Notified Outstanding Claims", which are claims that have been notified to the Company, but which have not yet given rise to a liability that is due and payable by the Company (for example, because the amount of the claim has not yet been agreed or is not currently ascertainable); and "IBNR Claims", which are claims in respect of liabilities that have been incurred, but have not been reported to or are not known by the Scheme Creditor. Under the proposed Scheme, claims (other than contingent claims) that are eligible for compensation from the FSCS are known as "Protected Claims", and contingent claims that may be eligible for compensation from the FSCS if and when they arise are known as "Protected Contingent Claims". These claims are treated differently under the Scheme (as set out in paragraph 2.5 above). The proposed Scheme does not apply to liabilities of the Company which would be preferential liabilities if the Company was being wound up (principally certain ex-employee 4
claims). Those liabilities will be paid in full and, as a result, creditors will have no entitlement to vote on the Scheme in respect of their preferential debts. 4. THE SCHEME MEETINGS AND THE PROPOSED VOTING CLASSES Under the provisions of Part 26 of the Companies Act 2006, in order for the Scheme to become legally binding on the Company and Scheme Creditors, a majority in number, representing 75% in value of those Scheme Creditors present and voting either in person or by proxy at each of the meetings ordered to be summoned by the Court ("Scheme Meetings"), must vote in favour of the Scheme. In order for the Scheme to become effective, the Scheme must then be sanctioned by an order of the Court, and an official copy of the court order sanctioning the Scheme must be delivered to the Registrar of Companies for registration. Where Scheme Creditors have rights which are so dissimilar or would be affected so differently by a scheme as to make it impossible for them to consult together with a view to their common interest, then they must be divided into separate classes and a separate Scheme Meeting must be held for each class. The Scheme must be approved by a majority in number representing 75% in value at the Scheme Meeting for each class. Determining the classes involves an assessment of how the scheme of arrangement will affect creditors' legal rights (as opposed to their commercial interests). In a scheme being proposed as an alternative to the liquidation of a company (such as the proposed Scheme), the treatment of creditors in a liquidation is the appropriate comparator. It is the responsibility of the Company to formulate the classes of Scheme Creditors for the purposes of convening meetings to consider and, if thought fit, approve the proposed Scheme. The Provisional Liquidators have considered the current rights of Scheme Creditors and the way in which those rights will be affected by the Scheme, and propose to invite the Court to direct the Company to convene two Scheme Meetings for the purpose of voting on the Scheme: the first Scheme Meeting will be for Scheme Creditors with "Protected Claims" and "Protected Contingent Claims" to vote in respect of those claims; and the second Scheme Meeting will be for Scheme Creditors to vote in respect of all other Scheme Claims. A Scheme Creditor that has claims in both classes will be entitled to vote at each Scheme Meeting in relation to its respective claims. Protected Claims and Protected Contingent Claims have been placed into a separate class because those claims are treated differently under the Scheme. As described above, Protected Claims and Protected Contingent Claims will not be estimated by the Scheme and the Company will not pay a dividend under the Scheme in respect of those claims. Instead, the agreement of those claims will be dealt with by the FSCS and, once agreed, will be compensated by the FSCS in accordance with its compensation rules and requirements. 5
The Provisional Liquidators consider that it is not necessary to convene separate Scheme Meetings in relation to the following: 4.1. Policyholders affected by the deduction of Defence Costs from dividends payable under the Scheme As described above, the proposed Scheme contains provisions allowing the Defence Costs paid by the Company to be treated as an advance dividend and deducted from the amount of dividend otherwise payable under the Scheme to the policyholders concerned. However, the Provisional Liquidators do not consider it necessary for Scheme Creditors affected by Defence Costs to vote in a separate class because, as set out in more detail above, the Scheme allows Scheme Creditors to opt out of the recoupment of Defence Costs where the Scheme Creditor is able to declare that it (i) did not agree to the treatment of Defence Costs as an advance dividend payment, and (ii) is not aware of any other basis upon which the Company is entitled to treat such Defence Costs as an advance payment. 4.2. Claims in respect of unexpired policies There are a small number of policies in respect of which the period of cover has not expired or been cancelled. Under the Scheme, those policies (except for policies that are or may in the future be eligible for compensation from the FSCS) will be terminated automatically on the date that the Scheme becomes effective. Policyholders will be required to submit a Claim Form to the Company before the Bar Date in respect of any claim under such unexpired policies. The value of the claim(s) in respect of the unexpired policies will then be estimated in accordance with the Scheme and be eligible for dividends under the Scheme. In the event that a scheme of arrangement is not put in place and a winding-up order is made in respect of the Company, any unexpired policies would as a matter of law be deemed to terminate automatically on the date of the making of the winding up order. The policyholder would then be admitted as a creditor in the liquidation for an amount equal to the value of the policy, which would be estimated in accordance with Schedule 1 of the Insurance Companies (Winding Up) Rules 1985 (which requires a "just estimate" of the value to be made). The treatment of unexpired policies in liquidation and under the proposed Scheme would therefore both involve the automatic termination of the policy and the estimation of the value of the policy in the same fashion as for all other policies. For this reason, the Provisional Liquidators do not consider that Scheme Creditors should be placed in a separate class in respect of any claims under unexpired policies. 4.3 IBNR Claims and Notified Outstanding Claims As set out above, the Scheme provides for the value of IBNR Claims and Notified Outstanding Claims (other than those claims which are or may in the future be protected by the FSCS) submitted to the Company before the Bar Date to be estimated in accordance with the "Estimation Guidelines" contained in the Scheme. 6
However, once the value of IBNR Claims and Notified Outstanding Claims are estimated, they will receive the same treatment under the Scheme as claims under the Company's insurance policies that have already been agreed or otherwise determined (and do not need to be estimated). Previous "cut-off" schemes of arrangement have established that in circumstances where (as here) the alternative to the scheme is a winding up in which all claims will (to the extent necessary) be estimated, it is not necessary to place IBNR Claims and Notified Outstanding Claims that will be estimated in a separate class. 4.4 Set-off As set out above, the Scheme contains provisions for amounts in respect of mutual credits, debits or other dealings between the Company and a Scheme Creditor to be set off. However, the set-off provisions in the Scheme are substantially the same as would apply on the liquidation of the Company, and so the Provisional Liquidators do not believe that a separate class is necessary for Scheme Creditors that will be affected by set-off. 5. WHAT ACTION SHOULD YOU NOW TAKE? If you have any concerns on the proposed constitution of the classes of Scheme Creditors for the Scheme Meetings, you should communicate your concerns to the Scheme Manager by letter or email using the contact details below as soon as possible and in any event 7 days before the date of the Court hearing. Any concerns communicated to us in writing will be drawn to the Court's attention at the hearing of the Company's application for permission to convene the necessary meetings of Scheme Creditors (the "First Hearing"). Whether or not you inform us of any concerns regarding the constitution of proposed classes of Scheme Creditors, the Company's creditors may attend the First Hearing and make representations. The Scheme Manager, whose contact details are given below, will be pleased to provide you with further information in this respect. The First Hearing will not be held before March 2015. The date and time of the Court hearing will be placed on the Company s website at www.independent-insurance.co.uk as soon as it is known to the Company. You may attend the hearing if you wish to do so. Please note that if the Scheme is approved at the Scheme Meetings, it will still be possible for Scheme Creditors to raise objections on the question of the classes at the subsequent Court hearing to sanction the Scheme. However, the Court would be likely to require objectors to show good reason why they did not raise any objection to the Scheme at the First Hearing. Assuming an Order to convene the two Scheme Meetings is made, Scheme Creditors will be sent a notice convening the meetings together with an explanatory statement from the Company explaining the effect of the Scheme (as required by section 897 of the Companies Act 2006) and containing details of where Scheme Creditors can obtain copies of the full Scheme document. The letter will also state how Scheme Creditors can obtain copies of their proxy and voting forms. The expected timetable for the Final Hearing will be set out in the Scheme document. 7
6. RECOMMENDATIONS AND FURTHER ASSISTANCE A draft of the Scheme document has been provided to the Prudential Regulation Authority ( the PRA ) and the Financial Conduct Authority ( the FCA ) for review. The Provisional Liquidators believe that the Scheme will provide a more cost-efficient, effective and timely method of agreeing and paying dividends on claims than if the Company was to go into liquidation. For this reason, all Scheme Creditors are encouraged to support the Scheme. The Scheme has been developed in consultation with the Informal Creditors' Committee and in their opinion it provides all Scheme Creditors with significant benefits over liquidation. As such, the Informal Creditors' Committee considers the Scheme to be in the best interests of creditors. Individual creditors should, however, consider their own circumstances and take advice as appropriate. Scheme Creditors are encouraged to contact the Scheme Manager using the below contact details if they have any queries or concerns in relation to this letter, if they require further information regarding their insurance policies or contracts with the Company, or if they wish to discuss the value of their Scheme Claims for voting purposes under the proposed Scheme. 7. CONTACT DETAILS General Queries Capita Insurance Services Ltd. For any general queries on this letter please contact our helpline on 0161 274 8837. Note: The helpline will be unable to discuss any queries regarding the expected dividend payment, or provide information on new, existing or previous claims. Alternatively you can use the following email address: Email: iiclscheme@capita.co.uk Scheme Manager IICL SOA PO Box 5456 Manchester M61 OLE 8
Yours faithfully For and on behalf of Independent Insurance Company Limited (in Provisional Liquidation) Mark C Batten Joint Provisional Liquidator Mark Batten and Dan Schwarzmann were appointed as Provisional Liquidators of Independent Insurance Company Limited to manage their affairs, business and property as agents without personal liability. Both are licensed in the United Kingdom to act as insolvency practitioners by the Institute of Chartered Accountants in England and Wales. The Joint Scheme Administrators are Data Controllers of personal data as defined by the Data Protection Act 1998. PricewaterhouseCoopers LLP will act as Data Processor on their instructions. Personal data will be kept secure and processed only for matters relating to the scheme of arrangement. Neither the Provisional Liquidators, nor any partner, employee, agent, advisor, representative, affiliate, director, officer, member, beneficiary, investor, servant, shareholder, trustee, attorney, or other person acting on behalf of, or otherwise related to or affiliated with the Provisional Liquidators, or the Company, nor any of their respective successors, shall have any personal liability directly or indirectly, under or in connection with the Scheme and in particular : (a) this letter, the Explanatory Statement, the Scheme and any notices convening the Scheme Meetings; (b) any agreement made or entered into under or pursuant to this letter, the Explanatory Statement, the Scheme and any such notices; or (c) any amendment or amendments to any of the foregoing made at any time or times, heretofore or hereafter. This exclusion of personal liability shall survive any termination of the Scheme. 9
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