APPENDIX 2: EXPLANATORY INFORMATION |
SI 2005/1998 Insurers (Reorganisation and
Winding Up) (Lloyd's) Regulations 2005
Paper submitted on behalf of over 5,000 Ex-Lloyd's
1) SI 2005/1998 implements the Insurance
Reorganisation and Winding-up Directive 2001/17/EC ('the Directive')
in respect of the Lloyd's of London insurance market. It amends
SI 2004/353, which implemented the Directive in respect of other
UK insurers. The Directive aims to ensure that reorganisation
measures or winding-up proceedings affecting an insurer are recognised
in all Member States without further formality, and to ensure
priority for insurance creditors over other claims.
2) SI 2005/1998 was laid before Parliament on
the 20th July (the day before the Summer Recess began)
and it came into force on 10 August 2005 under the negative resolution
procedure. It enables the Financial Services Authority ("FSA")
and/or the Society of Lloyd's to ask the Court to make a Lloyd's
Market Reorganisation Order ("LMRO") if Lloyd's might
not meet its regulatory solvency requirements under the Financial
Services and Markets Act 2000 ("FSMA"). Under an LMRO,
a Court-appointed reorganisation controller will devise a market
reorganisation plan in liaison with the FSA and initiate insolvency
proceedings against Names and former Names who are unable to meet
their insurance liabilities. Insurance creditors in such proceedings
would have priority over unsecured creditors in respect of Names'
3) The ex-Lloyd's Names claim that implementation
of the Directive by means of SI 2005/1998 is unjust and disproportionate
for the following reasons:
3.1) SI 2005/1998 makes considerable changes
to insolvency law by means of delegated legislation which has
not been debated in Parliament. The fact that it was laid on 20
July 2005, just before the summer recess, precluded debate before
it came into force. The Treasury has admitted, in its Consultation
Paper of December 2004, that their proposals "entail more
changes to existing practices than was the case for the main regulations"
- Executive Summary.
3.2) SI 2005/1998 threatens to facilitate
or accelerate the insolvency of some thousands of ex-Lloyd's Names,
whose average age is now over 80. In these circumstances, it was
unjust to publish the consultation document relating to this legislation
only on H.M. Treasury's website, a technology inaccessible to
most such former Names; to make matters worse, they failed to
publicise this in the printed media.
3.3) SI 2005/1998 operates retroactively,
as an LMRO can impact upon underwriting losses incurred prior
to the coming into force on August 10, 2005. This is offensive
because Names (through Lloyd's failures) were made liable for
undisclosed losses and liabilities, together with non-existing
reserves across the market, which Lloyd's knew about before the
Names joined Lloyd's. Unfairness is increased by Regulation 8
(12) (a) whereby the Society becomes sole arbiter of an "approved
debt" that the Court of Appeal has found as a fact to be
unaudited. (Footnote 1)
3.4) Regulations in SI 2005/1998 contain
a moratorium on new or ongoing legal proceedings against a former
Name or the Society of Lloyd's. This limits or removes the ability
of Lloyd's Names to challenge insolvency proceedings brought against
them by the Society of Lloyd's. (Footnote 3 and 4) Whilst the
Directive leaves it up to Member States how to deal with ongoing
proceedings, if reorganisation measures or unwinding proceedings
are initiated, the UK has done so in a way that is manifestly
3.5) An LMRO would force secured
creditors to foreclose by application and permission of the Court,
and may impel lenders to review lending criteria or withdraw liquidity
from a Name, or his business, or from the general financial Market.
Property values could suffer if a substantial number are caught
by an LMRO.
4) The new S.I. reinstates, reinforces and exacerbates
the serious injustices already suffered by Ex-Lloyd's Names as
a result of the denial of any legal remedy. There is a long history
to this dispute which goes back to the controversial Lloyd's Act
1982 which granted statutory immunity for Lloyd's under s.14 of
the Act. As a quid pro quo, Lloyd's undertook to Parliament to
maintain Errors & Omissions insurance cover (akin to professional
indemnity insurance) to protect Names at all times. (Undertaking
in continual breach since 1991).
4.1) While the Merits Committee may not
wish to explore the details of this history, as indicated in Footnote
1, Members should be aware that SI 2005/1998 will, if implemented
as presently introduced, make the situation much worse for the
ex-Lloyd's Names than otherwise would be the case. In particular,
the moratorium effected by Regulation 8 blocks defences and Appeals
such as those currently pending in the Court of Appeal, and unjustly
removes their legal rights to defend themselves in a British Court.
(Footnote nos. 2, 3 and 4 below refer) There does not appear to
be anything in the Directive which requires the UK Government
to include an all-embracing moratorium of the kind contained in
5) Unlimited liability Names will become liable
for the losses of limited liability Names. All losses (notably
from escalating asbestosis claims) which cannot be paid by Equitas
(the reinsurance vehicle into which all Names were forced to reinsure
their 1992 and prior liabilities in 1996) will be claimed from
the Lloyd's Central Fund. The limited liability Names and
companies at Lloyd's can walk away from an insolvent market forcing
the unpaid losses of the limited liability Names upon those
Names who will be bound by an LMRO and cannot walk away. It would
be a manifest injustice if unlimited liability Names have
to subsidise the limited liability Names; yet that could
be one effect of the S.I.
6) The Explanatory Memorandum wrongly claims
Statutory Instrument 2005/1998 is necessary because the Society
has no legal status. Section 2 of the Lloyd's Act 1871 states
that :- " ....... and all persons admitted as members of
Lloyd's before or after the passing of this Act, are hereby united
into a Society and Corporation for the purposes of this Act, and
for those purposes are hereby incorporated by the name of Lloyd's,
and by that name shall be one body corporate with perpetual succession
and a common seal, and with power to purchase, take, hold, and
dispose of lands and other property (which incorporated body is
hereinafter in this Act referred to as the Society)." The
Society's legal status as a 'one body corporate' and its personality
was reconfirmed in s.2 (1) Lloyd's Act 1982.
7) Given its huge impact on the lives of thousands
of ex-Names, it is suggested that S.I 2005/1998 should be withdrawn
and re-submitted with amendments, and then fully debated in both
Houses. At the very least this SI should be debated at an early
opportunity; it is understood that at least one Peer is ready
to table a Prayer to annul the Order.
8) If the S.I. were amended to provide an express
exemption - as appears to be allowed in the Directive - to cover
Ex-Lloyd's Names, that would go a long way to solve the problem.
This might be expressed to provide that an LMRO will not apply
to all members reinsured into Equitas but be limited to those
members who ceased underwriting by 31 December 1996 and such category
of members be excluded from the Order in accordance with Regulation
no. 7. (See Footnote 5.)
Sir William Jaffray
2nd September 2005
1) In Jaffray & Ors. v. Society of Lloyd's,
the Court of Appeal held that: "In short, throughout the
relevant period the system did not involve the making of a reasonable
estimate of outstanding liabilities including unknown and unnoted
losses. It follows that the answer to the question posed at paragraph
344 above, namely whether there was in existence a rigorous system
of auditing which involved the making of a reasonable estimate
of outstanding liabilities, including unknown and unnoted losses,
is no. Moreover, the answer would be no even if the word 'rigorous'
were removed. The first representation which we found to exist
in paragraph 321 above is therefore untrue"  EWCA Civ
1101, 26 July 2002, paragraph 376.
2) Society of Lloyds' v. Henderson & Ors.
(pending CA A3/2005/1755)
3) Society of Lloyd's v. Mrs. H. M. Adams (pending
4) Human Rights infringement : Notably, the peaceful
enjoyment of property enshrined in Article 1 Protocol 1 of the
European Convention on Human Rights, incorporated into the Human
Rights Act 1998.
5) For the avoidance of doubt, the recommendation
at 8) is that all Names who ceased underwriting by, on, or before
31 December 1996 should be excluded from the Order, in accordance
with Regulation no. 7.
Paper submitted by HM Treasury
This paper relates to the Insurers (Reorganisation
and Winding Up) (Lloyd's) Regulations 2005 (S.I. 2005/1998),
which implement the Insurance (Reorganisation and Winding Up)
Directive 2001/17/EC in respect of the Lloyd's of London market.
This Directive was implemented for all other insurers
by the Insurers (Reorganisation and Winding Up) Regulations 2004
(S.I. 2004/353) ("the principal regulations").
The complexities of the Lloyd's market demanded that further adaptation
to and refinement of the principal Regulations be made to give
effect to the requirements of the Directive in respect of the
HM Treasury worked closely throughout the implementation
process with the Financial Services Authority and the Society
of Lloyd's. Draft proposals were published in a public consultation
document on the Treasury website in December 2004 in line with
Cabinet Office guidance. All comments made during the consultation
were considered carefully and some amendments were subsequently
made to the draft Regulations.
The final Regulations were laid before Parliament
on 20 July 2005 as secondary legislation, using the negative resolution
procedure. The Regulations came into force on 10 August 2005.
The Treasury regrets that the Regulations could not
be made earlier. Consultation on these complex regulations ended
in March and a number of drafting comments were received. There
was also discussion with the European Commission as to whether
the Regulations effectively transposed the Directive. Considerable
resource was devoted to finalising these Regulations. The decision
to table the Regulations as early as possible was made in the
light of positive consultation comments and against the background
of advanced infraction proceedings by the European Commission
for late implementation of the Directive.
Concerns were raised with the Treasury about the
draft Regulations by some individuals after the formal consultation
period. The Treasury made it clear that they were prepared to
consider further comments and invited such. No comments on the
Regulations were received other than general concerns relating
to the Directive and a number of unconnected issues. The Treasury
tried to address various misunderstandings about the purpose and
effect of the Regulations through correspondence and the publication
of a Question & Answer Guide to the Regulations. A copy of
this guide is attached at Annex.
Purpose and scope of Directive
The purpose of the Directive is to establish rules
on the adoption of reorganisation measures and winding-up procedures
for insurance undertakings across the EU for the proper functioning
of the internal market and the protection of creditors. The key
objective of the Directive is to ensure that reorganisation measures
or winding-up proceedings affecting an insurer are recognised
in all Member States without further formality or additional checks
by other competent authorities beyond those in the home Member
The Directive is intended to apply to all undertakings
writing direct insurance, including the 'association of underwriters
known as Lloyd's'. The Directive bites on Lloyd's only in respect
of this entity, recognised in European Community law for the purposes
of EU legislation. Under section 4 of the Lloyd's Act 1911, the
objects of the Society include "the carrying on by Members
of the Society of the business of insurance of every description
including guarantee business" but do not include the carrying
on of insurance business by the incorporated Society. The association
treated in Community legislation as an insurance undertaking is
therefore not the Society incorporated by Lloyd's Acts 1871 to
The main misunderstandings in relation to the Regulations
- that Names will not be able to pursue any legal
proceedings as a result of the moratorium arising from any Lloyd's
Market Reorganisation Order (LMRO):
The moratorium is an essential mechanism of the LMRO
for ensuring that the position of all market participants can
be reviewed simultaneously, and as quickly as possible. It does
not in any way remove the legal rights of Names; it only freezes
proceedings by or against participants until such a time as the
moratorium is lifted. The Treasury would emphasise that the moratorium
also works the other way around i.e. in respect of creditors pursuing
Names for debts.
- that the Treasury made a policy choice to include
former Names, although this was not a requirement of the Directive:
Excluding former Names reinsured into Equitas would
not have correctly implemented the Directive. The Directive applies
in respect of insurance commitments that have already been undertaken.
As such, former members with outstanding liabilities under contracts
of insurance written by syndicates on which they have previously
participated are necessarily caught within the scope of the Directive.
The UK is therefore bound to transpose this aspect in its implementing
- that unlimited liability Names would, in the
case of an LMRO, have to essentially subsidise the outstanding
claims of limited liability Names:
Each Name is liable only in respect of those insurance
policies he has underwritten. In so far as contributions to and
from the Central Funds are concerned, in the event of an LMRO,
these Regulations do not alter, in respect of any member, either
the manner in which the Central Funds may be used or that in which
contributions are raised from Members.
- that the Regulations give the FSA and/or Lloyd's
the power to sequestrate Names' assets:
The Regulations give power to both the FSA and the
Society of Lloyd's to apply to the Courts for the making of an
LMRO and for the appointment of a Reorganisation Controller. In
the event that a Name then proved unable to pay his debts and
thus became subject to the priority provisions of the Regulations,
priority over the Name's unencumbered assets would arise within
the insolvency procedures (whether instituted by the Name, his
creditors or the Reorganisation Controller). As such, neither
the Reorganisation Controller, nor the FSA, nor Lloyd's, would
have the power to "sequestrate" assets. The Reorganisation
Controller, as an officer of the Court, has no special responsibility
to the FSA or Lloyd's and would act independently of both within
the frame provided by the LMRO.
1 Horse Guards Road London SW1A 2HQ
Question & Answer Guide
Q. What is the purpose of these Regulations?
A. These Regulations implement the EU Insurers Reorganisation
and Winding-Up Directive (2001/17/EC) into UK law. This Directive
creates rules at the EU level with regard to insurance undertakings
that are subject to reorganisation measures or winding-up proceedings.
The Directive provides that these measures or proceedings may
be established or opened only in the home Member State of an insurance
undertaking and that those measures or proceedings will be recognised
and have effect throughout the EU.
The principal purposes of the Directive are to simplify
proceedings when an EU insurance undertaking is in financial difficulties.
It does this by requiring procedures for the reorganisation or
distribution of assets; the co-ordination of reorganisation and
winding-up arrangements across Member States though mutual recognition;
and ensuring that all EU creditors are treated equally.
The Directive was implemented in respect of all other
insurers in the UK by the Insurers (Reorganisation and Winding-up)
Regulations 2003 and 2004. These new Regulations now give effect
to the Directive in respect of the Lloyd's market as well.
Q. Why do these Regulations have to be made?
A. The UK has an obligation under European Communities'
Act 1972 to implement EU law into domestic legislation. Non-compliance
with this obligation is a breach of a Member State's treaty obligations
and can lead to the Commission launching infraction proceedings
against that Member State. This Directive was negotiated by all
Member States for the benefit of the whole insurance market across
the EU. These Regulations constitute completion of the UK's obligation
in respect of transposition of this Directive into domestic law.
Q. How do the Regulations work?
A. Reorganisation measures and winding-up or bankruptcy
procedures already apply to persons who are members of Lloyd's
under the general law. By contrast, there is no legal mechanism
for the co-ordinated application of reorganisation measures and
winding-up procedures to the Lloyd's market as a whole. The regulated
'insurance undertaking' for the purposes of the insurance directives,
the "association of underwriters known as Lloyd's",
has no legal personality in any other context and has no legal
status in the UK.
These Regulations provide the necessary link between
the association and the persons and entities within the Lloyd's
market that have legal personality. In some circumstances the
reorganisation or insolvency of an underwriting member is to be
treated as falling within the ambit of the Directive and not the
Insolvency Regulation, which otherwise will continue to apply
to insolvencies of particular members rather than to the association
as a whole. These circumstances will arise in the event that the
following conditions are met:
- the Lloyd's market does not meet its regulatory
- a Lloyd's market reorganisation order is in force;
- the member is not excluded from that order;
- the court is not satisfied that it is likely
that the insurance market debts of the member will be satisfied.
In such a case, reorganisation measures and winding
up proceedings must be operated according to the 2004 Regulations
as adapted by these Regulations.
Q. What consultation has taken place in relation
to these Regulations?
A. HM Treasury has worked closely with the FSA in
the course of drafting these Regulations to ensure that they offer
the most effective means of complying with the UK's obligation
to implement the EU Directive, whilst at the same time offering
appropriate protection to both policyholders and Names themselves.
The consultation document for these Regulations, as with all HM
Treasury consultation documents, was published on HM Treasury's
public website. The Regulations were widely available to the public
for the duration of the 13-week consultation period that ended
on 11 March 2005. Any individual wishing to view and comment on
HM Treasury's proposals was entirely at liberty, indeed was encouraged,
to do so. A feedback statement on the consultation responses was
published together with the Regulations on HM Treasury's public
website on 21 July 2005.
Q. In what circumstances could a Lloyd's market
Reorganisation Order (LMRO) be sought?
A. A Court can make an LMRO upon application by the
Society of the FSA, in the event that it appears that the regulatory
solvency margin imposed by FSA rules is not or may not be met,
and the order is likely to meet one of both of its defined objectives.
The objectives of the order will be to preserve or restore the
financial situation of, or market confidence in, the association
of underwriters known as Lloyd's in order to facilitate the carrying
on of insurance market activities by members at Lloyd's, or to
assist in achieving an outcome that is in the interests of creditors
of members and insurance creditors in particular. The reorganisation
order will specify the persons to which it will apply.
Q. Do you intend to use these Regulations shortly?
A. No. The ability to seek an order only becomes
usable in the event that the Lloyd's market does not, or appears
unlikely to, meet its regulatory solvency requirements. The ultimate
decision to grant an order is at the discretion of the Courts.
Q. Do the Regulations facilitate the provisions
of the Fairness in Asbestos Injury Resolution (FAIR) Bill in the
A. No. There is no connection between the FAIR Bill
and these Regulations. These Regulations constitute the UK's transposition
of European Directive 2001/17 into domestic legislation in respect
of Lloyd's. The Regulations arise from the UK's obligation under
the European Communities' Act 1972 to comply with all EU law.
EU law is independent of US law and, as such, the FAIR Bill has
had no bearing on the making of these Regulations.
Q. Why was it necessary to have separate Regulations
for Lloyd's if as you say these Regulations do for Lloyd's what
the earlier Regulations did for all other UK insurers?
A. There were difficult issues over how to apply
the provisions of the Directive to the Lloyd's market, which has
unique features not found in other European insurers. These differences
meant that further complex adaptation and refinement of the earlier
Regulations were required. HM Treasury consulted on its proposed
approach in 'Implementation of the insurers reorganisation and
winding-up directive for Lloyd's - A consultation document', published
in December 2004.
Q. Do these Regulations enable the FSA to sequestrate
A. No. The Regulations give power to the FSA, along
with the Society of Lloyd's, to apply to the Courts for the making
of a Lloyd's Market Reorganisation Order and for the appointment
of a Reorganisation Controller. In the event that a Name then
proved unable to pay his debts and thus became subject to the
priority provisions of the Regulations, priority over the Name's
unencumbered assets would arise within the insolvency procedures
(whether instituted by the Name, his creditors or the Reorganisation
Controller). As such, neither the Reorganisation Controller, nor
the FSA, would have the power to "sequestrate" assets.
The Reorganisation Controller, as an officer of the Court, has
no special responsibility to the FSA and would act independently
of it within the frame provided by the LMRO. "Sequestration"
as used in the Regulations refers only to certain bankruptcy related
proceedings in Scotland under the Bankruptcy (Scotland) Act 1985.
Q. Is the Lloyd's Market Reorganisation Order
the trigger for granting priority to insurance creditors over
other unsecured creditors?
A. No. The LMRO provides for the imposition of a
moratorium and the application of the Insurers (Reorganisation
and Winding-Up) Regulations 2003 and 2004 to all involved Names.
The moratorium will not act to prevent the enforcement of security
held by lenders. The possibility for priority to be established
over Names' unencumbered assets (members' mortgages or other secured
borrowing are not affected) is one of several provisions that
may or may not arise from this situation, and is dependent on
the ability or otherwise for each individual Name to meet his
financial obligations. The LMRO provides the framework within
which the provisions of the Regulations are able to operate, should
they be required to do so. As such, the LMRO is therefore not
in itself the trigger event; rather, it is the inability or likely
inability of particular Names caught within the scope of the LMRO
to pay their debts. Members may also apply to the Court to be
excluded from the scope of any LMRO if they are able to demonstrate
that they can meet all of their insurance debts and they would
consequently not be subject to the priority provisions at all.
Q. Will Names' existing loans or mortgages take
second place to debts owed by Names to their insurance creditors?
A. No. Where a lender has security under the terms
of the loan over particular assets of the Name he will remain
able to enforce that security, for instance by taking steps to
exercise a power of sale under a mortgage, in order to obtain
repayment of the amount owed to him.
Q. Are the provisions in the Regulations retrospective?
A. Yes. The Directive affects all insurers by making
all reorganisation measures and winding-up procedures that take
place after 20 April 2003 subject also to the provisions contained
within the Directive. All insurance claims whenever instituted
on policies covered by an insurer subject to such measures or
proceedings are therefore affected. In the case of Lloyd's, only
at the point of the making of an LMRO would this retrospective
aspect take effect with regard to a particular member who proved
unable to meet his financial obligations to his creditors.
Q. Is it correct that the Regulations apply to
all Names, past and present?
A. Yes. Given that the provisions of the Directive
affect potentially all outstanding insurance liabilities whenever
they arise or arose, the Regulations must apply to all Names not
excluded from the LMRO. This is the case whether the Name in question
is a current or a former member.
Q. How will these Regulations affect Names reinsured
A. As a reinsurance company, Equitas itself does
not directly fall within the scope of the Directive, which relates
only to direct insurance undertakings. Only in the event that
there were a wider Lloyd's market failure so serious as to call
into question the adequacy of the Society's Central Fund or if,
in the particular circumstances surrounding a failure of Equitas,
there were to be consequences which jeopardised the ability of
the Lloyd's market to pass its regulatory solvency tests, would
these Regulations come into effect in relation to Equitas. In
such a scenario, Equitas Reinsured Names could be caught within
the scope of an LMRO. The Regulations do not, in the event of
the insolvency of Equitas, have the effect of mutualising losses,
or of altering the relationship between Equitas and those Names
reinsured by it.
Q. Did Lloyd's instigate the provisions of these
A. No. European Directive 2001/17 was adopted by
the European Parliament and the Council of the European Union
on 19 March 2001, following a proposal from the European Commission
published in 1989. These Regulations implement this Directive
into domestic legislation in the UK for the benefit of the entire
EEA insurance market. The Directive was negotiated by, and for
the benefit of, all Members States, and, as such, it does not
in any way arise from, or apply exclusively to, Lloyd's, but rather
to every insurance undertaking across the EEA.