In the 24 March issue of The Lawyer, there appeared a report on a very important piece of EU legislation about to be brought into force. That has now happened: the Insurers (Reorganisation and Winding Up) Directive was introduced in the UK on 20 April 2003, by means of the Insurers Reorganisation and Winding Up Regulations 2003

The UK has a good record for implementing EU legislation. Inquiries of other countries suggest that other member states have not been so diligent about complying with the deadline for introducing the directive, which was 20 April. It remains to be seen when the directive will be brought into force elsewhere.

Perhaps of greater concern than the question of timing is the issue of how the directive will be brought into force elsewhere. The process in this country has involved a fairly lengthy consultation process, with interested parties, such as the Association of Business Recovery Professionals, providing detailed comments on the terms of the directive and how it should be implemented. Again, inquiries suggest that no equivalent exercise has been carried out elsewhere.

The previous article noted the main changes that will follow the introduction of the directive – namely, that it will only apply to insurers and not to pure reinsurers. The idea is that rather than having individual winding-up or reorganisation procedures in separate member states, there should be a single set of proceedings commenced in the member state in which the insurance undertaking is based. This proceeding would then be recognised throughout the EU.

There is to be a very important change in the payment priority so that insurance claimants will have priority over uninsured creditors. This is likely to be the issue with the greatest commercial significance. In future, if a purchaser of reinsurance has a choice between dealing with a company that writes both insurance and reinsurance business, it may well make sense not to buy from anyone other than a pure reinsurer. The reason is simply that, on an insolvency, the reinsured might not receive any payment at all.

As far as historic business is concerned, there is little that can be done to mitigate this risk. It is a point that needs to be borne in mind by all those who are, for example, involved in commutation discussions. This change may also lead to some structural change in the industry.

There is one area where there have been developments since the original article was published: the schemes of arrangement under Section 425 of the Companies Act 1985. The Lawyer's article suggested that schemes would be covered by the directive. In fact, the Treasury has been persuaded that schemes should not fall within the scope of the directive.

What this means in practice is that the draftsmen of future schemes of arrangement will have to bear in mind the new order of priorities when drafting schemes. In other words, insurance claimants will undoubtedly form a separate class from other unsecured creditors, and if the terms of a scheme do not reflect the new order of priority, what incentive would there be for insurance claimants to vote in favour?

The final point to be noted regarding schemes relates to existing schemes of arrangement. Transitional provisions have been included in the statutory instrument to ensure that existing schemes are not prejudiced by the introduction of the directive.

It will be interesting to consider how and when the directive will be brought into force more widely throughout the EU. It will be even more interesting to see what impact the directive has on the next insolvency to hit the London, or indeed the European, market.