HIH Group: court consent refused for Australian scheme of arrangement

Eight companies in the insolvent HIH insurance group recently received a setback from the Australian New South Wales Supreme Court when it refused consent to convene creditors' meetings to consider their proposed schemes of arrangements. The court found that the HIH group companies had not complied with two technical provisions of the relevant Australian legislation that apply to insolvent insurance companies.

In its most basic form in both England and Australia, a scheme of arrangement is an arrangement between a company and some or all of its creditors (and in some cases shareholders) to change their rights against the company in some way. In the case of HIH the schemes of arrangement were intended to be used as a means of distributing the companies' assets to their creditors. In order to be approved, the court's consent is required to convene creditors' (and where relevant shareholders') meetings to consider any proposed scheme of arrangement. At the meetings, the scheme of arrangement is approved if the requisite majority vote in favour. Subsequently, the court must sanction the scheme of arrangement before it becomes effective.

In England, schemes of arrangement have traditionally been the preferred route for insolvent insurance companies to distribute their assets instead of using a formal liquidation process. This is because schemes of arrangement are generally regarded as a more advantageous and cost effective way of distributing an insolvent insurance company's assets. More recently schemes of arrangement have become popular with solvent insurance companies as a neat way of finalising a book of business in run-off.