Company arrangements

class of them’.3 An arrangement here may include a reorganisation of share capital by the consolidation of shares of different classes or by the division of shares into different classes.4 Such schemes are commonly used to effect compromises and moratoria with creditors and schemes with policy holder creditors of insurance companies have also been common.5 They are also used in takeover and merger transactions and in reorganisations of rights allocated to classes of shares or debt, often where the articles or instruments constituting the capital are inadequate.6

The relevant procedure for a scheme involves an initial approach to the court by the company or any creditor, member, liquidator or administrator of the company, or else the summoning (with court approval) of meetings of the company’s members and creditors.7 On such approval being obtained, the scheme must be approved by the court, which will consider

3Companies Act 2006 Part 26, ss. 895–901 restate ss. 425–7 of CA 1985 with effect from 6 April 2008. CA 2006 s. 895 also applies as between the company and the members or any class of them. On the meaning of ‘creditor’ as any person who has a pecuniary claim against the company, whether present or contingent, see Re T & N Ltd and Others [2006] 3 All ER 697 (on which see further J. Bannister and N. Hamilton, ‘Future Claims, Present Redress? Schemes, CVAs and Liquidations after T & N ’ (2006) Recovery (Summer) 36 and G. Stewart, ‘Legal Update – The Challenge of the T & N Case’ (2006) Recovery (Spring) 7); Re Midland Coal, Coke and Iron Co. [1895] 1 Ch 267, approved by Re Cancol Ltd [1996] 1 BCLC 100. On the predecessor s. 425 schemes see generally A. Wilkinson, A. Cohen and R. Sutherland, ‘Creditors’ Schemes of Arrangement and Company Voluntary Arrangements’ in H. Rajak (ed.), Insolvency Law: Theory and Practice (Sweet & Maxwell, London, 1993); D. Milman, ‘Schemes of Arrangement: Their Continuing Role’ [2001] Ins. Law. 145.

4Companies Act 2006 s. 895(2). A proposal under s. 895 has to involve an ‘arrangement’ or ‘reconstruction’: see further Re My Travel Group plc [2005] 1 WLR 2365, [2005] BCC 457 (where Mann J agreed with subordinate bondholders that the scheme as initially proposed was not a ‘reconstruction’ for the purposes of the statute because only 4 per cent in value of the shares in the new company were held by the shareholders in the old company, with the bulk of the new company’s shares going to the old company creditors. Mann J also indicated, however, that the subordinated bondholders had ‘no economic interest’ in the company. This recital was set aside on appeal: Re My Travel Group plc [2005] 2 BCLC 123.) See N. Segal, ‘Schemes of Arrangement and Junior Creditors – Does the US Approach to Valuations Provide the Answer?’ (2007) 20 Insolvency Intelligence 49; Re T

& N Ltd and Others [2006] 3 All ER 697 – per David Richards J – a mere expropriation of rights does not qualify as an arrangement; D. Milman, ‘Arrangements and Reconstructions: Recent Developments in UK Company Law’ (2006) 21/22 Sweet & Maxwell’s Company Law Newsletter 1.

5See CLRSG, Modern Company Law for a Competitive Economy: Completing the Structure

(November 2000) p. 206. A scheme of arrangement can also be put in place after the principal terms of an informal restructuring have been agreed, thus binding dissentient creditors: see further the discussion on informal rescue in ch. 7 above.

6Ibid.

7The Notes to Part 26 of the Companies Act 2006 state that one of the (two) changes of substance in the 2006 provisions is that ‘S. 899(2) makes clear that the persons who may apply

issues of procedural fairness, hear objections from dissenters and decide whether the scheme is ‘fair and reasonable’8 and would have been supported by any intelligent and reasonable bystander.9 The court will, inter alia, consider whether each common interest group (for which there must be a separate meeting) is fairly constituted and whether the class’s decision to approve the scheme was one that could reasonably have been made.10

One advantageous feature of the scheme of arrangement is that, if the arrangement is approved, it may modify the rights of shareholders and creditors and may do so without their consent. It is binding on all affected parties,11 not just those who, in accordance with the rules, were entitled to vote at the meeting approving the arrangement (as with a CVA under the Insolvency Act 1986 sections 1–7). Schemes, moreover, may be tailored to corporate needs. They are very flexible and there are no statutory prescribed contents for such schemes.12 They can be used in conjunction with liquidation (in order to reach a particular compromise

for a court order sanctioning a compromise or arrangement are the same as those who may apply to the court for an order for a meeting (under s. 896(2))’ (para. 1166). The other substantive change is that ‘S. 901 requires a company to deliver to the registrar a court order that alters the company’s constitution. It also requires that every copy of the company’s articles subsequently issued must be accompanied by a copy of the order unless the effect of the order has been incorporated into the articles by amendment’ (para. 1167).

8Re Anglo-Continental Supply Co. Ltd [1922] 2 Ch 723, 726; Re Dorman Long [1934] 1 Ch 635; Re NFU Development Trust Ltd [1972] 1 WLR 1548; Re RAC Motoring Services Ltd

[2000] 1 BCLC 307. See also Practice Direction: Schemes of Arrangements with Creditors [2002] BCC 355, [2002] 1 WLR 1345.

9See Re Abbey National plc [2005] 2 BCLC 15. On the issue of whether junior creditors have any residual economic interest in the debtor and the courts’ ability to deal with this issue when deciding whether the scheme is reasonable see Segal, ‘Schemes of Arrangement and Junior Creditors’; My Travel Group plc [2005] 1 WLR 2365 (Mann J); My Travel Group plc [2005] 2 BCLC 123 (CA).

10The court must be satisfied that the scheme does not operate unfairly between groups and will ask whether an intelligent and honest member of the class could reasonably have approved the proposal: see Re Linton Park plc [2008] BCC 17; RAC Motoring Services Ltd [2000] 1 BCLC 307; D. Milman, ‘Schemes of Arrangement’ [2001] 6 Palmer’s In Company 1.

11A majority in number representing three-quarters in value of the creditors, or class of creditors, or members, or class of members, is binding on all creditors, or the class of creditors, or the members, or class of members, where the arrangement is sanctioned by the court: Companies Act 2006 s. 899(1). The court has complete discretion, when approving a scheme, to make consequential directions. This may be useful where the proposal put to the court differs from the proposal considered by the shareholders: Re Allied Domecq plc [2000] BCC 582.

12Schemes must, however, be within the corporate powers of the company – Re Ocean Steam Navigation Co. Ltd [1939] Ch 41 – and must comply with the Companies Act requirements on reductions of capital or issues of redeemable shares – Re St James Court Estate Ltd [1944] Ch 6.

with creditors) or as an alternative to liquidation or as one of the purposes for which administration can be entered into.13 Section 895 schemes can also be embarked upon with regard to solvent companies.14 Securities may be removed or rights to enforce securities may be curtailed and creditors’ payment rights can be modified if the majority of secured creditors agree. (The court’s powers under the Companies Act 2006 section 900 are more extensive here than in relation to administration orders.)

A second advantage, of relevance to rescue scenarios, is that schemes may be formulated and approved without any requirement that there be an impending insolvency. Early attention to corporate difficulties and timely responses to problems may, accordingly, be instituted. (This may be a considerable advantage over some of the entry routes into the ‘new’ administration.)15 A third favourable factor is that schemes of arrangement are in essence agreements between companies and their creditors and, accordingly, there is no need to involve an insolvency practitioner in formulating or in implementing the scheme. This allows the existing directors to stay in control of the company and the process does not deter them from taking remedial action by holding out the real prospect of a ceding of control to an outside IP. Schemes, moreover, can be applied to companies not registered in the UK, and, if the company has assets in the UK, the scheme can prevent enforcement against these. This overcomes jurisdictional problems.16 A final attraction of the scheme of arrangement is that it can be used to reorganise corporate groups: debt can be exchanged for equity and schemes can provide for the transfer of shares or assets between companies or even the amalgamation of a number of companies.17

13See e.g. the broadly defined purposes of para. 3 in Sch. B1 of IA 1986; see ch. 9 above.

14See, inter alia, Re British Aviation Insurance Co. Ltd [2006] BCC 14; Re Abbey National plc [2005] 2 BCLC 15.

15See, for example, IA 1986 Sch. B1, paras. 11(a), 27(2) – an appointment of an administrator by the court (unless on the application of a QFCH), or out of court by the company or its directors, can only be made if the company is insolvent or nearly so: see ch. 9 above.

16Milman notes that the English courts have adopted ‘an open-door policy’ consistent with the ‘general policy of the English courts to expand our corporate law jurisdiction wherever possible’: see the discussions of Drax Holdings Ltd [2004] BCC 334; Re Home Insurance Co. [2006] BCC 164; Re DAP Holding NV [2006] BCC 48 and Re Sovereign Marine & General Insurance Co. Ltd [2006] BCC 774 in ‘Arrangements and Reconstructions’, p. 2.

17Note, however, that the Third and Sixth Company Law Directives of the EC – the Companies (Mergers and Divisions) Regulation 1987 (SI 1987/1991); EEC Council Directive 78/855, OJ 1978/295/36 and EEC Council Directive 82/891, OJ 1982/378/

In spite of such advantageous characteristics, schemes of arrangement have been used on relatively few occasions. This infrequency of resort is understandable once the disadvantages of the scheme of arrangement are considered. A major constraint on use has been that such schemes have been so rigorously protective of minority interests that, in practice, schemes have not been approved unless they have happened to satisfy the interests of all parties affected by them. This protective stance is seen in the complexity of the approval arrangements. It is necessary to ensure that separate meetings are held for each different class of member or creditor affected by the proposed scheme. It is often difficult, however, to know what constitutes a class for these purposes, and the court will not offer guidance on such matters at the application stage.18 Different types of shareholding clearly produce different classes, and preferential, secured and unsecured creditors will also be separately grouped. Other interest groups within these classes may also, however, have to be organised into different classes, and if such classes are not established properly from the start, the whole scheme will be nullified.19 There have, however, been recent signs of a less protective stance by the judiciary – a change of approach that has prompted some concern. When the Company Law Review Steering Group (CLRSG) looked at these issues, it considered that, in an important case, the Court of Appeal had not given sufficient protection to minority creditors and members. The decision in Re Hawk Insurance Co. Ltd20 was seen as worrying in so far as a scheme of arrangement under (the then) section 425 was approved where a single meeting of all the creditors had been held,

47 – are implemented by Part 27 of the Companies Act 2006, and s. 903 provides that, in the case of mergers or divisions within the scope of Part 27, ss. 895–901 are to have effect subject to the provision of Part 27: see Boyle and Birds’ Company Law (6th edn, Jordans, Bristol, 2007) p. 826.

18The CLRSG favoured the idea that the court should have discretion to decide class issues at the application stage: see CLRSG, Modern Company Law for a Competitive Economy: Final Report (July 2001) para. 13.8.

19A petition for approval of a scheme will be nullified: Practice Note [1934] WN 142.

20[2001] EWCA Civ 241. Chadwick LJ stated that: ‘those whose rights are sufficiently similar to the rights of others that they can properly consult together should be required to do so, lest by ordering separate meetings the court gives a veto to a minority group.

The safeguard against majority oppression … is that the court is not bound by the decision of the meeting ’ ; see further R3, ‘ Legal’ U(200pdate1) Reco very (September) 8. See also CLRSG, Completing the Structure, p. 215. The Report of the Review Committee

on Insolvency Law and Practice (Cmnd 8558, 1982) (‘Cork Report’) noted the difficulties of class definition (paras. 405–18), and CVA procedures avoid separations of classes in favour of remedial procedures for those who consider they have been unfairly prejudiced: see Insolvency Act 1986 s. 6.

484 the quest for turnaround

BCLC 675: ‘those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to acting in their common interest’; Re Sovereign Marine & General Insurance Co. Ltd [2006] BCC 774 (on which see T. McMahon, J. Wardrop and A. Wood, ‘Solvent and Insolvent Schemes of Arrangement …WFUM:

when reviewing proposed schemes and will have a huge impact on the structuring of solvent schemes in the future’). See also Re Telewest Communications plc (No. 1) [2004] BCC 342 (the rights of sterling and dollar bondholders were not identical but they were sufficiently similar to be treated as a single class); Re Osiris Insurance Ltd [1999] 1 BCLC 182 (Neuberger J indicated that a single class might contain members whose interests were not exactly the same).

22 CLRSG, Final Report, 2001, para. 13.8; see also Re BTR plc [1999] 2 BCLC 675;

Re Sovereign Marine & General Insurance Co. Ltd [2006] BCC 774.

23CLRSG, Final Report, 2001, paras. 13.7, 13.8.

24See for example Re Abbey National plc [2005] 2 BCLC 15, cited in Milman, ‘Arrangements and Reconstructions’, p. 4. Such pragmatism, however, does not go so far as to endorse a class ‘meeting’ as valid when attended by a single person where there was no evidence that there was only one person in that particular class: Re Altitude Scaffolding Ltd [2006] BCC 904.

25See In re Cape plc [2006] EWHC 1316, [2007] Bus LR 109 where David Richards J confirmed that three different types of asbestos claimant could be combined in a single class and that arrangements containing provision for future amendment could be

sanctioned by the court, albeit in exceptional cases. On In re Cape see further J. Townsend, ‘Schemes of Arrangement and Asbestos Litigation: In re Cape plc’ (2007) 70 MLR 837.

the meetings and fully informed of the issues. A very extensive explanatory statement must be sent out with notices of meetings, and this statement will be both scrutinised in its terms and subjected to a power of approval by the court.26 The court is thus involved in the procedure in at least two stages, first, on convening the necessary meetings of creditors and members and, second, on the petition to sanction the scheme as approved by the appropriate majorities of the meetings. On a petition for approval, moreover, a substantial review of information has to be provided to the court on such matters as the capital, business and financial history of the company, the terms of the scheme and the effects of the scheme on each relevant class of creditor or contributory. Dealings with the court on these matters involve substantial formality, routine and complexity as well as numerous attendances at court or chambers. Variations in schemes are also overseen by the court. When a scheme is approved by the court it must be filed at the Companies Registry27 and it cannot then be varied without court approval. In such circumstances the court will demand that further class meetings are held in order to approve the variation.

A further posited disadvantage of the scheme of arrangement is that, as noted, it involves no moratorium. In the period between the initial formulation of a scheme and its becoming effective by court order, each individual creditor is thus able to exercise all the rights and remedies that he or she possesses against the company debtor. Cork estimated that, because of the complex procedure involved, this period of high vulnerability was unlikely to be less than eight weeks.28 In this period the troubled company cannot prevent winding up or the random seizure of assets by individual creditors, and this will make it extremely difficult to launch even the simplest scheme.29 In 2000 the Insolvency Service recommended that it should liaise with the CLRSG to give full consideration to proposals for a moratorium in schemes of arrangement, one to resemble the CVA moratorium then proposed (and later

26 See Companies Act 2006 ss. 897–8. The statement must state all relevant facts:

Re Dorman Long [1934] 1 Ch 635; Re Jessel Trust Ltd [1985] BCLC 119.

27Note that the Companies Act 2006 s. 901 now requires a company to deliver to the registrar a court order that alters the company’s constitution. It also requires that every copy of the company’s articles subsequently issued must be accompanied by a copy of the order unless the effect of the order has been incorporated into the articles by amendment.

28Cork Report, para. 406 (discussing the Companies Act 1948 s. 206 scheme, the statutory predecessor of s. 425 of the Companies Act 1985).

29Ibid., para. 408.

implemented),30 and in its Final Report the CLRSG recommended further DTI consideration of the issue. The 2006 legislative restating of the rules on schemes, however, provided no addition of a moratorium.31 Schemes may, accordingly, have to be coupled with administration orders if any protection is to be secured.

It should, finally, be noted that the prominent role of the company’s existing management in a scheme of arrangement may bring some advantages (for example, the mentioned lack of disincentives to respond to troubles) but there may be concurrent disadvantages. Schemes of arrangement depend substantially on the management of the company to take new initiatives, often defensively. These qualities may often be lacking in companies, particularly troubled companies. As Cork noted:

It is, however, often the case that, where a company has become insolvent, the management has lost interest, or lost its grip, and there is a vacuum. All too often a scheme of arrangement with creditors would be of advantage to all concerned, but there is no one with the authority within the company, the means of information, and the energy to push the scheme through.32

In recent years the scheme of arrangement has revived in popularity33 – a revival due, in no little part, to the constructive attitude taken by the courts, whose concern to facilitate the implementation of schemes has been exemplified in an approach to assessing junior creditors’ ‘real economic interests’ with reference to the sums that such parties would receive in the alternative to the scheme (notably by enforcing their bonds within a winding up).34

30 Insolvency Service, A Review of Company Rescue and Business Reconstruction Mechanisms, Report by the Review Group (DTI, 2000) (‘IS 2000’) para. 43; CLRSG, Final Report, 2001, para. 13.11.

31It has been argued, however, that the lack of a moratorium provision combined with a simplified scheme of arrangement procedure could actually facilitate the restructuring of companies in providing a cheaper and more cost-effective process: see J. Tribe, ‘Company Voluntary Arrangements and Rescue: A New Hope and a Tudor Orthodoxy’ (Mimeo, Kingston University, 2008).

32Cork Report, para. 417.

33In the Takeover Panel’s consultation paper, Schemes of Arrangement (Takeover Panel, London, June 2007) the Code Committee noted that schemes of arrangement have been used increasingly in recent years to effect takeover transactions regulated by the Takeover Code. (The aim of the consultation paper’s proposals is to codify the application of the Code to such schemes.) See further ‘Takeover Panel Consults on Schemes of Arrangement’ (2007) 12 Sweet & Maxwell’s Company Law Newsletter 8.

34As in Re My Travel Group plc [2005] 1 WLR 2365: see Segal, ‘Schemes of Arrangement and Junior Creditors’, p. 51; and p. 481 above.

As for ways forward, the CLRSG’s Final Report of 2001 advocated that the requirement that a majority in number of those who cast the votes needed to agree a scheme be dispensed with so that a threshold of 75 per cent in value alone would apply.35 Regarding the latter point, the CLRSG had argued that in many modern listed companies shareholders consisted to such a great extent of nominees that the decision of the true owners ‘bears little or no relation to whether or not a majority in number is attained’.36 No other meetings of members of a company, the Committee pointed out, required a majority other than by reference to value or voting powers.

Looking more broadly at reforms to section 895 procedures, there is a strong case for contending that the procedures for schemes of arrangement should be modelled along the lines of those relating to CVAs so that the class meeting regime as presently set up should be replaced with a statutory framework of meetings in combination with remedial powers to challenge the process by parties who are able to demonstrate that they have suffered prejudice – as per the Insolvency Act 1986 section 6 provisions on CVAs. Improvements in the transparency of the CVA process (as discussed below) could also be applied to schemes of arrangement.

Adopting this revised procedure for schemes of arrangement would offer a cheaper and quicker route to affirmation than mechanisms involving the court in routine approvals and decision-making on the procedural requirements of individual corporate circumstances. Cork, indeed, doubted whether ‘painstaking perusal of documents by court officials with little or no experience of commerce or finance provides any real protection for creditors or contributories’.37 There would be efficiency gains without material losses in fairness or accountability. As for the requirement of a numerical as well as a 75 per cent by value majority, the argument in favour of the existing rule is that this serves to limit the ability of creditors with large claims to impose their wills on their smaller creditor brethren. A further consideration is that if the schemes of arrangement process is streamlined so as to involve lower levels of court scrutiny

35CLRSG, Final Report, 2001, para. 13.10. See also C. Maunder, ‘Bondholder Schemes of Arrangement: Playing the Numbers Game’ (2003) 16 Insolvency Intelligence 73 at 76, for argument that removing the majority in number requirement would make schemes (now used as the tool of choice for many major restructurings involving bond issues) more ‘flexible and attractive as well as saving significant amounts of costs for the debtor company and its creditors without necessarily putting at risk the rights of minority creditors’.

36CLRSG, Completing the Structure, p. 216. 37 Cork Report, para. 419.