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 Re Equitable Life Assurance Society

 

CHANCERY DIVISION (COMPANIES COURT)

 

[2002] EWHC 140 (Ch), [2002] 2 BCLC 510

 

HEARING-DATES: 4, 5, 6, 8 February 2002

 

8 February 2002

 

CATCHWORDS:

Scheme of arrangement -- Classes of creditors -- Insurance society selling with-profits policies -- Some policies having guaranteed annuity rate -- Society required to provide guaranteed annuity rate out of whole of with-profits fund -- Society proposing compromise between policies having guaranteed annuity rate and policies which did not -- Whether policy-holders forming more than one class of creditors -- Whether court should sanction scheme -- Companies Act 1985, s 425

HEADNOTE:

The petitioning company (the society) carried on business selling life assurance, annuities and pensions. Between 1957 and 1988 the society sold with-profits policies linked to pension plans which included an option to take an annuity at a guaranteed rate (GAR policies) or which had no such guarantee (non-GAR policies). As at 1 October 2001 the society had some 70,000 GAR policy-holders and 415,000 non-GAR policy-holders and the aggregate value of GAR policies was some £ 5,057m while the aggregate value of non-GAR policies was about £ 15,977m. In 1993 current annuity rates fell below the guaranteed rate applicable to GAR policies and because of low interest rates they continued to be below the guaranteed rate. In legal proceedings brought by a disaffected policy-holder the House of Lords held that the society could not ring-fence its GAR liabilities so that they would be borne only by GAR policy-holders and instead the burden of the GAR liabilities, estimated to be £ 1,500m, had to be borne by the whole with-profits fund, including non-GAR policies. Since assets attributable to GAR policies amounted to about 25% of the with-profits fund, the non-GAR policy-holders were in effect required to bear 75% of the additional cost. The society remained technically solvent but, faced with declining stock market values, the obligation to meet the GAR liabilities out of the whole of the with-profits fund, its inability to attract new business, the prospect of mis-selling claims from non-GAR policy-holders and not being able to find a buyer for its business, it decided to seek a compromise between GAR and non-GAR policy-holders. Under the proposed scheme both groups of policy-holders, but particularly non-GAR policy-holders, would give up their mis-selling claims against the society, GAR policy-holders would give up their guaranteed annuity rights in return for an average increase of about 17.5% in their policy values, and non-GAR policy-holders would agree to the uplift for GAR policy-holders in return for an increase of about 2.5% in their policy values. The proposed scheme was put to the policy-holders in three meetings, namely (i) a meeting of GAR policy-holders, (ii) a meeting of non-GAR policy-holders, and (iii) a further meeting of non-GAR policy-holders in respect of their possible mis-selling claims. All three meetings voted overwhelmingly in favour of the scheme. The society then presented a petition under s 425 of the Companies Act 1985 to sanction a scheme of arrangement between the society and the policy-holders (who effectively constituted its creditors). The issues arose whether the classes of creditors which met were correct, and if so whether the scheme ought to be sanctioned by the court. Objections were raised by various policy-holders who contended that particular groups of non-GAR policy-holders should have been treated as a separate class.

Held -- (1) In determining whether the policy-holder creditors ought to have been divided into different classes when voting on whether to approve the scheme proposed by the society the appropriate test was whether, in the context of the rights which were to be released or varied under the scheme and the new rights which the scheme gave by way of compromise or arrangement, the scheme was properly regarded as being a single arrangement or a number of linked arrangements. That depended on whether the rights of those affected by the proposed scheme were sufficiently similar for those persons to be required to consult together or whether their rights were so dissimilar that they could not consult together with a view to a common interest and ought to be treated as parties to distinct arrangements with their own separate meetings. In so deciding, the court also had to ensure that a class was not subdivided unnecessarily by the ordering of separate meetings since that could result in a proper scheme being thwarted by the veto of a minority group. The scheme proposed by the society was clearly a series of linked arrangements as regards the three classes which were identified and involved no more than three separate elements, in terms of linked arrangements with different classes. Each of the three classes consisted only of persons whose rights and interests in relation to the scheme were sufficiently similar for them to be required to vote together rather than be subdivided into separate classes. Furthermore, none of the objecting policy-holders had shown that they had an essentially and fundamentally different, and conflicting, claim from all other policy-holders or that they ought to be treated as a different class. Re Hawk Insurance Co Ltd [2001] 2 BCLC 480 applied.

(2) Having regard to the almost unanimous vote in favour of the scheme with less than 3% by number and less than 2% by value voting against, and applying the test of whether the scheme was one which an intelligent and honest man who was a member of the class concerned and acting in respect of his interest, might reasonably approve, the court would sanction the scheme pursuant to s 425 of the 1985 Act.%19:

Anglo-Spanish Tartar Refineries, Re [1924] WN 222.

Bramelid and Malmstrvm v Sweden (1982) 29 DR 64.

Dorman Long & Co Ltd, Re [1934] 1 Ch 635.

English Scottish and Australian Chartered Bank, Re [1893] 3 Ch 385.

Hawk Insurance Co Ltd, Re [2001] 2 BCLC 480.

Hughes v Metropolitan Railway (1877) 2 App Cas 439.

National Bank Ltd, Re [1966] 1 All ER 1006, [1966] 1 WLR 819.

NFU Development Trust Ltd, Re [1973] 1 All ER 135, [1972] 1 WLR 1548.

Nordic Bank plc v International Harvester Australia Ltd [1982] 2 VR 298.

Sovereign Life Assurance v Dodd [1892] 2 QB 573, CA.

Taylor Fashions Ltd v Liverpool Victoria Trustees Co Ltd [1981] 1 All ER 897, [1982] QB 133n, [1981] 2 WLR 576.

 

INTRODUCTION:

Petition

The Equitable Life Assurance Society presented a petition seeking the sanction of the court to a scheme of arrangement under s 425 of the Companies Act 1985. The facts are set out in the judgment.

 

COUNSEL:

Gabriel Moss QC, David Richards QC, Martin Moore and Barry Isaacs for the society; Various policyholders made representations in writing and in person.

 

PANEL: LLOYD J

 

JUDGMENTBY-1: LLOYD J

 

JUDGMENT-1:

LLOYD J: [1] I have before me a petition under s 425 of the Companies Act 1985 to sanction a scheme of arrangement between a company and classes of its creditors. The company is Equitable Life Assurance Society, which I will call the society. The creditors, divided into classes, include substantially all of the holders of its current with-profits policies. More than one million people are interested, directly and indirectly, under these policies. For many of them their investment in a policy with the society represents a substantial part of their savings, or of their pension provision; in the case of annuitants it may be all or a large part of their actual pension. It is therefore not surprising that there has been very wide interest in the difficulties which the society has got into recently, and in the scheme and these proceedings, which represent a major part of the society's attempt to reduce those difficulties.

[2] The hearing was attended, apart from counsel and solicitors for the society, by a large number of others, many of whom I suppose to be interested as, or on behalf of, policy-holders. I received written comments of one kind or another from 34 persons, and ten wished to address me orally. I declined to hear representations from two of them, Mr Josephs and Mr Stonebanks, who are not current policy-holders, though I had seen written comments from them and a few others who are not (though they had once been) policy-holders, and Mr Stonebanks continued, notwithstanding my ruling, to submit further written material, which I have looked at. I heard oral representations from 8 people who are, or were acting on behalf of, current with-profits policy-holders (including annuitants) in different categories. Thus I had a wide range of comments about the merits, or otherwise, of the scheme from different standpoints. Among other things, some of these comments gave me graphic examples of the worry felt by some of those concerned at the effect on their actual and prospective financial position of what has happened to the society, the anger that is felt by some at the conduct of the society (and of some others) in respect of the matters at issue, and the dissatisfaction that some -- on all sides -- feel about the situation and the terms of the scheme.

[3] At present levels of annuity rates, and with current legislation requiring most of any retirement provision by way of pension to be taken by way of an annuity, it is unfortunately the case that a lot of people will receive, or are receiving, a lower level of pension income than they had hoped for. That is common to all pension providers, and is an understandable cause for concern to many people in, or approaching, retirement. Some of the society's policy-holders might have supposed that they were protected against this situation. For those entitled to it, the right to take an annuity at a guaranteed rate, higher than current rates, can afford some relief against this problem. But in the society's present position the difficulties associated with the rights of this kind attached to some of its policies are such that the benefit is overshadowed and threatened by the society's problems of uncertainty and consequent potential instability, and the existence both of the rights to a guaranteed annuity rate and of the current difficulties also has a depressive effect on the value of the policies of those who do not have rights to a guaranteed annuity rate. The society's hope is that, through the approval of the scheme, it will come into a more stable and secure position so that it can adopt policies, as regards both investment and bonus declaration, that are not so constrained by the need for caution as they now are, because of the uncertainties affecting claims on the with-profits fund, which would be for the benefit of all those interested in that fund. The cake of the with-profits fund is smaller than would have been hoped, not least because of the fall in the market. But the society sees the benefits of the scheme as being, on the one hand, a substantial reduction of the elements of uncertainty and therefore instability, and on the other hand additional funds which will become payable to the society, as I will mention below.

[4] In this judgment I will deal with the matters that have to be considered in the following order. After an introduction about the nature of the society's business and the circumstances which led to its current difficulties, I will summarise the scheme, describe the legislation and mention some of what has been said about the relevant principles in previous authorities, refer to the meetings of creditors, and then address first the question whether the classes of creditors which met were correct, and secondly whether, assuming that to be so, the scheme is one which ought to be sanctioned.

[5] The society started life in 1762 as a mutual society, governed by a deed of settlement. Since 1892 it has been registered under the Companies Acts as an unlimited company without share capital. That registration made it a corporate entity, distinct from its members, but did not alter its mutual character. Its liability under the policies which it issues is limited to its assets and no claim can be made on members of the society under or in respect of any policy, by virtue of reg 4 of its articles of association. The society has always and still does carry on the business of life assurance, annuities and pensions.

[6] In respect of some of its with-profits policies, issued between about 1957 and 1988, the terms of the policies included options to take an annuity at a guaranteed rate. These policies are known and will be referred to as GAR policies, and the society's other with-profits policies, by contrast, as non-GAR policies. The proposed scheme involves compromises between the society and, respectively, the holders of its GAR policies and of its non-GAR policies. Accordingly, it is appropriate to say something about the various types of policy issued by the society and how the GAR rights relate to them.

[7] I will describe these under the following headings: private pensions, group pension plans, investment annuities, managed pension policies and life business.

(i) Private pensions themselves can be subdivided as follows:

(a) Retirement annuity policies (RAP policies), sold between 1957 and June 1988. These were taken out only by individuals. As at 1 October 2001 there were about 84,000 with-profits RAP policies, held by about 63,000 policy-holders, with a value of some £ 3,288m. All but about £ 53m in value have GAR rights.

(b) Individual pension plans. These are occupational pension policies sold between 1977 and 1988 to employers for the benefit of particular employees. Some of these carry GAR rights. As at 1 October 2001 there were about 26,000 such with-profits policies, held by about 18,000 policy-holders, to a value of some £ 1,227m, of which £ 594m in respect of GAR policies.

(c) Transfer plans. These policies were issued in order to enable someone who was leaving an occupational pension scheme to transfer his or her benefits to a separate policy. Until 1988 these plans were sold with GAR rights. As at 1 October 2001 there were about 19,500 transfer plans held by 18,500 policy-holders, with an aggregate value of £ 286m, of which £ 96m with GAR rights.

(d) Personal pension plans and free-standing additional voluntary contributions. These were available from 1988 and 1987 respectively. None of them ever carried GAR rights. As at 1 October 2001 there were about 276,000 of these policies, held by about 256,000 policy-holders, to an aggregate value of £ 4,617m.

(ii) Group pension plans. These are occupational pension schemes with a membership which may be very large, very small or anything in between according to the circumstances of the relevant company and the particular scheme. The with-profits element of the benefits carried GAR rights, but the society withdrew, or sought to withdraw, such rights from new members joining the relevant group scheme after 1988. An issue has arisen as to whether this was in all cases effective, to which I will refer later. As at 1 October 2001 there were some 6,000 such group pension policies, with about 600,000 members of the individual schemes. The trustees of the scheme who hold the policies are the members of the society in these cases. Subject to the issue to which I have referred the society considers that the value of these policies as at 1 October was £ 4,213m, of which £ 1,132m was attributable to policies with GAR rights.

(iii) Investment annuities are single premium policies some of which were written as with-profits. None of them carries GAR rights. As at 1 October 2001 there were about 68,000 policies of this kind, held by 51,000 policy-holders, with a total value of the order of £ 3,126m.

(iv) Managed pensions. These are also single premium policies including with-profits as well as unit-linked elements. None of them carries GAR rights. Some 15,000 policies are held by 13,500 policy-holders. The total aggregate value as regards the with-profits element in these policies was £ 1,657m.

(v) Life business. This covers a wide variety of policies, including traditional endowment and whole life assurance, and other types of policy. None of these policies carried GAR rights. 178,000 policies, held by 122,000 policy-holders as at 1 October 2001, had a value of the order of £ 2,720m.

[8] I should also mention that, while the society's principal business has always been carried on in the United Kingdom, it has also sold policies through branches in Germany, Ireland, and Guernsey, and through the latter branch, also in Dubai. It has sold a small handful of policies in Greece. Policies sold through the overseas branches are governed by the law of the jurisdiction where they were issued. Of course there are also policy-holders resident abroad whose policies were issued in the United Kingdom.

[9] Looking at the position overall, on 1 October 2001 the society had some 70,000 GAR policy-holders, whose policies had an aggregate value of around £ 5,057m. The GAR rights are not uniform. Initially they only applied if the policy-holder chose to take a single life annuity on retirement. Later a wider variety of options was made available. It follows from this that different GAR policyholders have rights of different value. At the same date the society had some 415,000 non-GAR policy-holders, with policies valued in aggregate at £ 15,977m.

[10] I must say something about policy values as regards with-profits policies. In some cases there will be a guaranteed value, namely that which the society is contractually bound to pay on the happening of a given event. However, the society also uses the term policy value. This is not a guaranteed amount, but represents what the asset share of the policy-holder would be if he or she were to retire at the date of the valuation. The asset share is an actuarial technique for ascertaining the current value of the premiums paid by the policy-holder together with the actual (but smoothed) investment return on those premiums, less expenses, and a share of the net profits of the business as a whole. Often guaranteed values will be lower than the policy value figure, though the reverse may sometimes be true.

[11] The problem facing the society which is sought to be addressed by the scheme derives from the sale of policies with GAR rights. Throughout the period when these policies were sold, the guaranteed rates were lower than those currently applicable in the market, but the guarantee would be of value if, by the time the pension came to be taken, current rates had declined to a level below that which was guaranteed. Given the long-term nature of a pension policy, the moment at which this would be tested would lie long in the future at the inception of the policy. Annuity rates are affected not only by interest rates but also by demographic and other factors, and have been declining for some years. In 1993 current rates fell below those applicable under the GAR policies. The society had foreseen that this might happen, and had withdrawn GAR rights from sale in relation to new policies in 1988. However, premiums continue to be paid, and will do for years, under policies which were issued with GAR rights.

[12] I should mention that many policies issued before 1 July 1996 (some 75 to 80% of the society's current with-profits policies) carry a separate guarantee, called the guaranteed rate of investment return, or GIR. This is not directly relevant to the scheme, but it featured in some representations made to me. The guarantee is of a rate of return of no less than a given amount (3.5%) on a policy-holder's guaranteed funds purchased by premiums. These rights would be of value when rates of return on investments in the market are very low. The scheme does not affect GIR rights attached to the society's policies. These rights have nothing to do with GAR rights.

[13] The society's approach to the disparity which could be created by the exercise of the GAR option on retirement was that in all cases the policy-holder should have benefits which reflected his or her asset share. The disparity was particularly apparent where a policy-holder was married and had to choose between taking a single life annuity at a guaranteed rate, and taking benefits which included an annuity for the surviving spouse at the current rate. In order to eliminate what was seen as an anomaly, the society adopted an approach known as the differential final bonus practice. The final bonus under a policy was not itself guaranteed, so the society would determine the final bonus differently according to whether the policy-holder opted for a GAR annuity or a non-GAR annuity. The bonus would be lower if the GAR option was taken, thereby reducing the economic benefit of the GAR rights by applying them to a smaller fund.

[14] This practice, applied from 1994 onwards, led to objection from policy-holders. A Mr Hyman was one of these, who complained about it to the Personal Investment Authority Ombudsman. The society decided to try to bring the doubt to a resolution, and initiated proceedings in the Chancery Division against Mr Hyman. It sought a declaration that it was entitled to exercise its discretion under reg 65 of the articles of association so as to equalise the value of the benefits taken by any given policy-holder under a GAR policy irrespective of whether or not the policy-holder elected to take an annuity to which the GAR applied. It also stated in evidence that if this practice was not upheld, it would consider a different practice, whereby differential bonuses would be applied as between GAR policies and non-GAR policies, thereby ring-fencing the GAR liabilities so as to be borne only by the GAR policy-holders. In the High Court the society's practice was held to be valid, but the Court of Appeal, by a majority, allowed an appeal by Mr Hyman. The society then appealed to the House of Lords which rejected the appeal and went on to say, as the Court of Appeal had not, that the society could not ring-fence the GAR liabilities so as to be borne only by GAR policy-holders.

[15] Thus the burden of the GAR liabilities has to be borne by the whole with-profits fund. The society estimated the cost of the GAR rights at £ 1,500m, including £ 200m for putting back into the correct position those policy-holders who had taken benefits since 1994 on a reduced basis as a result of the application of the differential final bonus practice. Assets attributable to GAR policies amounted to about 25% of the with-profits fund, so that the non-GAR policy-holders, in effect, were to bear 75% of the additional cost. In order to make provision for this extra cost the society withheld from policy values for all with-profits policy-holders 7/12 of the interim rate of return allocated for the year 2000 and reduced by 1% for 5 years the annual return for with-profits annuities. It also decided to look for a buyer of the society's business, but it was unable to find one by early December and, on 8 December 2000, it closed its doors to new business.

[16] In February 2001 the society entered into arrangements with Halifax plc relating to the sale of some of its assets and business. This has a bearing on the benefits that may be available under the scheme, and as to timing, but is otherwise of only peripheral importance.

[17] As is well known, stock market values declined substantially during 2001. On 16 July 2001, on the advice of its appointed actuary, the board of the society announced that, because of the decline in the value of the stock market investments in the with-profits fund, policy values were to be reduced by 16% with immediate effect. To many policy-holders this added insult to injury. However, the society's position is that this has nothing to do with the GAR problem. In fact the implications of the House of Lords decision for the society were such that it had already started to change the balance of the investment portfolio in the with-profits fund in favour of gilt-edged securities and away from equities, so that the impact of the collapse of the equity market on the society's with-profits fund may have been less than it otherwise would have been. It is also the case that, because the society's policy has always been to distribute by way of bonus as much as possible in each year, it does not have a very significant reserve, or as it is sometimes called 'estate', not committed to policy-holders which could serve as a cushion against the impact of the bear market. That too has nothing to do with the GAR problem. Other insurers have had to take similar action to that taken by the society as a result of the fall in value of the assets of their with-profits funds. Individuals who invested directly in the stock market will have seen even larger falls in the value of their funds during 2001. However, it is perfectly understandable, in human terms, that policy-holders already hit by the reduction of bonuses in 2000 should feel aggrieved at the further reduction in 2001, and may not easily be able to distinguish in their minds the consequences of the GAR problem, affecting the position in 2000, from the problem of the fall in the stock market, hitting the value of their investment in 2001.

[18] The society took advice about the implications of the House of Lords decision for the society and in particular for the non-GAR policyholders, who had been represented in the proceedings by the society under a representation order. In particular it obtained from Mr Nicholas Warren QC and Mr Thomas Lowe two joint opinions, one in May and the other in September, intended specifically for publication, to consider the matters from the point of view of non-GAR policy-holders. They first advised that there was no real prospect of re-opening the litigation before the House of Lords, that the non-GAR policy-holders were bound by the decision about ring-fencing, but that non-GAR policy-holders could assert against the society contractual rights under their own policies which might compete or conflict with those of GAR policy-holders, or rights outside their policies as a result of what can conveniently be called mis-selling-whether the remedy arose from common law factors such as misrepresentation or statutory provisions such as breach of regulatory requirements. In their second opinion they considered more extensively the possible mis-selling claims, identifying a number of bases of which the most probable were s 62 of the Financial Services Act 1986, in force from 1988, and misrepresentation. The essence of the mis-selling claim would be that the value and appropriateness of a non-GAR policy was misrepresented because the burden on the fund of the GAR liabilities was not disclosed. They discussed issues of limitation and of quantification of damages. Their opinion was necessarily general and tentative, and they recognised that a number of seriously difficult issues arose.

[19] Other advice was also taken. The Financial Services Authority (FSA) took advice, as the society's regulator. Counsel whom they consulted also advised that there might well be claims from non-GAR policy-holders under s 62 or at common law, and they too considered limitation and damages. Their views did not in all respects coincide with those of Mr Warren and Mr Lowe. The society took advice for its own sake from the Counsel who represent it before me. They advised much more briefly and upon less lengthy consideration, but they pointed out a number of respects in which the Warren and Lowe views might be questioned.

[20] In relation to mis-selling claims I should mention that a Mr Hughman, who I understand to have held a non-GAR policy with the society, but to have surrendered it, has brought proceedings against the society in the Queen's Bench Division of the High Court for damages for mis-selling. He obtained a judgment in default, which I assume was for damages to be assessed. The society applied unsuccessfully to have that set aside. It has applied for permission to appeal, which has recently been refused on paper. An oral hearing of that application will take place in due course. A number of those making representations to me took this as showing that all non-GAR policy-holders have mis-selling claims for damages against the society. One asserted that Mr Hughman had been awarded damages on a particular basis. Since the judgment is subject to an application for permission to appeal, it would be wrong to make any assumption as to its ultimate fate but, as I understand it, the judgment which exists is not for a given sum and, even if he holds his judgment, Mr Hughman will still have to prove the loss he claims to have suffered. Accordingly, it does not seem to me that Mr Hughman's position shows anything more than I would assume in any event, namely that some, perhaps many, non-GAR policy-holders may well have mis-selling claims, but that there are open questions about what those claims are and what they are worth.

[21] Faced with the obligation to meet the GAR liabilities out of the whole with-profits fund, the inability of the society to attract new business (except from existing members), and the prospect of compensation claims from non-GAR policy-holders, past as well as present, and being unable to find a purchaser for the whole of its business, the society decided to seek a compromise whereby GAR policy-holders would give up their GAR rights, and existing non-GAR policy-holders would give up their claims for mis-selling against the society. The society and the with-profits fund are solvent, and they meet the regulatory requirements in this respect, but they are subject to fundamental uncertainties which would adversely affect the management of the with-profits fund, and its investment in particular, and would require an extremely cautious policy as regards bonus declaration. The society's evidence, and the scheme documentation, describes the various other courses of action considered by the society as a way of reducing the uncertainty as far as possible. I do not need to mention any of these.

[22] In addition to seeking a way of reducing the debilitating effect of the uncertainty arising from the GAR rights and the potential mis-selling claims, the society, under a new chairman, board of directors and chief executive, is taking steps to investigate possible claims against others. Apart from claims which might be asserted directly by the society, for example against former directors or advisers, an enquiry has been set up by the government, chaired by Lord Penrose. The government has stated that no government aid would be made available to policy-holders. However, since then, the Parliamentary Ombudsman has embarked on an investigation of the role of the FSA in relation to the society and if he recommends compensation for policy-holders, the government may pay it. That however lies well into the future, as does any recovery by the society from any third party.

[23] The desirability of a compromise whereby GAR rights would be released had been identified early in 2001, by the time of the transaction with Halifax plc already mentioned. By that transaction Halifax paid the society £ 500m for certain assets and parts of its business. In addition a further £ 250m is payable if a scheme has become effective under s 425 on or before 1 March 2002 to compromise the GAR rights. If that condition is met, then a further £ 250m may also become payable in 2005, but that is also conditional on targets being met as regards new sales and profitability.

[24] The scheme proposed under s 425 has a number of elements. First, all GAR policy-holders will release their GAR rights, in return for an uplift to their respective policy values. Secondly they also release any mis-selling claims that they might have. (These seem to be remote and rather theoretical; they would be based on the society's failure to disclose the existence of the non-GAR policy-holders' mis-selling claims which might impact on the with-profits fund and thereby reduce the amount available to satisfy the GAR policy-holders' claims). Thirdly, the non-GAR policy-holders agree to the uplift for GAR policy-holders. Fourthly, the non-GAR policy-holders release their own mis-selling claims in return for an uplift to their respective policy values. The uplift for GAR policy-holders varies according to the value of the particular GAR rights that they have, but on average it is about 17.5%, of which 1.3% is attributable to the Halifax payment of £ 250m payable in March if the scheme is effective by then. The uplift for non-GAR policy-holders is 2.5%, of which 1.1% is attributable to the Halifax payment. The scheme document is so drafted that the mis-selling claims given up are only those which relate to GAR rights, and that they are only given up in relation to the particular policies held by the non-GAR policy-holder at the effective date. If such a person has previously had another non-GAR policy, which he no longer holds, any mis-selling claim as regards the former policy is unaffected by the scheme.

[25] The society undertook a wide consultation exercise with its with-profits policy-holders during the latter part of 2001, once its ideas about a possible scheme had been formulated. Only relatively modest changes were made to the proposals so presented when it came to putting the scheme into its final form. Thus policy-holders have had the opportunity to comment on the proposal both before and after the circulation of the scheme documents. It is fair to say that the package which went to policy-holders with the scheme circular is of formidable complexity and size, and may well have been daunting. The documents for the consultation exercise were also substantial. It would be understandable if some policy-holders may have thrown up their hands at the prospect of reading all this material, and may therefore not have contributed to the consultation exercise nor even voted on the scheme itself. In order to make the task of understanding the proposals easier, the formal scheme document was accompanied by a more readable questions and answers document and a letter from the chairman and the chief executive. The essence of the scheme would have been apparent from those documents, even if the particular policy-holder could not face reading the formal scheme document, including the explanatory statement required by s 426 and the scheme itself, that document running to almost 200 pages.

[26] The society obtained a report from its own appointed actuary about the scheme in its final form, and also instructed an independent actuary, Mr Arnold, to review the scheme and report on it. Both of those reports have been made available to policy-holders, and the scheme document includes summaries of them. The document also explains how the society has gone about estimating the value of the GAR rights and the mis-selling claims, and the basis on which the respective uplifts for GAR and non-GAR policy-holders were arrived at.

THE LEGISLATION

[27] The court's jurisdiction arises under s 425 of the Companies Act 1985, which is relevantly in the following terms:

'(1) Where a compromise or arrangement is proposed between a company and its creditors, or any class of them, . . . the court may on the application of the company . . . order a meeting of the creditors or class of creditors . . . to be summoned in such manner as the court directs.

(2) If a majority in number representing three-fourths in value of the creditors or class of creditors . . . present and voting either in person or by proxy at the meeting, agree to any compromise or arrangement, the compromise or arrangement, if sanctioned by the court, is binding on all creditors or the class of creditors . . . and also on the company . . .'

[28] Section 426 contains ancillary provisions, including the requirement for an explanatory statement about the effect of the compromise. On 26 November 2001 I ordered the convening of meetings of three classes of creditors to consider and, if thought fit, to approve the scheme. I shall consider later in this judgment the evidence as to the convening and holding of the meetings. In short, however, they were convened and held on 11 January, and each of the three meetings voted by an overwhelming majority to approve the scheme.

[29] The approach to be adopted by the court in considering whether or not to sanction a scheme under this section has been considered on a number of occasions. A passage from Buckley on the Companies Acts (14th edn) vol 1, pp 473-474 has been approved by the court, for example in Re National Bank Ltd [1966] 1 All ER 1006 at 1012, [1966] 1 WLR 819 at 829, and is always quoted, as follows:

'Function of the court. In exercising its power of sanction the court will see, first, that the provisions of the statute have been complied with, second, that the class was fairly represented by those who attended the meeting and that the statutory majority were acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve. The court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting, but, at the same time, the court will be slow to differ from the meeting, unless either the class has not been properly consulted, or the meeting has not considered the matter with a view to the interests of the class which it is empowered to bind, or some blot is found in the scheme.'

[30] It is therefore necessary for me to be satisfied that the requirements of the Act were fulfilled, in relation to which, apart from ensuring compliance with the procedure as regards the meetings, the important point can be whether the right classes of creditors have been identified. Issue was taken on this by some objectors. One objector, more fundamentally, suggested that policy-holders are not creditors at all. Clearly they are. Another suggested that the rights involved are not class rights, so that s 425 is inapplicable. That shows a misunderstanding of what is involved. Of course the claims by creditors which are dealt with by a scheme under the section will be individual claims. That was certainly the case in Re Hawk Insurance Co Ltd [2001] 2 BCLC 480, recently decided on the section in the Court of Appeal, for example, where the debts were claims under general insurance policies. The question is whether the creditors whose claims are to be dealt with constitute a class, in the sense in which that word is used in the section and has been explained by the courts. Plainly there are classes here, and the only relevant question which arises is whether the classes have been properly identified.

[31] Another point, to which some of the objectors referred, is whether the scheme really is a compromise. As to that, in Re NFU Development Trust Ltd [1973] 1 All ER 135 at 140, [1972] 1 WLR 1548 at 1555, Brightman J said:

'The word "compromise" implies some element of accommodation on each side. It is not apt to describe total surrender. A claimant who abandons his claim is not compromising it. Similarly, I think that the word "arrangement" in this section implies some element of give and take. Confiscation is not my idea of an arrangement. A member whose rights are expropriated without any compensating advantage is not in my view having his rights rearranged in any legitimate sense of that expression.'

[32] If I am satisfied that the statutory provisions have been complied with, a variety of matters may be relevant to the exercise of the court's discretion.

[33] I propose first to deal with the processes in relation to the meetings, then to come to the question of classes, and then deal with points taken on the merits of the scheme and otherwise as regards the court's discretion. In that last context I will also mention points taken as to whether the scheme really qualifies as a compromise.

THE MEETINGS

[34] The order I made on 26 November contained directions as to the convening of the meetings. I am satisfied by the evidence before me that those directions were complied with, subject only to two points. The first is that the scheme documents were not sent, as they should have been, to 3,873 policy-holders who had contracted out of group schemes. The reason for this is that the society's computer records had not been amended to take these people out of the relevant group scheme and to show them as individual policy-holders. I am satisfied that this error can fairly be regarded as accidental, and therefore within the proviso to para 1 of my order of 26 November such that the failure to send the documents to these people does not invalidate the process.

Sierra Leone

[35] The second point is that the society has one policy-holder with a registered address in Sierra Leone. The scheme documents could not be sent to this person, because the state of civil unrest in that country has led to the postal system being suspended. It seems unlikely that the documents could have been got to this person in any other way. If I had been made aware of the problem on 26 November I might well have dispensed with the requirement to send documents to this person in those circumstances. I will waive strict compliance with the order on this point, following the precedent in Re Anglo-Spanish Tartar Refineries [1924] WN 222. I therefore hold that the meetings were properly convened.

[36] A point was raised by one objector to the effect that EU law required the scheme documents to be served on Greek policy-holders in Greek translation. I will deal with that point later, even though on one view it might be regarded as a point about proper service of the documents.

[37] I am satisfied by the evidence put in on behalf of the society that the relevant procedures as regards voting were correctly carried out. One objector said that he had read of irregularities mentioned by others, but he did not identify any, and there is no evidence before me to cast doubt on the correctness of the procedure.

Results

[38] The numbers voting at the meetings, and the results of the votes, were as follows, according to the scrutineers' returns:

Total	Percentage	Percentage	For (by	For (by	Against	Against
numbers	voting by	voting by	number)	value	(by	(by
eligible	number	value			number)	value)
to vote
GAR meeting
69,976	57.2%	75.2%	97.3%	98.1%	2.7%	1.9%
1st Non-GAR meeting
418,888	44.9%	69.9%	98.6%	99.2%	1.4%	0.8%
2nd Non-GAR meeting
418,886	44.7%	68.9%	98.2%	99%	1.8%	1%

[39] The discrepancy between the figures for those eligible to vote at the two non-GAR meetings is almost certainly due to an accidental error of some kind, since both meetings should have had the same number of those entitled to vote.

[40] Some 30,000 or so completed proxy forms arrived after the 48 hour deadline before the time for the meeting which was specified for those submitted by post. They were rejected, even though if they had been handed in at the meeting itself they would have been valid and accepted. I am satisfied that their rejection was correct. In Re Dorman Long & Co Ltd [1934] 1 Ch 635 Maugham J questioned the rejection of proxies which had arrived late, but it seems that in that case the deadline had not been approved by the court order convening the meeting, as it was in this case when I approved the forms of notice and the proxy forms. In any event they would not have affected the result.

[41] Given the large attendance (mainly by proxy, but that makes no difference) and the overwhelming majorities, as well as the large size of the classes with which I am concerned, it is not a case, such as sometimes arises, where the result of the vote could have been distorted by collateral factors affecting some members of the class, or where those voting do not fairly represent the class. The question which arises at this preliminary stage is whether the classes were correctly defined.

WERE THE THREE CLASSES CORRECTLY IDENTIFIED?

[42] The three classes for which the separate meetings were held were as set out below. They are all subsets of the class of the holders of scheme policies. These are: first, all subsisting with-profits policies and, secondly, any policy which is not a with-profits policy but has a GAR right, but in each case excluding a class of German policies (described in Pt 3 of Sch A to the scheme) which I will hereafter ignore.

(i) GAR policy-holders are scheme policy-holders in relation to a scheme policy described in Pt 1 of Sch A to the scheme which contains a GAR right (or is treated by the society as containing such a right), or in relation to any scheme policy not so described which contains a GAR right (or is treated by the society as containing such a right), other than those in a category excluded from the GAR class and described in Pt 2 of Sch A.

(ii) Non-GAR policy-holders are the holders of scheme policies (or parts of them) which do not contain any GAR rights, and of scheme policies in the category excluded from the GAR class and mentioned in Pt 2 of Sch A.

(iii) In addition a separate meeting was held of non-GAR policy-holders in respect of their possible mis-selling claims against the society. This is the same class as the second, but voting in respect of a different claim. There was also a difference of treatment within the class for the purposes of this meeting, unlike the other meeting of non-GAR policy-holders. The society took the view that members of this class who had taken out their policies before 29 April 1988, the commencement date for the Financial Services Act 1986, had a materially less strong claim than the rest and that, although they had the same common interest as the rest of the class, it would be right to value their claim at a lower rate than those of the others.

[43] The courts have had to consider the test for a class of creditors on a number of occasions over the years, as it happens often as regards creditors of insurance companies. The starting point is words of Bowen LJ in Sovereign Life Assurance v Dodd [1892] 2 QB 573 at 583, as follows:

'The word "class" is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the court to order a meeting of a class of creditors to be called. It seems plain that we must give such meaning to the term "class" as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.'

[44] In the same judgment, shortly before the passage which I have just quoted, he said this, of the equivalent section then in force:

'. . . it exercises a most formidable compulsion on dissentients, or would-be dissentients; and it therefore requires to be construed with care, so as not to place in the hands of some of the creditors the means and opportunity of forcing dissentients to do that which it is unreasonable to require them to do, or of making a mere jest out of the interests of the minority.'

[45] That is undoubtedly one respect in which care is needed in the application of the section. Another, however, has been pointed out more recently, namely that over-zealous subdivision may, by giving small groups a right of veto, defeat the basic approach of the legislation, which is to enable large groups of people to achieve a compromise or effect an arrangement: Nordic Bank plc v International Harvester Australia Ltd [1982] 2 VR 298 at 301 per Lush J. In the recent Court of Appeal decision in Re Hawk Insurance Co Ltd [2001] 2 BCLC 480 at [33], already referred to, Chadwick LJ said this:

'. . . it is necessary to ensure not only that those whose rights really are so dissimilar that they cannot consult together with a view to a common interest should be treated as parties to distinct arrangements -- so that they should have their own separate meetings -- but also 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.'

[46] In balancing these two considerations, as between the power of the majority and that of the minority, an important factor is that, whereas unnecessary subdivision of a class may thwart a proper scheme altogether because of a veto thereby afforded to a small minority, on the other hand if it is said that there has been unfairness or oppression on the part of the majority in a larger undivided class, the control mechanism is the court's scrutiny at the sanction stage: see Re Hawk Insurance Co Ltd [2001] 2 BCLC 480 at [11]-[12], [33] and Nordic Bank plc v International Harvester Australia Ltd [1982] 2 VR 298 at 301.

[47] The judgment of the Court of Appeal in Hawk contains some valuable guidance about the circumstances in which creditors must, or may not, be divided into different classes. Chadwick LJ put it in one way which I find helpful by way of illustration, namely whether the rights of those who are to be affected by the scheme proposed are such that it can be seen as a single arrangement or that it ought to be regarded as a number of linked arrangements. Clearly the present scheme is a series of linked arrangements as regards the three classes which have been identified. But the question is whether, at any rate within the third class, there are such differences of position that it ought to be regarded as a series of linked arrangements with each of two or more different classes within the overall body of non-GAR policy-holders. The Court of Appeal also said that the question of classes can only be answered in the context of analysing both the rights which are to be released or varied under the scheme and also the new rights which the scheme gives, by way of compromise or arrangement, compared to those rights which are to be released or varied. Moreover, different legal rights at the first stage of the analysis do not automatically mean separate classes, and likewise different outcomes at the second stage do not automatically require separate classes.

[48] It might be said that when Bowen LJ spoke of persons consulting together with a view to their common interest, he cannot have had in mind a class of the nature and size of those (whether or not subdivided as some propose) concerned in the present case, although even in the late nineteenth century there were some large and widely spread bodies of shareholders and creditors, and communications were slower and more difficult. Some groups of policy-holders have formed action groups to put pressure on the society and others in the interests of their own group, and they and others have been able to communicate widely among these large and widespread classes by the use of websites and bulletin boards. The issues have also gained extensive coverage in the press and broadcast media. However, that part of Bowen LJ's language seems almost as remote from the circumstances of a company such as the society today as Athenian democracy in the fourth century BC is from Parliamentary democracy in the United Kingdom today. Nevertheless the principle to be drawn from his judgment, and the more recent decisions, above all Hawk, does not depend on any actual, or even practically possible, process of reciprocal consultation throughout the entire class, otherwise than by the holding of the class meeting, but on the similarity or otherwise of the rights of those within the class.

[49] A number of submissions were made to the effect that one or another particular group of non-GAR policy-holders should have been treated as a separate class. One was with-profits annuitants; another was 'late joiners', that is to say those who took out policies with the society after one or another of a variety of recent dates, starting in 1997; another was international policy-holders, or within that group the holders of policies issued in Greece; yet another is the holders of the society's with-profits life assurance products; one objector suggested that group policies were a separate class. I will consider these in turn.

With-profits annuitants

[50] The main point made about with-profits annuitants is that they, unlike other policy-holders, cannot take their money and go elsewhere. In a graphic phrase used by Mr W E Holt in his written representation to me, 'even if at present (if the scheme is approved) there are lifeboats swinging gently on their davits, these annuitants cannot board them'. In theory, it is suggested, all or most other policy-holders might leave the society, with the result that the with-profits annuitants would remain as a rump of policy-holders, having to cope with the impact of such uncertainty as is outstanding after the scheme. It is an unavoidable feature of the scheme that not all mis-selling claims against the society will be bought out, because the scheme is not designed to bind those who have ceased to be policy-holders before it becomes effective (such as Mr Hughman, mentioned above). Mr Gabriel Moss QC, for the society, however, makes the point that, although other policy-holders are in practice allowed to leave the society before maturity, this is not a matter of contractual right, which is why, in that event, the society applies an adjustment factor to their policy value, known as the market value adjustment (MVA), designed to take account of the loss of the expected long term investment, and seeking to protect those continuing to be interested in the remaining fund. It does not seem to me that the fact that a with-profits annuitant cannot go elsewhere at all, whereas other policy-holders can do so by concession, puts the annuitants into a different class, within the principles laid down in the authorities which I have discussed. In other respects, with-profits annuitants, none of whom have GAR rights, have just the same interest as other non-GAR policy-holders, in that the amount obtained by way of their investment directly reflects the condition of the with-profits fund and is therefore directly affected by the GAR rights, and by the uncertainty and instability of the present situation.

[51] I accept Mr Moss's submission that there is nothing in the rights of with-profits annuitants, in their situation as such, or in the way in which they are treated under the scheme, which would justify considering their position to be so dissimilar from that of the generality of non-GAR policy-holders that they cannot all fairly be put in the same class. To look at it differently, it cannot be said that the arrangement as regards mis-selling rights of non-GAR policy-holders is really a series of linked arrangements with one group of policy-holders on the one hand and with one or more other such groups, including with-profits annuitants, on the other. Though it would not be an answer to the point about the definition of the class, if that point were a good one, it is interesting to note that it appears, from calculations done for the purposes of the hearing in response to the point being raised, that the votes cast by with-profits annuitants at the second non-GAR meeting were 99% in favour and 1% against both by number and by value, which matches the overall position. This does not suggest that any of them perceived that they were in a relevantly different position from non-GAR policy-holders generally.

Late joiners

[52] The point made in respect of the policy-holders described as late joiners (who have their own action group) is that their mis-selling claims should be regarded as being very much stronger than those of other non-GAR policy-holders. Different people put forward different dates as the point at which a separate class could be identified. Mr Oke, who addressed me on behalf of Mr A M White, suggested 1 January 1997. Mr Jebb suggested 1 September 1998. Another put forward 15 January 1999, the day on which the Hyman litigation was commenced, though in a slightly different context. Others claimed that, having taken out their policies in 1999 or 2000 they, at least, ought to be regarded as within a separate class. The difficulty in putting forward any one date as the point after which all policy-holders should be regarded as being in a wholly distinct position from all of those who had taken out policies earlier seems to me to demonstrate the fallacy in the proposition.

[53] It is, of course, likely that the strength of the mis-selling claims which different non-GAR policy-holders might put forward would differ, according to the particular facts of each case. However, the mis-selling claims cannot possibly be valued on an individual basis for the purposes of the scheme. The time taken and the cost of such an exercise would be enormous. If the scheme had included such a provision, no single non-GAR policy-holder could receive any uplift by way of compensation until all claims had been quantified. It seems to me that the consequent delay in settling the compensation to be given to individual policy-holders would be altogether unacceptable. That is a compelling reason for a flat-rate distribution.

[54] The submission to the effect that late joiners are in a separate class, however, depends on establishing that the class proposed, whatever it may be, is in a fundamentally different position from all other members of the overall non-GAR class. It is not sufficient to say that all those who took out policies after 1 January 1997, or 1 September 1998, or whatever date is chosen, have a strong case for compensation for mis-selling; it would have to be the case that they had an essentially and fundamentally different, and conflicting, claim from all others, including those who took out a policy a day or a week before whatever cut-off date is chosen. None of those putting forward this objection sought to do that, nor could they do so, so far as I can see. The essence of their case is that they have been particularly hard done by, in part because as time went on, they say, the society ought to have known (or as some of them say, did know) that the position was otherwise than as represented, and in part because, having had money in the society for less time, they have had less opportunity to build up bonuses during times of rising markets, and the bonus reduction in 2000 and the policy value reduction in 2001 have therefore hit their policy values particularly hard. Neither of those is a point which shows an essential difference between their position and that of all other non-GAR policy-holders. The fact (if it be the case) that their mis-selling claims should be regarded as stronger than those of others is a matter of degree, not of the nature of the right.

[55] Some of those who made oral submissions to me did not shrink from saying that the misrepresentation or non-disclosure in their case was fraudulent, in the sense that the board of the time already by then knew that the position was as the House of Lords later declared. This is mere assertion. No evidence was put forward for it. As Mr Moss for the society commented, it is not particularly likely that this was the case, since in the High Court the society's differential final bonus practice was held to be valid by Sir Richard Scott V-C (as he then was), and one member of the Court of Appeal (Morritt LJ, as he then was) agreed. No doubt the society hoped that the House of Lords would agree with them. While I understand that the combination of strength of feeling and hindsight might lead people to accuse the board of knowing, from some early date, that the position would be declared to be as the House of Lords eventually said, it is not a proposition on which any part of my decision can be based. It may be that some who have outstanding mis-selling claims will allege fraud, but that possibility cannot lead me to regard the claim of any one non-GAR policy-holder as being different in principle from that of any other. Accordingly, I reject the submission that there should have been a separate class of late joining non-GAR policy-holders, whatever date were chosen.

[56] Again, if there should have been a separate class of late joiners, the figures would not help, but calculation of the voting figures at the second non-GAR meeting of those whose policies dated from 1 September 1998 or later shows a result which matches the overall result almost exactly.

International policy-holders

[57] The suggestion was made that those who took out policies through one of the society's overseas branches or agencies should be treated as a separate class, but no basis for this has been demonstrated. No separate fund was created in relation to these policies. Their terms do, in some cases, differ (and not only in respect of the choice of law), but then there are differences between other groups of non-GAR policies as well. Those differences do not lead to the conclusion that the rights are so different from those of other non-GAR policy-holders that they cannot be expected to vote together in one meeting. The regulator in Guernsey took advice about this question. The advice was that there was no case for regarding those who had taken out policies through the society's Guernsey branch as a separate class. That advice was accepted by the regulator and published. I also note that the calculation of the voting figures of international policy-holders showed a favourable vote even closer to unanimity than on the overall result.

[58] Mr Bountra, who represented the holders of four policies issued under Greek law, argued in favour of an international class, but also of a separate Greek class, of which his four policies would now be the whole. He said that, when the scheme documents were circulated, there had been about 25 such policies outstanding, though the society's evidence was that there were fewer than 10 such policies at that time. His argument was based on a special point of Greek law about penalties under the policies being illegal. He did not explain to me how this principle affected the society's policies or put the holders of the Greek policies in any materially different position from other non-GAR policy-holders. He further argued that under European Community law, the Greek policy-holders should have had the documents sent to them in translation, and that they could not be expected to consult together with other non-GAR policy-holders because they live in Greece and do not speak English.

[59] His point about the right to translations is based on the Third European Directive relating to Life Assurance. I was shown the Directive, 92/96/EEC, which is supposed to have been transposed into national law by June 1994. Mr Moss was not able to discover any UK legislation giving effect to the particular provision on which Mr Bountra relied, which is Annex II. This opens as follows:

'The following information, which is to be communicated to the policy-holder before the contract is concluded (A) or during the term of the contract (B), must be provided in a clear and accurate manner, in writing, in an official language of the Member State of the commitment.

However, such information may be in another language if the policy-holder so requests and the law of the Member State so permits or the policy-holder is free to choose the law applicable.'

[60] It then provides lists of particular information under headings (A) and (B). As to that, first, it is not altogether clear that the scheme documents do fall within the relevant list in (B). Even if they do, two points arise. One is that each of these policy-holders signed an agreement containing the following term:

'We hereby confirm that we agree that the policy documentation and any other documents issued by the society in connection with the proposed policy shall be in English. We understand that we may request a copy of any of those documents in Greek.'

[61] The scheme documents were sent in English. No request was made for a translation. Accordingly, even if (which is not at all clear) the failure to translate might have amounted to a breach of some national law enacted to give effect to the Directive, it might well be that this agreement amounts to a request by the policy-holder to have the documents, in the first instance, in English, with the right, not in this case exercised in time, to have a translation. If so, there would not in any event have been a breach.

[62] In the light of that provision in the contract, it does not seem to me that, even if it were otherwise valid, these policy-holders could argue that they are to be treated as a different class on account of language. But it would not be a good point in any event. It would be an example of what Chadwick LJ spoke of in Hawk, giving a veto to a minority group, carried to an absurd extreme. There would have to have been a separate meeting of perhaps as few as four policy-holders to consider the scheme, upon the result of which would depend the fate of a scheme affecting over 500,000 actual policy-holders directly, and taking in indirect interests through group schemes more than a million people. The Greek policy-holders may have some different rights, and these may to an extent depend on Greek law. But there is no basis for saying that there is any significant difference between their rights and those of the other non-GAR policy-holders as regards the mis-selling claims or otherwise. I therefore reject the argument both as regards international policies generally and Greek policies in particular.

[63] It could perhaps be said that the question of translation goes to whether the scheme documents were properly served on the Greek policy-holders. Since the documents were served in accordance with my order of 26 November, I hold that no point does arise as to validity of service. But I would add this. At most the issue now concerns the holders of four policies. I am told, in a witness statement put in on the point, that the cost of translation would be likely to have been of the order of £ 73,000. In those circumstances, it seems to me that if, at the hearing on 26 November, I had been told of this question of translation, it is likely that I would have dispensed with the need for the society to serve the documents in Greek, or perhaps at all, on these few policy-holders. Whatever would have happened in that event on the facts as they have arisen, the point not being taken until the last moment after the meetings, and if, contrary to my view, there were any defect in service on these policy-holders, I would not hesitate to waive the strict requirements of the earlier order, as I have for different reasons in relation to the policy-holder resident in Sierra Leone (see para 35). I will not therefore refuse to sanction the scheme because of these points raised by Mr Bountra. At most, it seems to me, there is a possibility that the holders of these four policies may have some remedy under Greek law in the Greek courts, of a wholly unknown nature. This may be another loose end which the scheme cannot tie up, but that possibility, as regards international policies, is expressly referred to and recognised in the scheme document.

Group schemes

[64] One objector suggested that policy-holders in respect of group schemes should have been put in a different class from individual policy-holders. The basis for this is that these policy-holders are allowed to surrender their policies with a lower MVA than individuals; I was told that the rate might be applied at 5% to group schemes, or at least to some large schemes, whereas it would be 10% for individuals. Neither type of policy-holder has a right to surrender the policy, and the terms on which they do are a matter of negotiation between them and the society. The fact that, as a matter of practice, the society allows different terms for some surrenders from those which it requires for others has nothing to do with the terms either of the policies or of the scheme. It is not a factor which puts one type of policy into a different class from another. It is also clear from the analysis of the voting that there was no difference in the pattern of voting as between individual policy-holders and the holders of group policies.

Life assurance policies

[65] Lastly, and late, a representation was made that the holders of the society's with-profits life assurance policies formed a separate class. I can see no basis for this. The point was made that under their policies, and in the circumstances, they have to maintain annual premiums whatever happens. Even if that is so, legally or as a matter of economic reality, it makes no difference. Their rights and interests as regards the with-profits fund are relevantly just the same as those of other non-GAR policy-holders.

Conclusion on classes

[66] For these reasons I am satisfied that the scheme involves no more than the three separate elements, in terms of linked arrangements with different classes, and that each of the three classes consists only of persons whose rights and interests in relation to the scheme are sufficiently similar that they can, and therefore that they must, be required to vote together rather than be subdivided into separate classes. It follows that I am satisfied that the court has jurisdiction to decide whether or not to sanction the scheme, and I will now deal with the matters which were urged upon me as relevant to the discretion whether or not to give that sanction.

OUGHT THE COURT TO SANCTION THE SCHEME?

[67] I have already quoted (at para [29]) the passage from Buckley on the Companies Acts where the relevant test is said to be whether 'the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve' (At p 81 of the scheme document this test is slightly misquoted, and in so doing is put too high, since it uses the phrase 'would reasonably approve', whereas the cases say 'could' or 'might'.). The same passage refers to 'some blot on the scheme' as being a reason why the court may withhold its sanction. That phrase derives from the judgment of Lindley LJ in Re English Scottish and Australian Chartered Bank [1893] 3 Ch 385 at 409 where he said:

'The court does not simply register the resolution come to by the creditors or the shareholders, as the case may be. If the creditors are acting on sufficient information and with time to consider what they are about, and are acting honestly, they are, I apprehend, much better judges of what is to their commercial advantage than the court can be. I do not say it is conclusive, because there might be some blot on a scheme which had passed that had been unobserved and which was pointed out later. While, therefore, I protest that we are not to register their decisions, but to see that they have been properly consulted, and have considered the matter from a proper point of view, that is, with a view to the interests of the class to which they belong and are empowered to bind, the court ought to be slow to differ from them. It should do so without hesitation if there is anything wrong; but it ought not to do so, in my judgment, unless something is brought to the attention of the court to show that there has been some material oversight or miscarriage.'

[68] A powerful starting point for Mr Moss's submissions in favour of the court sanctioning the scheme is the voting figures on the various resolutions. As noted above, at para 38, each vote was almost unanimously in favour, the adverse votes being less than 3% by number and less than 2% by value in each case. Those voting were 57% by number in the case of the GAR policy-holders, and 75% by value, and in the case of the non-GAR policy-holders about 45% by number and almost 70% by value. Almost 39,000 GAR policy-holders voted in favour, and at the two non-GAR meetings, over 185,000 non-GAR policy-holders voted in favour at the first meeting, and over 183,000 at the second. Expressing the votes cast in favour as percentages of the entire class eligible to vote in each case, 55.6% by number and 73.8% by value of all eligible GAR policy-holders voted in favour, and even in the second non-GAR meeting, where the vote was slightly lower than in the first, 43.9% by number and 68.2% by value out of the whole class voted in favour. Unless it be said that these favourable votes were obtained under some misapprehension or as a result of inadequate information, it would be a remarkable proposition that a scheme approved by more than 220,000 (I do not overlook the fact that there is likely to be some duplication in this figure, since some policy-holders hold more than one policy, in different classes, and would therefore have been entitled to vote at all the class meetings.) votes cast by the society's policy-holders was one which no intelligent and honest man in their position could reasonably approve.

Was the information given adequate?

[69] A number of those who objected to the scheme suggested that the information given was inadequate. They did not dispute that a huge amount of information was given -- some said it was far too much -- but these critics suggested that, for all this, it did not include all that was reasonably needed. One of the action groups sought the opinion of an economist, Professor David Blake, who wrote a report dated 19 December 2001, which he made clear was produced against a very tight deadline, and should be regarded as preliminary. In the report he does criticise the information given with the scheme documents in some respects. A number of those making representations against the scheme referred to his report.

Professor Blake's report

[70] Professor Blake was asked to assess whether policy-holders had been provided with adequate and objective information concerning the scheme, and he approached this from a financial economics perspective rather than either a legal or an actuarial viewpoint, on either of which, I take it, he would not have been qualified to express a view. I can summarise his criticisms as follows:

(i) The scheme documents provided information as at 30 June 2001, 'nearly 6 months old'. In the interests of transparency and full disclosure additional information was needed, consisting of a statement of affairs as at 30 November providing information on: (a) number of policy-holders (GAR and non-GAR) still in the fund; (b) value of the fund; (c) solvency level of the fund; (d) fund available for appropriations.

(ii) The scheme documents ought also to have provided information as to how the fund would be run in future if the scheme became effective, including as to the intentions of Halifax in that event, and what would happen if the scheme were not approved.

(iii) Even if the scheme is fair and reasonable in an actuarial sense, policy-holders did not have enough information to determine whether it is fair and reasonable in a sense of financial economics, namely whether the GAR policy-holders are being adequately compensated for the rights being given up and the non-GAR policy-holders are being adequately compensated for their part in the scheme.

(iv) Policy-holders had not been given enough information to assess whether the scheme is the best that can be done, and in particular whether the fund might better be split between the two groups of policy-holders.

(v) The information provided by the Board was inadequate as to whether approval of the scheme would put an end to further claims against the society, in particular because no figure was given for those who had left since 8 December 2000 and who might have mis-selling claims.

[71] Professor Blake does not indicate how the society could be expected to provide information up to 30 November in the scheme documents which were in virtually final form already on 26 November, the printing of which started within one or two days of that date, on a timetable which could not have been delayed consistently with keeping to the meeting date of 11 January 2002 and retaining any reasonable chance of the scheme becoming effective (if it is to) before 1 March 2002. The fact is that it could not have been done, and I find it surprising that he should have said that it was necessary. He does not explain in his report why he was of that view.

[72] As for the future of the fund, it does not seem to me that the society could reasonably have been expected to give information to policy-holders as regards what may happen in the future in one event or the other, which necessarily they do not know.

[73] As regards whether policy-holders have enough information to tell whether the scheme is fair and reasonable in a financial economics sense, Professor Blake suggests that the scheme omits a clear statement of what the respective classes of GAR and non-GAR policy-holders are giving up in each other's favour. The summary of Professor Blake's point in this respect (para 2.11) suggests that he is talking about inadequacy of information, but from the body of his report (para 2.10) it seems that he is of the view that the scheme is not fair and reasonable, and that the documents are defective for not expressing the comparison in financial economics terms. In my judgment the documents are expressed in entirely suitable terms to convey to policy-holders the reality of what is to be achieved by the scheme.

[74] Professor Blake then outlines a different approach which he says would recognise the fundamental difference of interests between the GAR policy-holders and the non-GAR policy-holders. He accepts that the technique involved was considered by the board, but he does not accept the view expressed by the board that it would not work. Moreover his approach involves having done something in 2000 which did not happen, namely that 'policy values would have been reduced immediately after the House of Lords ruling in order to penalise exercise of the GAR option and transfers from the fund at above fair value'. Not only did that not happen, so that it does not seem altogether useful to put forward a proposal now on the basis that it had happened, but also, if it had been attempted, it seems to me clear that it would at once have been challenged on behalf of GAR policy-holders, and rightly so, as being inconsistent with the House of Lords ruling itself. Thus, far from eliminating uncertainties and difficulties resulting from that ruling, it would have exacerbated the difficulty and led to further, possibly lengthy, litigation. I do not find this a constructive or helpful suggestion in the circumstances. A number of those who put in representations to me made points which depended on ignoring or challenging the House of Lords decision. I will deal with these later.

[75] Professor Blake points out, rightly, that the scheme does not provide complete stability, because it does not seek to bind those who have ceased to be policy-holders before the date on which it would become effective. As he says, this is clear from the terms of the scheme documents. What he says is not disclosed is the full extent of the possible claims, or the best information that could have been given about this, namely the number of the non-GAR policy-holders who left after, say, 8 December 2000 and up to a date as close as possible to the finalising of the scheme documents. The scheme document provides this information, not by numbers of policy-holders but by value, as at the end of September 2001. Since the documents had to be in final form before the end of November, the information was, in practice, up to date to less than two months before the date on which it was to be published. I do not see that later information could reasonably have been expected, nor that it would be of any significant additional materiality.

[76] I therefore reject Professor Blake's criticisms as reasons for supposing that the scheme document was inadequate as regards the information given to those who had to decide whether, and if so how, to vote on the scheme.

Other points about inadequate information

[77] Several objectors mentioned one or more of the points made by Professor Blake about the inadequacy of the information given. One, Mr Bountra, whom I have already mentioned, mentioned an additional point, namely that policy-holders should have been told the figures, in number and value, for the GAR rights prospectively exercisable as at the date on which the scheme would become effective. He did not explain how it would have been possible to do this in scheme documents finalised in late November as regards a date expected to be between 12 and 15 weeks later. Even as regards a date before the settling of the scheme documents I do not see that further information about this was needed to ensure that policy-holders had enough information on which to make up their minds about the merits or otherwise of the scheme. Mr Oke, speaking on behalf of Mr A M White, said that the society should have given details of the commencement dates of all subsisting with-profits policies, for example in bands, year by year. I cannot see how that could fairly be regarded as necessary or even useful.

Criticisms of the House of Lords judgment

[78] As I have mentioned, several of the objectors suggested that the House of Lords judgment did not have the effect which the society has been advised that it has, or that it could be challenged or clarified, or that action could be taken which would be inconsistent with the ruling as it has been understood. I will leave for later points of this kind based on the Human Rights Act 1998.

[79] Professor Blake is one who takes this standpoint, though it is not clear to me how the expression of the view mentioned at para 74 above comes within the scope of his expertise. As I have mentioned in describing the events leading up to the scheme, Mr Warren and Mr Lowe were asked specifically to advise whether there was any way in which the ruling could be re-opened or challenged from the point of view of non-GAR policy-holders. They advised that there was no such course available. It seems to me that they are right, but even without going so far, it must be clear that any attempt to reopen the question would be legally extremely difficult and doubtful of success, and would also be time-consuming. Certainly the society could not have been advised to take any action which, on the face of it, was inconsistent with the House of Lords ruling without first seeking to establish, by an application to the court, that this was legally feasible. I therefore cannot see that a suggestion such as that of Professor Blake mentioned in para 74 above could ever have been practicable.

[80] Mr Rodney Allen did not suggest that the society should have gone ahead in disregard of the House of Lords ruling, but he did, in his written submissions, argue that the judgment, as regards ring-fencing, was 'ex parte', could be revisited and, if it were, would be reversed. In his oral submissions to me, he withdrew somewhat from this, and suggested only that the judgment may have been right but was more limited in effect than had been assumed. It outlawed the differential final bonus practice, and ring-fencing, but did not exclude a more limited and reasonable approach to mediating between the interests of the two classes of GAR and non-GAR policy-holders. He submitted that the society should be required to fund an action to clarify the full meaning and implications of the House of Lords ruling.

[81] Mr Nicolas Bellord put forward a different approach to getting round the House of Lords ruling. He said, first, that the House of Lords were misled, not being given the full facts about the size of the problem if the differential final bonus practice and ring-fencing were disallowed, that the society, appointed by then to represent non-GAR policy-holders, must have been acting in breach of its duty to that class by not making the House of Lords aware of the relevant facts, that the judgment was therefore obtained in consequence of abuse of the process on the part of the society, and that the equitable remedy (namely the implication of a contractual term) granted by the court could not be enforced. Leaving aside the fact that, so far as I can see, the House of Lords did not make any declaration at all, and certainly did not grant any equitable remedy, Mr Bellord's process of reasoning is speculative as regards the facts and fanciful as regards the consequences of the facts even if true. His second point was that the ruling was unfair and unconscionable, and inconsistent with the principles of estoppel by convention discussed in Taylor Fashions Ltd v Liverpool Victoria Trustees Co Ltd [1981] 1 All ER 897, [1982] QB 133n. Clearly he resents the House of Lords decision, as no doubt do many non-GAR policy-holders. He has devoted some imagination to thinking how it might be got round. But even if (contrary to my view) there were any substance in his ideas, to test either of them, or any other, would involve a potentially long period of litigation and uncertainty, during which nothing would be being done to improve the position of the society and its policy-holders, and the cost and continued uncertainty would be likely only to make the position worse.

[82] Mr Donald Horrell, who put in a written representation, urged me to 'use the law of equity to override the House of Lords judgment, and to guide the society to a more equitable solution, where the rights of the non-GARs are recognised', their funds being retrospectively ring-fenced and the GAR funds reduced until the society can afford to pay GAR rates on the reduced values.

[83] All of these various suggestions fly in the face of reality. Even if it might have been possible to challenge or test the scope of the House of Lords decision, to take that course would have been lengthy, expensive and doubtful. It does not seem to me that the society can be criticised for not doing more in this respect than seeking the advice that it got from Mr Warren and Mr Lowe, and then acting on the basis of that advice.

Human Rights

[84] Very much the same can be said of several points taken under the European Convention on Human Rights. One, from Mr Allen, was that the House of Lords decision itself was inconsistent with art 1 of the First Protocol to the Convention. This is in the following terms:

'Every natural and legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. The preceding provisions shall not, however in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.'

[85] Of course the effect of the House of Lords decision, even more than that of the Court of Appeal, was to show that the rights in the with-profits fund were otherwise than they had been assumed to be. But it did not itself effect that change; it merely stated what was the result in law of things done over the years. So, even apart from the fact that the Human Rights Act was not in force at the date of the House of Lords judgment (20 July 2000), the point is misconceived.

[86] I understood Mr Allen to have argued also that the procedure under s 425 was an infringement of art 1 of the First Protocol. He disavowed this, but the point remains open because it was taken by Mr Andrew Pike in written representations. I accept Mr Moss' submission that this is wrong. He showed me a decision of the European Commission of Human Rights, on the admissibility of a complaint, made on 12 October 1982 in relation to applications 8588/79 and 8589/79, reported as Bramelid and Malmstrvm v Sweden (1982) 29 DR 64. The legislation complained of there was not quite like s 425 but it was somewhat similar to s 429 of the Companies Act 1985. The Commission said that this type of rule, essential in a liberal society, cannot in principle be considered contrary to art 1 of the First Protocol, provided that the law does not create such inequality that one person could be arbitrarily and unjustly deprived of property in favour of another. It seems to me plain that, given the terms of s 425 and the case law that has been established concerning its application, there is no possible argument for saying that the approval of a scheme under s 425, so as to bind dissentients among the relevant classes, breaches the rights afforded by art 1 of the First Protocol. Mr Pike suggested that the scheme would amount to confiscation of rights, and others made a similar point, even if not in quite the same way, saying that the compensation was not worthy of the name. I have already quoted Brightman J as to what is meant by compromise and arrangement, and the essential need for some quid pro quo. The objectors may feel that it is inadequate, and indeed some said so to me, on both sides of the GAR/non-GAR divide, but the scheme does both in law and in fact involve exchange of rights and thus consideration. No arrangement capable of being approved under s 425 could, in my view, amount to a confiscation such that art 1 would be infringed.

[87] One objector said that the House of Lords judgment should be taken to the European courts. It is not clear whether he had in mind the European Court of Justice or the European Court of Human Rights. Neither could be relevant. The Hyman case did not involve any question of European Community law, such that a reference to the European Court of Justice would have been possible. Even if, contrary to what I have already said, a question arises of infringement of rights under the Human Rights Convention, the European Court of Human Rights does not have any jurisdiction to override national courts; an application by an aggrieved party to that court would only seek compensation against the Government for a breach, and would not alter the private rights established by the House of Lords judgment.

Are the GAR rights valid?

[88] Mr Jarman, in writing only, and Mr Christopher Whitmey, in writing and orally, submitted to me that the scheme was fundamentally flawed in that it assumed that the GAR rights were valid, whereas it was beyond the powers of the directors to create such rights without a special resolution of the society for the purpose, which had never been passed. Others also mentioned this point. The point was put in different ways, but essentially it turns on cl (F) of the society's memorandum of association and reg 57 of the articles of association. Clause (F) is in the following terms:

'To create or set aside out of the capital or revenue of the society a special fund or special funds, and to give any class of its policy-holders or annuitants any special right over or interest in any fund or funds so created or set aside.'

[89] Regulation 57 prohibits the directors from exercising any of the powers conferred by cl (F) without the sanction of a special resolution of the society. It is then said that the creation of the GAR rights involved giving a class of policy-holders a special right over a fund, and that this could not be done without a special resolution. Mr Whitmey accepted that, literally, the clause is not in point, because the special right which he says is given is not over a special fund, but over the society's general with-profits fund. He said, however, that the clause showed that the directors were not to be able to confer special rights over any part of the society's funds without special resolution sanction. Therefore, by implication, cl (F) and art 57 prohibit the conferring of special rights over the society's general with-profits fund, even though they do not say so. Leaving aside the question whether such an argument could successfully be raised, the House of Lords having given a judgment which assumes that GAR policy-holders do have valid rights, it seems to me that this argument is simply wrong in any event. First, nothing justifies the implication for which Mr Whitmey argued. Far from it, the specific terms of the clause and the article suggest that the society and the board are not to be restricted in other respects. Secondly, however, it seems to me highly doubtful whether the creation of the GAR rights is the conferring of a special right over a fund, any more than the grant of any other right under a with-profits policy of any kind would be the conferring of a special right over the fund. At all events, I cannot accept that there is any defect in the scheme or in its documentation on account of the fact that this possibility suggested by Mr Whitmey (and others) at the hearing was not reflected in the scheme or referred to in the scheme documents.

Lapsed GAR rights

[90] Mr John MacLeod put to me a specific point about GAR policies. These policies generally include a clause under which the policy-holder must pay a regular minimum premium (I believe some £ 150 pa) in order to keep up his right to pay additional premiums which will carry GAR rights. The society has, however, never insisted on this requirement strictly. It has always been prepared to accept new single premiums under GAR policies even if, strictly, they could have rejected them because the right to pay such premiums (with GAR rights attaching) had lapsed. Mr MacLeod suggested that, because a good deal of the GAR problem arises from the possibility of future premiums being paid on existing policies, it would be imprudent for the society to continue to be so generous as regards late acceptance. He therefore submitted that lapsed policies should be valued less generously for the future than other GAR policies, and that the scheme was defective in this respect. Mr Moss's answer was that the society had taken the position, after advice, that its practice had been so long established that it could not be changed, or at any rate not without giving a significant period of notice. The position would be similar to that in Hughes v Metropolitan Railway (1877) 2 App Cas 439. If, however, in preparation for the scheme, the society were to have given, say, six months' notice to GAR policy-holders where the rights had lapsed, it was highly probable that almost all such policies would be brought up to date, with the payment of the minimum premium for the relevant number of years, so that no great advantage would be gained. It seems to me that such a position was eminently reasonable, and that accordingly the society cannot be criticised for not taking that step, and the scheme cannot be criticised for not discounting lapsed policies for the future.

Other possible courses of action

[91] Several of those who made representations to me had exercised their imagination as to what might be done with the society other than approving the scheme. Mr Bellord, from the point of view of a trust lawyer, and influenced by the society's origins under a deed of settlement, suggested that the directors should have applied to the court, after the House of Lords judgment, for directions what to do, and that the court should now put the society under administration. This ignores the fact that the society is no longer a trust, and has not been for over 100 years, nor is it subject to the court's jurisdiction in the matter of trusts. I do not believe that he had in mind administration under the Insolvency Act 1986, but even if he had, insurance companies cannot be put into administration (see s 8(4) of the Act) and there would be no case for doing so in this case even if they could.

[92] Mr Bell put forward a variant of the point as to other courses of action. He said that policy-holders had been put under unfair pressure to vote in favour of the scheme because the society had told them that 'there was no Plan B', ie the scheme was the only way out of the current situation. He said that it was not, and therefore the society's attitude amounted to coercion. His list of suggested alternatives was as follows:

'a readjustment of the July 2001 policy cuts to protect capital values; a new test case to present the position of non-GAR policy-holders; a referral to the original House of Lords ruling to the European courts with a society funded representative of the non-GAR positions.'

[93] Essentially these would all amount to challenging the House of Lords ruling. The July 2001 reduction in policy values has nothing to do with the GAR problem, but presumably Mr Bell meant, by a 'readjustment' of these cuts, one which favoured non-GAR policy-holders, so one which would be inconsistent with the House of Lords ruling.

The July 2001 reductions in policy values

[94] A number of policy-holders complained about the July 2001 reductions in their representations. Of course this was a harsh reality, perhaps especially for those who had only recently put funds into the society. But in my judgment Mr Moss is right to say that this has nothing to do with the GAR problem or with the scheme. Some objectors suggested that the society was not entitled to make the reductions as they did, or not in the case of the particular policy-holder. In some cases the reduction took the policy value below the guaranteed value under the policy. Of course the society accepts that, in such a case, the policy-holder is entitled to the guaranteed value. But its position is that as and when it declares bonuses in future, it will do so only on the policy value, not on the guaranteed value. Some objectors complain about this approach. The society would not accept the validity of these criticisms in relation to the reduction of policy values, but if there is any force in any of them, it is not a point overridden by the scheme. The scheme does not, in the language of one objector, 'legitimise' the policy value reduction; it is neutral on that point. That is not, therefore, a reason for not approving the scheme.

The Halifax transaction

[95] Some objectors sought to make points about the propriety or validity of the transaction with Halifax plc mentioned above. I do not see that this has any relevance to the question whether I should sanction the scheme.

A blot on the scheme?

[96] Mr Whitmey accepted that it was not open to him to argue that the scheme should be rejected because a better scheme might have been put forward. He therefore fastened on the words of Lindley LJ quoted above, at para 67, and suggested that there were features of the scheme which amounted to 'blots on the scheme', or to 'oversight or miscarriage'. It seems to me plain that, when Lindley LJ used that language, he was talking of some defect in a scheme which at first escaped notice, and only came to light after the meeting or meetings, and maybe not until the sanction hearing. That is clear from his words 'that had been unobserved and which was pointed out later'. Nothing that Mr Whitmey relied on in this respect was of that kind. They were all points which are deliberate and plain, such as, for example the failure to bind those who have been policy-holders but have surrendered their policies, who may therefore have subsisting mis-selling claims. I do not feel it necessary to deal with all his points, but it is clear to me that none of them came into the category of things of which Lindley LJ was speaking.

[97] Though a GAR policy-holder himself, Mr Whitmey contended that GAR policy-holders had excessive benefits, and that it would be wrong for the scheme not to take steps to discount these benefits. He had fastened on the phrase 'excessive benefits' in s 17(4) of the Policyholders' Protection Act 1975. This occurs in the context of provisions to do with compensation for policy-holders where an insurer is in financial difficulty, but which have, and could have, nothing at all to do with the present situation. The provisions of the 1975 Act have been replaced, as of 1 December 2001, by new arrangements through the Financial Services Compensation scheme, made under the Financial Services and Markets Act 2000. The point is so plainly irrelevant that I will not take up time explaining the present position.

[98] Mr Whitmey also suggested that the society might have put forward an amendment to art 65 to give it the effect that the Board had thought it had but which the House of Lords said it did not. I have to say that this seems to me an unrealistic suggestion.

Is the scheme inconsistent with the society's mutual nature?

[99] Some policy-holders objected to the scheme on the basis that it recognised and entrenched groups of members with different rights, whereas they submitted that, the society being a mutual organisation, all members ought to have equal rights, and all ought to own the society's assets equally. These points ignore first the fact that the society is not now a trust, or a club, but a company having separate corporate identity and owning its assets itself, secondly the fact that it has always been the case that policies are written on different terms, and therefore carry different incidents and different rights as against the with-profits fund, and thirdly the fact that the House of Lords ruling showed there to be a severe conflict between two classes of member, which the scheme would reduce, by eliminating the GAR rights altogether.

The unfairness of the scheme

[100] In the end, a lot of the objections, on both sides, came down to a complaint that the scheme was unfair, in providing inadequate compensation for the claims to be given up, whether it be the GAR rights or the potential mis-selling claims, and whether overall or because the compensation ought to be graduated within the classes. That is a matter of opinion on which, it seems to me, different policy-holders may legitimately take different views. Mr Moss submitted, with some force, that the fact that the same point is made both on behalf of GAR policy-holders (for example by Mr Millo and Mr Oliver) and on behalf of non-GAR policy-holders (by many of the objectors), namely that the compensation for giving up their respective rights is inadequate, suggests that there is here a real element of compromise, and one which can sensibly be regarded as fair and reasonable.

[101] Both in respect of GAR and of non-GAR rights, some objectors submitted that the scheme was unfair because it did not recognise that there were differences in the value of the claims. Among the non-GAR class, the latest entrants were said to have the strongest rights, so that the claims should be graduated in their favour. (Mr Bellord and Mr H M White were among those who put this forward). I have referred, at para [53], to what seem to be powerful arguments against this idea. Within the GAR class, it was said that the highest compensation should go to the policies closest to maturity, and the society was criticised, particularly by Mr Millo, for differentiating according to age of the policy-holder rather than according to period to maturity of the policy. One objector suggested that the holders of life assurance policies ought to receive a higher uplift, and a similar point was made about the with-profits annuitants. I am sure that these views are sincerely and firmly held. I wonder whether, in some cases, the feeling that the GAR right, or the mis-selling claim, in the bush is better than the uplift in the hand, is not based on either or both of a strong feeling of indignation at the society for having allowed this situation to arise, and a lack of perception of the difficulties which might affect the value of that which is in the bush. But that is neither here nor there. The fact is that some people feel very strongly that the scheme is not good enough for them, but among those who voted on the resolutions to approve the scheme, they were less than 3% of GAR policy-holders and less than 2% of non-GAR policy-holders. The fact that they take their particular view does not show that the 220,000 or so votes of the society's policy-holders who voted the other way were the result of being misled, or represented a position which no intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.

Modification of the scheme

[102] Paragraph 13.3 of the scheme allows for modifications of or additions to the scheme, and for conditions which the court may approve or impose. One such condition is the giving of an undertaking which I will mention below. Some objectors picked up the idea of a modification and suggested that in this way the scheme could be transformed into something materially different. That is not a permissible approach. The provision is salutary, because there may be some immaterial error or oversight, or change of circumstances, that needs to be corrected or covered. But it would be quite wrong to use the provision so as to foist on a class of creditors something substantially different to what has been approved at the relevant meetings. It is not possible, as one person suggested, for example, to sanction the scheme on terms that the uplifts be treated as being in escrow pending further litigation to clarify the effect of the House of Lords ruling, being released if that litigation showed that the society's present understanding is correct, but otherwise remaining in escrow pending new arrangements for a 'fairer' distribution.

[103] On a different but related point, Mr Oke submitted that, since Mr White, on whose behalf he spoke, only objected to the release of the mis-selling claims, and since the payment of the money due from Halifax is conditional only on the release of the GAR related claims, the scheme could go ahead as regards the result of the GAR policy-holders meeting and the first non-GAR policy-holders' meeting, leaving the mis-selling claims outstanding to be resolved later and differently. But the scheme is one single scheme, comprising linked and interdependent arrangements. It is not a question of picking and choosing between different elements.

[104] It is also one which, if it comes into effect at all, binds all scheme policy-holders. It is not open to any in the minorities in either class to opt out, as some asked to be allowed to do. That is the whole point of s 425, which enables the large majorities required by the statute, proceeding in the manner prescribed and with the court's sanction, to force on the minority the release of their rights in exchange for the consideration provided by the scheme. That is why care is needed to ensure that the procedure is correctly followed and, by means of the court's discretion, to see that any suggested reason why the scheme should not be sanctioned is considered.

Entitlement to be treated as having GAR rights

[105] Two points have been mentioned which can be taken together. On one the scheme is neutral, and all that is necessary is to note it. On the other the scheme might override individual rights and the position is to be safeguarded by an undertaking given by the society as a condition of any order approving the scheme.

[106] First, in some cases it is claimed that particular policies, or the rights of some members within group policies, are being treated by the society as not having GAR rights, but that this is unjustified. The point has been raised first in relation to some group policies issued before 1988 with, at that time, GAR rights for individual members of the group scheme. As from 1988 the society sought to withdraw GAR rights, not of course for existing members, but for those admitted to the group scheme after the date on which the announcement was made. This was done by the society issuing an endorsement to the policy. Some holders of these group policies have challenged the society's ability to do this, or the manner in which it was done. They therefore say that new members admitted after the date of the endorsement have GAR rights despite the endorsement. The society has a number of grounds on which it says that the course taken was effective. Issues arise as to that which may have to be resolved by some form of dispute resolution. The scheme is neutral on this. If a given policy, or part of a policy, is wrongly treated by the society as not having GAR rights, and it can be agreed or established that it did have GAR rights, then it will be treated accordingly for the purposes of the scheme.

[107] The second point is different. This concerns people who had GAR policies, but who were persuaded to surrender them in favour of non-GAR policies. Some of these allege that they were so persuaded by the society, or someone acting on its behalf, and that this persuasion involved a breach of duty by the society or its representative. Such policy-holders are undoubtedly properly treated as non-GAR policy-holders for the purposes of the scheme. The scheme would by its terms involve the release of any claim arising from the allegation of breach of duty. However, at the insistence of the FSA, the society has agreed that any such person who can persuade the society that the circumstances are as I have indicated above, or in default of agreement can establish that they are, in one of a number of agreed ways, will be given the treatment that they would have had if their policy had had GAR rights at the relevant date, though of course taking into account the benefits already given on the basis of non-GAR status. Since the position of these people would be affected by the scheme, the society has offered an undertaking to cover the point, which will be a condition of the making of any order sanctioning the scheme.

[108] A separate but related point was made in written representations from solicitors on behalf of two pension fund trustee companies in the Allied Domecq group. I do not need to deal with the point in any detail, since it does not appear to be of any general application. However it involves a dispute as to whether benefits which are currently treated by the society as not including GAR rights are correctly so treated. I am satisfied that, if the trustees' point is good, either it will come into the first category of these points mentioned above, and the scheme will not alter the position, or, if putting the situation right involves alleging, and remedying, some breach of duty by the society, then it would come into the second category. Either way, the scheme will not prejudice the possible argument.

CONCLUSION

[109] Having considered all these various points, having re-read the written submissions made to me, by no means all of which I have referred to individually, and reviewed the transcript and my notes of the oral representations made, I am satisfied, first that I have jurisdiction to sanction the scheme, because the procedure has been properly followed, and secondly that I ought to sanction it under s 425. I am in no doubt that it is a scheme such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve. The fact that such large numbers and majorities of the three classes did approve it is a major factor in this, but I am also satisfied that neither on account of any inadequacy of information or otherwise in the procedure, nor in respect of any of the substantive points made to me, is there the slightest reason to suppose that it is not a proper scheme which, having been approved by the requisite majorities of the various classes, ought to be sanctioned by the court. I will so order.

DISPOSITION:

Order accordingly.

 

SOLICITORS:

Lovells.