Adjudication comes of age

Adjudication is an increasingly popular way to resolve disputes involving schemes of arrangement. Peter Matthews and Paul Murray of EMB, both experienced adjudicators, discuss how the system works and the advantages of this method of resolution

All adjudications for schemes of arrangement are different, with their own individual characteristics, and the issues can sometimes be exceptionally complex. The ability to interpret the rules accurately, independently and fairly requires sensitivity and imagination as well as technical expertise. Since the sums involved can be very large, it places a great deal of responsibility on the adjudicator, whose decision is normally binding.

This article considers the three main types: vote adjudication; scheme adjudication; and actuarial adjudication. Of these, disputes about voting are the most common and can be quite controversial. The article also considers the reasons behind the increasing use of adjudication and the potential for this trend to continue.

1. Vote adjudication

Vote adjudication takes place before a scheme comes into being. It rose to prominence in 2005 when a judge threw out a proposed scheme involving BAIC, mainly on the grounds that insufficient weight had been given to certain types of creditor, particularly those with large IBNRs. Both he and, subsequently, representatives of commercial insurance buyers criticised the way some schemes were operating at the time.

Schemes require the approval of more than 50% of creditors by number and 75% by volume before they can go ahead. How you measure the size of claims outstanding owed to each creditor, and therefore their share of the overall vote, can be a contentious question. Unfortunately the vote happens before the creditors formally value their claims under the scheme.  For the purposes of the vote they submit a high level assessment of value of their claim against the scheme company.

This leaves the thorny question of how much weight to give unresolved claims, especially latent claims with long tails. A local authority that knows it faces allegations of child abuse, for example, has no reliable means of predicting what the eventual level of damages might be.

The vote adjudicator aims to ensure that, in assessing the votes cast at the creditors’ meeting, they have all been treated in a consistent manner, reasonably and fairly.  S/he comments on whether the chairman of the meeting has been fair and reasonable in her/his evaluation (Some schemes have a vote valuer rather than adjudicator. The valuer performs a similar function, but reports to the chairman rather than the court and does not comment on the chair’s assessment).

The adjudicator’s report will normally state the number (and value) of creditors voting for and against the scheme.  It will state whether s/he accepts these results or whether some creditors have been disallowed from the vote (for example where there appears not to be a valid claim).  If certain policies have to be excluded, the report will state how many of these votes (each in favour and against) have been adjusted and the effect on the values for and against with brief reasons for why adjustments were necessary. If there is more than one class of creditor for voting purposes, the vote adjudicator will comment on each class separately.

The adjudicator sometimes only reviews the disputed votes referred to him/her by the scheme manager.  To ensure that all votes are treated consistently it is preferable that the vote adjudicator has access to all votes. Typically s/he is not told how individual creditors have voted, but simply the value of their votes. The rationale here is that the adjudicator is less likely to be biased if s/he assesses them blind. We would argue, however, that a genuinely independent adjudicator should be trusted with this information; doing so can have a number of practical advantages. 

For example, when the vote is one-sided, knowing the value of the yes or no votes will save time and money.  Alternatively, if the result is close, s/he can concentrate on the pivotal vote(s) if s/he knows what they are.  The vote adjudicator should also know the implications of subtle changes in the overall valuation so that s/he only says the scheme has passed the vote if s/he truly believes this to be fair. 

The vote adjudicator will usually get her/his information from the scheme company, although occasionally extra information may be requested directly from scheme creditors where something looks very wrong or strange.  

2. Scheme Adjudication

Unlike vote adjudication, scheme adjudication takes place once the scheme is up and running and usually follows disagreement over the value of individual claims. This does not happen often – perhaps involving 1/1000 claims. Indeed, for many schemes all submitted claims get resolved without adjudication. 

Only when the scheme company and creditor have exhausted all other avenues will they normally go to adjudication. Creditors usually prefer to negotiate a settlement in a manner akin to a commutation rather than having to prepare further documentation and incurring further uncertainty.   

The appointed adjudicator has to act in the manner described below:

• Review the papers and documents referred to her/him by the scheme company and creditor within a specified timeframe;
• Request any further documents, data or information of either party and set a deadline for compliance;
• Consider any further information and raise further queries as necessary;
• Request a meeting (or series of meetings), if required, with the company and/or the creditor to discuss outstanding matters; 
• Call upon other professional advisers including actuaries, legal advisers, claims adjusters, as necessary, for advice; 
• Make a determination of the dispute;
• Write a letter, jointly addressed to both scheme company and the creditor, to communicate the decision.

There can be subtle but important differences when adjudicating insolvent and solvent schemes. For example, the adjudicator of an insolvent scheme must take in account that any decision to agree to increase a claim settlement must inevitably be at the expense of another creditor.

The sheer variety of disputes makes adjudication interesting.  Apart from typical APH (Asbestos, Pollution and Health Hazards) exposure/allocation issues, examples of some of the adjudications that have been required involve:

• Gem robberies
• Surge and subsidence property claims caused by tunnelling 
• Foreign bank collapses causing professional PI claims 
• Allocation of international compensation awards
• Pharmaceutical latent claim exposures
• Child abuse claim exposures
• Catastrophic ice storms
• Fraud

Slightly more than half of all adjudications require actuarial input to resolve the probability and quantum of a dispute whilst a further quarter require legal input to interpret policy wordings or time bar issues.   

The adjudication process typically takes about three months. In contrast to an arbitration, the letter setting out the adjudication determination will be concise. It will contain no discussion or reasoning of the issues at stake or the logic developed to determine the award.  A typical decision would read as follows:

Because the decision is final and not appealable, it imposes a great responsibility on the adjudicator to have acted impartially, to have requested and reviewed as much relevant information as time allows and to be fair and reasonable to both parties.  Quite often s/he may disappoint both creditor and scheme company, but this is the nature of the role.  The adjudicator may well pause a number of times and indeed sleep on it before issuing her/his final opinion.  This delay will give the adjudicator time to search his/her professional conscience and to determine that all relevant matters (including peer reviews where appropriate) have been considered in a fair, reasonable and measured way.

A sensitive issue is how to apportion the costs.  Some adjudicators adopt the view that, because the company has imposed its scheme on the creditors, it should always pay the costs. 

Others seek to apportion costs on the basis of which party has been most culpable in causing the process to be invoked.  For example, a creditor who has been non-communicative throughout and provides no supporting evidence for a submitted claim may find that they are landed with the whole cost; likewise, a scheme company that has been particularly un-cooperative.  In most cases, though, costs are apportioned on a less extreme basis and could be shared equally.

3. Actuarial Adjudication

The WFUM Pools’ Schemes provide the only instance to date of the specific role of actuarial adjudicator, a role similar to the actuarial peer review role in the early insolvent schemes.  It remains to be seen whether this will set a trend for future schemes with complex actuarial issues.

 The actuarial adjudicator in the WFUM Pools’ Scheme was required to:

• Review the actuarial estimation methodology proposed by the scheme actuary at the pre-sanction stage;
• Suggest enhancements to the methodology where appropriate;
• Approve the final estimation methodology;
• Resolve any creditor’s actuarial dispute relating to the estimation methodology;
• Report the adjudication determination to both scheme company and creditor.

At the pre-scheme stage the actuarial adjudicator reviews the actuarial estimation methodology proposed by the scheme actuary at a reserving class level, with particular reference to how it will be applied to individual policies.  After careful consideration and discussion about possible amendments, s/he should approve the methodology and issue a statement, which may become part of the published scheme documentation.

In the event of a dispute once the scheme has received court approval, the actuarial adjudicator will give an opinion on whether the estimation methodology has been applied correctly. If not, s/he will reapply it to provide a binding value of the creditor’s claim.

The costs of the actuarial adjudicator during the pre-scheme stage are paid by the respective scheme companies.  However, should a dispute arise with a creditor once the schemes are effective, the costs would be apportioned along similar principles to those discussed above for scheme adjudication.

Conflicts of Interest

An adjudicator is normally a recognised professional in her/his respective discipline and will have many years of market experience.  This will inevitably create occasions where a conflict of interest arises or is perceived to do so.  Should the adjudicator or company or creditor believe a conflict will jeopardise impartiality, the scheme manager will appoint someone else.

Future Developments

There is a movement afoot for the various roles of adjudication to become specialised by profession and by region.  In the future one might see more specified roles such as:

• a lawyer appointed to the role of legal adjudicator;
• a claims adjuster appointed to the role of claims adjudicator;
• a US actuary/lawyer/claims adjuster appointed to adjudicate USA only related disputes;
• an actuary/lawyer/claims adjuster appointed to adjudicate non-USA related disputes.

There is a case for forming a professional association of approved adjudicators from different professional backgrounds (similar in concept to ARIAS) from which a scheme manager could select the person deemed to have the most relevant experience to resolve a particular dispute.

Regardless of these possibilities, it is hard to avoid the conclusion that the use of adjudicators will continue as an alternative to litigation and arbitration. Adjudication is a speedier and more cost-effective solution, qualities that help to explain its growing popularity.

Peter Matthews is a consultant and Paul Murray is a director at the specialist non-life actuarial consultancy EMB.