Shareholder approval is not needed by directors to have a company wound up, according to a ruling passed down in Bermuda.

In a landmark judgement, Puisne Judge Ian Kawaley ruled that the directors of First Virginia Reinsurance, an insolvent Bermuda-based reinsurer, did not need shareholder approval to put the company into liquidation.

This is despite the fact that the company's by-laws did not state they could do this. The ruling was taken all the way to the Supreme Court.

In his written judgement, Mr. Justice Kawaley said that if the company had been solvent, then shareholder approval would be needed to put the business into wind-up. But "the general rule that the interests of the company are synonymous with those of the shareholders on whose behalf all major decisions are taken" would come into play, he said, and no approval needed.

He said: "... I would resolve any doubts in favour of the conclusion that no shareholder approval was, in the circumstances of this case, required."

Mr. Justice Kawaley said he hoped that this decision would be of assistance to those advising directors on the "corporate authority" required for filing winding up petitions in insolvency situations and "facilitate troubled companies' ability to seek the protection of this court".

The mid-80s liability capacity crisis in the United States was the driving force behind the formation of First Virginia Re - a Bermuda-based treaty reinsurer set up in 1984.

Managed by Atlantic Security, First Virginia was owned by 32 tax-exempt, mostly health-care corporations generating more than $30 million of gross premiums a year in the late 1990s.

First Virginia Re reinsured physicians professional liability policies issued by a doctor-owned risk retention group in Tennessee and a hospital-owned admitted carrier licensed in 14 states.

The failed company hit the headlines in the US earlier this year after its financial collapse forced State regulators to take over a Virginia medical malpractice insurer, Reciprocal of America.

This company, domiciled in Virginia, insures hospitals for malpractice, workers' comp and premises liability and used First Virginia Re as its reinsurer.

Virginia's State Corporation Commission blamed both the US insurer's financial difficulties on its claims-related losses and the inability of First Virginia to honour its obligations to Reciprocal of America.

The Bermuda Supreme Court documents say that on October 10 this year, the company applied for its own winding up on the grounds of insolvency and Mr. Justice Kawaley then heard the application on October 13, when he granted the petition.

He then said that counsel raised an important point of law which the judge said was carefully argued and supported by written arguments on a point "that has seemingly not been the subject of a considered judgement by the Bermudian courts".

"The question is whether directors are competent to authorise the presentation of a petition by a company without shareholder approval in circumstances where the bye-laws do not explicitly confer this power," Mr. Justice Kawaley said in his judgement dated October 23 this year.

Mr. Justice Kawaley added that it was apparent from evidence filed in court that the company was "insolvent in terms of its ability to meet its obligations as they fall due".

And he said that this was because its principal creditors, who may also be shareholders, included affiliates recently placed into receivership in Virginia, the "improper lying down" of a trust fund established to secure its reinsurance obligations and the filing against the company of two class action suits in Alabama.

He said that independent actuarial reviews indicate that on a balance-sheet basis, the company has a deficit of between roughly $79 million and $111 million.

He wrote in the 12-page ruling: "Not surprisingly the directors resolved on a meeting of October 1, 2003, to authorise Messrs. Conyers Dill & Pearman to apply immediately for the appointment of provisional liquidators.

"For reasons that were not explicitly spelt out but which are, to my mind, unimportant, seeking prior shareholder approval was not practicable for the board in the present case."

He said that leaving the company to "drift, in limbo until an informed creditor or an enlightened shareholder presents a third party petition". And he said that this take on the law was "both illogical and absurd".

He added that the shareholders may in fact want to "improperly extract funds from the company or recklessly incur further credit in the vain hope that a recovery may be made".

And he ruled that in fact "shareholder approval in these circumstances would have no substantive meaning or significance and would be merely a procedural requirement which would frequently materially impede the company in issuing proceedings designed to protect their own interests."