In a ruling expected to have a far reaching effect on the ability of US companies to seek recoveries from foreign insurers protected by schemes of arrangement, the US Bankruptcy Court has issued an order preventing General Mills from taking action against Bermuda-based Hopewell International Insurance Ltd.

A Bankruptcy Court judge last week ordered that General Mills was also subject to a ruling made on August 19, which compelled Hopewell's creditors to comply with a scheme of arrangement drawn up local lawyer Jan Woloniecki.

At the time Mr. Woloniecki called the decision an endorsement of the Island's reputation.

The more recent ruling endorses the earlier decision and provides protection of Hopewell's managers, scheme administrators and board of directors, US lawyer Howard Seife said.

Mr. Seife was the lawyer representing Hopewell in court. He is head of the bankruptcy and restructuring department of Chadbourne & Parke LLP. General Mills had opposed being included in the earlier decision.

"This ruling marks the first time that a US court in a contested proceeding recognised and enforced the terms of a scheme of arrangement for a solvent company,'' he said.

In 1994 General Mills found that an independent contractor had sprayed raw oat grain with a non-approved pesticide. General Mills had to destroy 50 million boxes of cereal and then sought though its captive insurance company Gold Medal to claim $230 million from Hopewell.

The ruling means Gold Medal can only seek recovery of the claim through arbitration proceedings in Bermuda.

"Because of a 1996 change in the reinsurance law in Bermuda, it will be easier for Hopewell to challenge any settlement between General Mills and its captive, Gold Medal,'' Mr. Seife said.

He described the ruling as "critical'' for the increasing number of insurers and reinsurers in Bermuda and the UK that are entering into schemes of arrangement to wind down their operations under those countries' laws while they have substantial assets in the US.

"Solvent schemes of arrangement now may be afforded protection by US bankruptcy courts, preventing US creditors from interfering with those proceedings,'' he said.

Hopewell, managed by Bermuda-based International Risk Management Group Ltd., went into run off in June 1995. At the time Hopewell entered into a scheme of arrangement with its creditors which was approved by the Bermuda Supreme Court.

The scheme provides for the cut-off and estimation of Hopewell's liabilities after a run off period of four years. All creditors were required to file claims by June 30, 1999.

Gold Medal Insurance Co., a captive insurer of General Mills, Inc., contended that the company was not bound by the arbitration provisions of the scheme which required all disputes to be heard in Bermuda.

Since Gold Medal was threatening to get an injunction in the US, Hopewell decided to sue for a decision on the issue in Bankruptcy Court. After eight days of hearings Judge Brozman rejected Gold Medal's objections in a decision handed down on August 19.

Hopewell was in the business of reinsuring captives. A scheme of arrangement was drawn up because of the unknown magnitude of Hopewell's pollution exposure at Lloyd's of London. Mr. Woloniecki proposed the adoption of the scheme in 1995 as a means of cutting down the traditional run-off period of 20 years and gaining savings on administrative costs.

Under the scheme all claims would be paid by June 30, 2001.