By Audrey Naa Dei KOTEY& Clara METTLE-NUNOO
The Insurance Act, 2021 (Act 1061) was passed on 5th January 2021 to provide a comprehensive framework for regulating activities in the insurance sector. This brief note focuses exclusively on the provisions concerned with the resolution of insolvencies in the insurance sector. This is a fitting enquiry, as insolvencies in the insurance industry are unique and may not necessarily follow the format applicable in other industries. As the learned authors of the ‘Law of Reinsurance in England and Bermuda’ note: “The principal difficulty that exists when it comes to the liquidation of an insurance or reinsurance company is the very difficulty which gave rise to the need for insurance in the first place – future uncertainty”. It is for this very reason that insurance legislation modifies the application of the Corporate Insolvency and Restructuring Act, 202o (Act 1015) (CIRA).
a) Does the Insurance Act, 2021 (Act 1061) deal with insolvency in the insurance sector to the exclusion of the CIRA?
No. The Insurance Act recognises the application of the Corporate Insolvency and Restructuring Act (CIRA) in insurance matters. However, due to the peculiar nature of the insurance terrain, the CIRA has only limited application. Its provisions are to be applied with these nuances in mind.
b) Can you list out the various options that the Act provides as a means of dealing with an insolvency?
- Private Liquidation
- Official liquidation
- Reduction of contract as an alternative to official liquidation
- Placement of the company in Statutory management
C) Can you briefly explain these options in a bit more detail?
- Private Liquidation: The directors of the insurance company may pass a resolution voluntarily bringing the affairs of the insurance company to an end. In opting for the voluntary winding-up of the affairs of the insurance company, the directors warrant that the company is able to pay its debtors and outstanding liabilities within 12 months of passing the resolution.
The Insurance Act specifically insists that companies that seek to wind-up by private liquidation must obtain the Regulator’s permission before going ahead with the winding-up. Therefore, a resolution for the winding-up of the affairs of an insurance company without the prior written approval of the National Insurance Commission is void.
- Official liquidation: Even though under the Companies Act, 2019 (Act 992) and Corporate Insolvency and Restructuring Act, 2020 (Act 1015) there are a number of pathways by which a company may be placed in official liquidation, these options have been severely limited under the Insurance Act.
The official winding-up of a company licenced to carry put direct insurance work can only be commenced by a petition to the court. This means that a special resolution by such a company for its official liquidation is void. However, for insurance intermediaries like insurance brokers, they can commence official winding-up with a special resolution or a petition to the court.
When a petition for the winding-up of an insurance company is made by someone other than the Regulator, the petition must be served on the Regulator.
- As an alternative to official liquidation, the court may order a reduction of the contracts of the insurance company sought to be wound up.
- Statutory management of company: The Insurance Act provides for a pre-insolvency intervention known as statutory management. The aim of placing a company under statutory management includes preventing or limiting the risks that a licenced insurer or reinsurer would cause to the financial system and preventing or limiting the risks of further financial distress of a licenced insurer or reinsurer.
A company may be placed under statutory management where the licenced insurer or reinsurer has: (a) breached or is likely to breach a solvency control level; (b) its business is not being conducted in a prudent manner or in accordance with sound insurance principles; (c) its business is being conducted in a manner that is detrimental to the interest of policyholders or the public generally; or, (d) that the company has failed to comply with a condition of its licence.
- Is there an equivalent of an administration under the Insurance Act, 2021 (Act 1061)?
The Insurance Act does not specifically make reference to Administration, as contemplated under CIRA, as an option available for companies in the insurance industry. That said, the objectives of placing companies in statutory management include: enabling “the licenced insurer or reinsurer to be rescued and restored as a going concerning”, and preventing “the risk of financial distress of the licenced insurer or licenced reinsurer”.
Considering the objects and mechanics of the statutory management provision, it can be said that it is a close alternative of the rescue provisions contained under the general insolvency legislation.
In spite of the general similarity in objects, there are some differences in how Administration and Statutory Management operate. For starters, a person who is an insolvency practitioner immediately also qualifies as an Administrator under CIRA. A Statutory Manager, on the other hand, must have experience in the insurance sector in addition to their qualification as an insolvency practitioner.
In terms of the similarities, the placement of an insurance entity in Statutory Management (just like administration) triggers the imposition of a moratorium. The Act states that during the period of statutory management, there is a blanket prohibition on the enforcement of security over assets of the insurer or reinsurer, repossession of assets in use by the company, transfer of shares, commencement or the continuation of court proceedings (including those aimed at enforcement).
Another similarity between the Statutory Management and Administration is that in both instances, management of the companies are stripped of their managerial functions and their powers are vested in the Statutory Manager or Administrator. The Statutory Manager, like the Administrator, may with written consent of the Regulator carry on the business of the licenced insurer or reinsurer and make payment to creditors as well as enter into compromises and arrangements with creditors.
- How are insurance liabilities treated in the event of the liquidation of an insurer or reinsurer?
The Insurance Act alters the order of priorities provided under the Corporate Insolvency and Restructuring Act. The Insurance Act prioritises the payment of insurance liabilities over and above preferential debts (including taxes and social security contributions owed), and debts secured by a fixed charge.
- What impact does the liquidation of an insurer or reinsurer have on long term business?
Conventionally, a liquidator’s appointment brings the company’s business to an end. Therefore, the liquidator’s mandate is confined to beneficial winding-up of the company’s affairs. In Re Wreck Recovery and Salvage Co (1880) 15 ChD 353, a liquidator was chided for seeking to explore a means of continuing the business of the company with a shareholder.
The position is similar to (re)insurance companies with a slight variation. Once a (re)insurance company goes into liquidation, all general business contracts come to an end upon the appointment of a liquidator, with the exception of insurance contracts imposing long term obligations.
The insurance legislation specifically provides that the liquidator of a long-term licenced insurer must carry on the long-term business of the licenced insurer or reinsurer – unless the court thinks otherwise. The liquidator bears this obligation until the insurance contract is transferred to some other [viable] entity.
The Authors
Audrey and Clara are lawyers from AudreyGrey, a boutique corporate law firm specialising in Corporate Law, taxation and insolvency. Both are corporate attorneys who specialise in Insolvency and bankruptcy. Audrey is also a licenced insolvency practitioner.
