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    UK: English High Court Authorises Partition of Trust Fund in Scheme of Arrangement

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    In an uncontested application in English & American Insurance Company Limited, [2013] EWHC 3360 (Ch) the High Court has confirmed that section 57 of the Trustee Act 1925 (the Act) can be used by trustees to partition a trust fund in order to allow trustees to pay one class of beneficiaries without disadvantaging a smaller class of beneficiaries.

    English & American (E&A) was authorised to write insurance business and did so by way of participation in a number of pools which underwrote a variety of insurance and reinsurance business. Following an increase of claims notifications in 1992, E&A ceased participating in the pools and underwriting new business. E&A entered into a reserving scheme of arrangement under section 425 of the Companies Act 1985 and continued in run-off (the Original Scheme). A revised scheme was approved by the Court in 2000. Certain E&A policy holders’ policies had the benefit of guarantees given in their favour by other companies in the E&A group. A payment was made to compromise the claims made against the guarantees and this sum was settled into a trust for the benefit of those policyholders.

    In 2009, the scheme administrators determined that it was appropriate to set a bar date for claims into E&A’s estate (the Closing Scheme). Whilst the majority of the policy holders entitled or potentially entitled to the trust fund were subject to the Closing Scheme, a small number (the Overlapping Beneficiaries) were not as they also had the benefit of a letter of credit (therefore their claims could be satisfied by the trust or the letter of credit). Counsel for the scheme administrators referred to this as “a disconnect between the operation of the Closing Scheme and the administration of the trust”. As the trust contained no mechanism for amendment, the trustees were unable to distribute the fund to the majority of the beneficiaries.

    The trustees made an application under section 57 of the Act to vary the structure of the trust, which they stated would be in the interests of the beneficiaries as a whole. The trust would be split into a principal sub-trust for the majority and a residual sub-trust for the small group of Overlapping Beneficiaries.

    Highlighting a “real and material prejudice” to the vast majority of beneficiaries who would otherwise have to wait for a final distribution from the Closing Scheme, the deputy-judge held that the trust could be so partitioned. The deputy-judge held that the funds of the sub-trust should be sufficient to cover the entire claim of the Overlapping Beneficiaries based on an actuarial calculation of IBNR claims held by the Overlapping Beneficiaries.

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