The liquidators of Bermuda-based Mentor Insurance Ltd. have scored a victory in London's Privy Council.

The Council's decision against Ambassador Insurance Company came as Mentor prepared yet another dividend to creditors.

The highest court has delivered a decision that fully backs a Bermuda Supreme Court judge, Justice Ground, and supports a principle feature of cut-off schemes of arrangement in insurance liquidations.

Meanwhile, an additional $8.12 million or two cents on the dollar is being disbursed at the end of this month, or early January, to creditors, bringing the total pay out up to nearly $285 million.

Joint liquidator Charles Kempe said, "The two cents on the dollar dividend we have declared would bring the total dividend so far in Mentor up to 70 cents on the dollar.

"We still have receivables due to Mentor from its reinsurers of some $16 million and we retain adequate assets to fund whatever collection measures and efforts are going to be required to collect the money.'' Mr. Kempe was confident that the creditors were happy so far with the success of the scheme of arrangement employed in the liquidation.

He said, "Clearly, the technique we used, a cut-off schme, has been a correct one. And we have been successful in the litigation against the company's parent and others, to the extent that we have enhanced the returns to the creditors to a level beyond which they had any expectation in the first instance.'' And the judgement taken by the Privy Council in London, backs the original ruling by Justice Ground in Bermuda's Supreme Court, in favour of the liquidators.

The Privy Council has clarified that if a scheme of arrangement imposes strict time limits for the submission of appeals against claims previously rejected by the administrators of the scheme, the court has no jurisdiction to extend such time limits.

The ruling confirms the practical importance of cut-off schemes of arrangement, which impose deadlines for claims in an effort to speedily resolve the run-off of insolvent non-life insurers.

And Chris Galyer of London lawyers, Eversheds, wrote in Insurance Day that the decision, in a wider sense, lends support to the use of cut-off schemes for the run-off of solvent, as well as insolvent, insurance companies.

The very reason for cut-off schemes is to try to bring liquidations to a close as quickly as is practically possible. If the court had ruled that the deadlines imposed by a scheme could be varied at the will of the court, it would have undermined a key reason for their use.

Mentor was ordered wound up by the Bermuda Supreme Court in 1985, with Charles W. Kempe Jr. and Nigel Hamilton appointed joint liquidators. They gave notice to creditors that proof of Mentor's debts had to be filed to them by May 31, 1989.

On the basis of those proofs, the joint liquidators declared an interim dividend of 25 cents on the dollar and paid out $78.2 million.

But creditors in a liquidation are allowed to file new and revised proofs at any time before the assets are finally distributed, so long as they do not disturb assets already distributed.

The liquidators determined that this could have the effect of allowing the liquidation to go on for many years, and they proposed a scheme of arrangement, under section 99 of the Companies Act 1981, which established a strict deadline for filing claims of June 30, 1993.

Ambassador, which had ceded business to Mentor in the late 1970s or early 1980s, filed for $1,158,140.27, all of which was rejected by the liquidators except $79,075.24. The liquidators gave their reasons in writing November 17, 1994. Ambassador had until December 8 to appeal that decision.

The Lords of the Judicial Committee of the Privy Council noted: "Owing to an administrative lapse in its offices, Ambassador did not file a summons until 16th December.'' The Ambassador summons sought an order to extend the deadline under Rule 75 of the Companies (Winding-Up) Rules 1982 or the inherent jurisdiction of the court.

Justice Ground had held that neither Rule 75 nor the inherent jurisdiction had any application to appeals under the scheme. He struck out the summons on the ground that the court had no jurisdiction to entertain it.

The Court of Appeal later reversed his decision and enlarged the time for appealing. Against this decision, the liquidators successfully appealed to Her Majesty in Council.

The liquidators of Mentor had spent some $20 million in an earlier legal fight against Mentor's former owners and spent several million dollars more in other court room battles.

Said Mr. Kempe, "The most significant one was against Mentor's owner ODECO (New Orleans-based Ocean Drilling & Exploration Company). And then we have had cases in several parts of the US, New York and Kansas City. We've had cases in England.

"I couldn't estimate right now, how many of these things we've done. And we have had to go back something like 100 times to the Supreme Court for directions and for rulings on various matters in Bermuda. So it has been a significant amount of legal work involved.'' Charles Kempe Richard Ground