Markel CATCo Reinsurance Fund Ltd

• Jurisdiction: Bermuda
• Judge: Mussenden J
• Judgment Date: 25 February 2022
• Court: Supreme Court (Bermuda)
• Docket Number: COMPANIES (WINDING UP)

In the Matter of Markel CATCo Reinsurance Fund Limited

And in the Matter of CATCo Reinsurance Opportunities Fund Limited

And in the Matter of the Companies Act 1981

And in the Matter of the Segregated Accounts Companies Act 2000

[2022] SC (Bda) 12 Com

COMPANIES (WINDING UP)

Case 2021: Nos. 307 and 309

In The Supreme Court of Bermuda

COMMERCIAL COURT

Appearances:

Daniel Bayfield QC, South Square, Gray's Inn, London and Kehinde George, ASW Law Limited, for the Companies

Christian Luthi and Rhys Williams, Conyers, for the Joint Provisional Liquidators

Felicity Toube QC, South Square, Gray's Inn, London and David Kessaram, Cox Hallett Wilkinson, for Opposing Scheme Creditors, HWH Realty Holdings LLC and Partners Capital LLC

JUDGMENT of Mussenden J

Introduction

1 This matter came before me by a Summons dated 29 October 2021 in respect of each of the companies Markel CATCo Reinsurance Fund Limited (the “ Private Fund”) and CATCo Reinsurance Opportunities Fund Limited (the “ Public Fund”, together the “ Scheme Companies”). The Scheme Companies are part of the CATCo Group (the “ Group”) which operates an Insurance Linked Securities fund business (“ Markel CATCo”) which was founded in 2011 and acquired by Markel Corporation (“ Markel Corporation”) in late 2015. The Group provided investment opportunities in retro and non-retro reinsurance products to its investors (the “ Investors”) 1

2 The Scheme Companies each seek an order pursuant to section 99 of the Companies Act 1981 (the “ CA 1981”) convening meetings (the “ Scheme Meetings”) of the beneficial owners of their shares, in their capacity as creditors of the Scheme Companies (the “ Scheme Creditors”), for the purpose of considering and, if thought fit, approving schemes of arrangement between each of the Scheme Companies and its Scheme Creditors (the “ Schemes”). The applications were originally supported by the evidence filed by the Scheme Companies including:

• a. The third affidavit of Federico Alejandro Candiolo filed on behalf of the Scheme Companies dated 17 November 2021 (“ Candiolo 3”);

• b. The first and second affidavits of Andrew Good of Skadden, Arps, Slate, Meagher & Flom (“ Skadden”) dated 16 November 2021 (“ Good 1”) and 1 December 2021 (“ Good 2”);

• c. The first affidavit of Joe Cotterell of Sterling Financial Print dated 16 November 2021; and

• d. The first affidavit of Eric Bertrand of Centaur Fund Services (Bermuda) Limited dated 15 November 2021.

3 Shortly before the original return date for this hearing on 10 November 2021, certain parties informed the Scheme Companies that they intended to oppose the Schemes. Those parties are Pension Insurance Corporation plc (“ PIC”) and HWH Realty Holdings LLC (“ HWH”), both of which are Investors in the Private Fund, and Partners Capital LLC and certain of its clients (“ Partners”, and together with PIC and HWH, the “ Opposing Scheme Creditors”), which is an investment manager and adviser to various Investors in the Private Fund. The Opposing Scheme Creditors had filed evidence from several people.

4 Shortly before the Convening Hearing on 7 December 2021, PIC withdrew its opposition to the Scheme proposed by the Private Fund, and signed a support undertaking. PIC were no longer part of the Opposing Scheme Creditors which consequently consisted of HWH and Partners.

5 On 7 and 8 December 2021, there was a full hearing when I heard submissions from counsel for the Scheme Companies and the Opposing Scheme Creditors. Counsel for the Scheme Companies provided full details of the proposed Schemes and counsel for the Opposing Scheme Creditors provided full details of their objections to the Schemes. At the end of the hearing, I reserved judgment.

6 On 28 January 2022, counsel for the Scheme Companies informed the Court by letter that the Scheme Companies and the remaining Opposing Scheme Creditors had agreed to an in principle settlement that would, if successfully concluded, result in the withdrawal of the objections to the proposed Schemes raised by those creditors. On that basis, modifications would be required to the proposed Schemes. In order for the proposed Schemes (as amended) to proceed, the Scheme Companies would still require Orders from the Court summoning meetings of the Scheme Creditors, and the Court would still need to be satisfied that it had the necessary jurisdiction to make the Orders sought.

7 On 3 February 2022, counsel for the Scheme Companies informed the Court by letter that the Scheme Companies and the remaining Opposing Scheme Creditors (HWH and Partners) had entered into a settlement agreement (the “ Settlement Agreement”). As a result of the Settlement Agreement, HWH, and Partners would no longer be Scheme Creditors and they no longer opposed the Private Fund Scheme. Thus, there would no longer be Opposing Scheme Creditors.

8 On 16 February 2022, there was a hearing in Court when counsel for the Scheme Companies provided an update on the proposed Schemes (the “Update Hearing”). They relied on the Third Affidavit of Peter Newman sworn on 15 February 2022 (“ Newman 3”) which provided an overview of the developments since the Convening Hearing. At the end of the hearing I made the Orders with reasons to follow, which I now provide.

9 As the Opposing Scheme Creditors withdrew their objections, I have for the majority of this Judgment referred only to the submissions of the Scheme Companies referring to the same as the “Scheme Companies” or “counsel for the Scheme Companies” or “counsel”.

Background to the Scheme Applications – Prior to the Settlement Agreement

10 Counsel for the Scheme Companies submitted that in light of litigation brought and threatened against them, the directors of each Scheme Company consider that the risk of Scheme Creditors bringing claims against the Scheme Companies or persons who are indemnified by the Scheme Companies in relation to certain claims which might be made against them (referred to as “ Investor Claims”) is such that they cannot make further distributions to Scheme Creditors at present. This is because the Scheme Companies are likely to incur costs and expenses (including costs of defending such claims) if Investor Claims are brought and other liabilities if Investor Claims succeed or are settled.

11 The Schemes form part of a wider proposal (the “ Buy-Out Transaction”) pursuant to which the Scheme Creditors will receive 100% of the adjusted net asset value of the shares in which they are beneficially interested (the “ Closing NAV”) which includes the value of a US$20 million contribution by Markel Corporation or its affiliates towards the expenses of the transaction and future run-off of the group (the “ Administrative Expenses Contribution”), 2 plus their pro rata share of a further US$34 million which will be contributed by Markel Corporation or its affiliates (the “ Additional Consideration”), while retaining the right to any future upside should the value of fund assets increase.

12 In exchange, the Scheme Creditors will provide releases (the “ Releases”) of any Investor Claims that they might hold against the Scheme Companies and certain third parties, including all those who are, directly or indirectly, entitled to an indemnity from the Scheme Companies, such as Markel Corporation (the “ Indemnified Parties”).

13 The Releases, which the Scheme Companies accept are broad, are a key feature of the Schemes. Markel Corporation is not willing to fund the Buy-Out Transaction if there remains any risk of litigation being brought by Scheme Creditors in relation to the Investor Claims. The funding is only available if Markel Corporation is confident that the Schemes will bring an end to the litigation threatened by a number of the Scheme Creditors, and which might be brought by other Scheme Creditors. The Schemes are designed to bring about finality and certainty and the breadth of the Releases reflects that and is necessary to achieve it.

14 On 1 October 2021, the Bermuda Court appointed joint provisional liquidators (“ JPLs”) in respect of the Scheme Companies and other entities in the Group for the purpose of overseeing the implementation of the Schemes and the Buy-Out Transaction (together, the “ Restructuring”). The appointment of the JPLs brought into effect a moratorium on claims against the Scheme Companies which has subsequently been recognised in the U.S. under Chapter 15 of the U.S. Bankruptcy Code.

15 Absent the Schemes, the boards of directors of the Scheme Companies had determined that they would have no choice but to take steps to place the Scheme Companies into full liquidation proceedings. A report had been prepared by AlixPartners UK LLP (the

“ AlixPartners Report”) which indicated that returns to Scheme Creditors in that scenario would be substantially lower than if the Schemes are implemented

16 Thus, the Scheme Companies submit that in the interests of the Scheme Creditors that they be permitted to convene meetings of the Scheme Creditors, and, if the Schemes be approved at those meetings, for the Schemes to be sanctioned, allowing the Buy-Out Transaction to proceed.

17 All Private Fund Scheme Creditors will receive the same treatment under the Schemes, in that they will receive 100% of the Closing NAV of the shares in which they are beneficially interested, plus their pro rata share of the Additional Consideration.

18 Public Fund Scheme Creditors will effectively receive the same treatment, save that their share of the distributions will be made via the Public Fund through its receipts from the Private Fund.

19 The Scheme Companies propose that their Scheme Creditors should be divided into a number of classes for the purpose of voting on the Schemes:

• a. For the Private Fund Scheme, it is proposed that the Scheme Creditors who are beneficially interested in shares in the main fund of the Private Fund (the “ Master Fund”) will...