Judge Lloyd S425 Judgement

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Re Equitable Life Assurance Society




(Transcript: Smith Bernal)




26 NOVEMBER 2001


Company - Scheme of arrangement - Application - Compromise with creditors or members - Meeting - Class meeting - Split voting - Whether court should order meetings to be convened - Companies Act 1985, s 425


G Moss QC, D Richards QC, M Moore and B Isaacs for the Society







LLOYD J: This is the hearing of an application which is of a very usual kind but is made in a very unusual way.  The application is under s 425, sub-s (1) of the Companies Act 1985, for an order that meetings of classes of creditors of a company be summoned in such manner as the court directs, the purpose of those meetings being to consider a compromise or arrangement which is proposed between the company and its creditors or any class of them.

Normally, an application of this kind is made to a Registrar of the Companies' Court, is made (as this one is made) without notice to any other party, is heard briefly and, although, in theory, the hearing is in open court, it is probably not attended by anyone other than those limited number of representatives of the company who need to attend.

This hearing is before a judge.  The company isrepresented by two leading and two junior counsel.  The hearing has been attended by a large number of people who wish to know what happens.  That stems from the fact that the company is The Equitable Life Assurance Society (to which I will refer as the Society), and the proposed compromise or arrangement is intended to resolve the difficulties, or most of the difficulties, that that company has got into in consequence of the issue of certain policies of assurance and, immediately, in consequence of the decision of the House of Lords in Equitable Life Assurance Society v Hyman, [2002] 1 AC 408, [2001] Lloyd's Rep IR 99 which ruled that the practice adopted by the Society for alleviating or overcoming the disparity between the terms of certain policies and its status as a mutual body were unlawful.  (That is an oversimplified summary of the decision but will do for present purposes).

There is a very large number of people who are interested directly or indirectly in the difficulties that the Society is under and are interested in the proposed arrangement.  It is for that reason that this hearing is taking place in the unusual manner I have described.

It is, however, in essence, no different from the application that would more normally be made to a Registrar of the Companies' Court without notice for a direction as to the convening of meetings of classes of creditors.  It is rightly an application which is made without notice to any particular party, although the fact that the application was to be made was known at the end of last week, at any rate on Friday, hence a good deal of reference to it in the press and in broadcast media and the attendance of those interested, and hence also the fact that the court generally and I, in particular, have received a number of communications from interested parties today seeking to put particular points before me.

The nature of the exercise that the court has to undertake on such a hearing as this has recently been illuminated by the judgments of the Court of Appeal in Re Hawk Insurance Company Limited, [2001] 2 BCLC 480, at 508.

In the judgment of Lord Justice Chadwick, there is a review of the process that has to be undertaken in relation to a proposed scheme of arrangement.  Stage one is the hearing of the kind that is before me, at which the question is whether and, if so, what directions should be given for the convening of the meetings.  Stage 2 is the holding of the meetings, at which, under the section, certain minimum majorities have to be achieved if the scheme is to go forward.  Stage 3 is a further hearing, which in this case would also come before me, at which the court is invited to sanction the compromise or arrangement.

At that hearing, issues both of jurisdiction and discretion may arise, and that is a hearing which will be on notice to all relevant creditors.  It may very well be that creditors or groups of creditors will be represented.  Argument may be addressed to me as to whether the classes of creditors, meetings of which have been held, were appropriate; that would go to jurisdiction.  Matters may also be urged upon me which go to the discretion of the court not to sanction the arrangement even though it has been approved by the necessary majorities of all the relevant classes of creditors.

In the Hawk Insurance case, what had happened was that a single meeting had been convened of all the creditors, taking the view that it was not necessary or appropriate to subdivide the creditors into different classes.  The meeting took place and voted solidly in favour of the arrangement and the matter then came back to the court for sanction, with no creditor opposing.

The judge, however, at that stage, took the view, on a careful analysis of the scheme, that there were different and incompatible interests of classes of creditors, and that there should have been three separate class meetings, and, accordingly, that the scheme could not be sanctioned.

There was an appeal against that ruling and the Court of Appeal held, with the benefit of further evidence, that that was the wrong view and that there was indeed only one class of creditors.  It is in that context that Lord Justice Chadwick spoke of the exercise that the court has to undertake both at the first and the third stages.

What he said about what has to be done at the first stage is of assistance to me today.  He says, first, at p 511, para 12:

 "At the first stage, the court directs how the meeting or meetings are to be summoned.  It is concerned at that stage to ensure that those who are to be affected by the compromise or arrangement proposed have a proper opportunity of being present (in person or by proxy) at the meeting or meetings at which the proposals are to be considered and voted upon."

Then he goes on to describe the purpose and nature of the second and third stages.  He then reviews the law as to whether there is indeed only one class, or rather more than one class involved, and, if so, how you work out what the classes are.  He refers to the practice of the Companies Court which is long-standing, that the view is taken at the first stage by the company as to what creditors are to be summoned to any meeting, with the consequence that if it turns out that the meetings are incorrectly convened, that objection has to be taken at the third stage, and the company takes the risk that, if the objection turns out to be justified, then the scheme cannot be sanctioned and a good deal of time and effort would by then have been wasted.

He makes the comment that there may be cases in which one can grapple with the question of class or classes at the first stage, on notice to those or, at any rate, some of those who would be interested in arguing one way or the other.  That is not a course which commends itself to the Society in the present case because there is a substantial reason to try, if at all possible, to get the Scheme approved and effective by 1 March 2002, which I will mention later.  The Society has taken the view, entirely understandably, that it simply cannot afford to take the time for a preliminary hearing on notice to whatever might be thought to be possibly relevant classes of creditors to work out at the first stage what classes there are.

So Lord Justice Chadwick's suggestion of that kind, while undoubtedly helpful in general terms, is of no relevance to the present case.

If that is not feasible, going on from this suggestion, he says this at para 21:

 "In my view an Applicant is entitled to feel aggrieved if in the absence of opposition from any creditor the court holds at the third stage, and on its own motion, that the order which it made at the first stage was pointless.  It is to my mind no answer to say that that is a risk which the Applicant must accept.  It may be inevitable that an Applicant must accept the risk that a dissentient creditor will persuade the court at the third stage that the order which it made at the first stage, without hearing that creditor, was the wrong one, but that is not to say that the Applicant must be required to accept that when exercising what is plainly a judicial discretion at the first stage, the court will not address the question whether the order which it makes serves any useful purpose or that, if it has addressed that question at the first stage, it will have changed its mind of its own motion at the third stage."

The moral of that seems to me to be that it is right for the Court to attempt to form a prima facie view as to whether the class or classes put forward by the company are appropriate, because if there were some clear flaw or fallacy in the proposition, in particular some real conflict within one proposed class, it would be pointless and extremely unsatisfactory for that to remain concealed at the first stage, not to be adverted to at the first stage and only to emerge at the third stage when time and money will have been devoted to proceeding on the false basis.

For that reason Mr Moss, for the Society, has ightly shown me the three classes that are proposed to be the subject of different meetings in the present case and has dealt with such arguments as appear, for example, in some of the very recent communications with the Court, as to why there ought to be different subclasses.  In doing that he has been assisted particularly by the fact that the Society has undertaken a substantial consultation exercise over the last months which has thrown up a number of suggestions from different groups as to the existence of different subclasses.

The view that I take at this stage, for reasons that I will explain very briefly, is that the three classes are properly formulated and appropriate, but I wish to make it clear that that is no more than a preliminary view.  Although I have seen, as I say, some letters and some reference to possible arguments, I have heard no argument from any party concerned to argue that there is some subclass of one or other of the various classes proposed such that there ought to be more than three meetings.  My conclusion, therefore, does not in any way pre-judge the question that I will have to address on the petition for the sanction of the arrangement, if it is approved by the necessary majorities of the class meetings.  If that comes to be argued before me at that stage, I will of course address the matter afresh.  In my view Mr Moss was right to undertake the task of showing me why the Society has put forward the three classes that it has and to show me, by reference, in particular, to the review of the authorities in Hawk Insurance, that that is an appropriate formulation of the classes.

The test of class is set out in Lord Justice Chadwick's judgment in Hawk Insurance at 516.  After a quotation in para 26 from a previous Court of Appeal case from a judgment of Lord Justice Bowen, Lord Justice Chadwick says this:

 "The answer, therefore, which Lord Justice Bowen may be taken to give to the question: 'Are the rights of those who are to be affected by the scheme proposed such that the scheme can be seen as a single arrangement, or ought it to be regarded on a true analysis as a number of linked arrangements?' is clear enough.  The scheme proposed may be regarded as a single arrangement with those creditors whom it is intended to bind if, but only if, the rights of those creditors are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.  If the rights of those creditors whom the scheme is intended to bind are such as to make it impossible for hem to consult together with a view to their common interest, then the scheme must be regarded as a number of linked arrangements.  'In the latter case it will be necessary to have a separate meeting of each class of creditors, a class being identified by the test that the rights of those creditors within it are not so dissimilar as to make it impossible for them to consult together with a view to their common interest."

He carries that further, to an extent, in para 33 in his judgment when, after referring to the question, he says:

 "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.  The safeguard against majority oppression is that court s not bound by the decision of the meeting.  It is important that Lord Justice Bowen's test should not be applied in such a way that it becomes an instrument of oppression by a minority."

He then went on to apply that approach to the facts of the case.  In the present case there are proposed three separate class meetings, although two of them, in a sense, overlap.  There is a very clear distinction between the interests of those policyholders whose policies have rights in relation to guaranteed annuity rates and those policyholders whose policies do not carry those rights, referred to as the "GAR Policyholders" and the "Non-GAR Policyholders" for short.

There is, as Mr Moss pointed out, notwithstanding the conflict, a good deal of community of interest between all policyholders interested in the with-profits fund, but the very clear conflict in respect of the impact of the guaranteed annuity rates makes it perfectly plain that there have to be separate class meetings of the GAR Policyholders and the Non-GAR Policyholders.

The need for the third class meeting, which is a meeting essentially of the Non-GAR Policyholders, arises from the fact that advice has been given to the Society and to others, in particular to the Financial Services Authority, that Non-GAR Policyholders, or some of them, may have claims against the Society as creditors in respect of mis-selling.  The nature of those claims is potentially quite varied.  I have read two lengthy joint opinions by Mr Warren QC and Mr Lowe, which review a very wide variety of possible claims and which attempt to assess, in general terms, the possible strength and incidents of these different claims and also the impact on them, if any, of the rules about limitation and the relevant principles for quantification of damages.

The view has been taken, in the light of that advice or that expression of view, that there are possible claims, principally by the Non-GAR Policyholders, but also consequentially, to some extent, by the GAR Policyholders.  These are claims against the Society in respect of mis-selling of the relevant policies which need to be compromised as part of any arrangement.  What is therefore proposed is that, on the one hand, the GAR Policyholders will be present in person or by proxy at one class meeting and will vote on the scheme, thereby considering whether to accept the proposed uplift of their policy values in exchange for the surrender of their guaranteed annuity rate rights and also, incidentally, waiving any mis-selling claims they may have.

Secondly, the Non-GAR Policyholders should have the opportunity to attend and vote at a class meeting at which they will consider whether to agree to the uplift for the GAR Policyholders in exchange for the surrender of the GAR rights.

Thirdly, there will be a meeting of the Non-GAR Policyholders - it is likely to be exactly the same class - in their capacity as potential Claimants against the Society by way of one or more kinds of mis-selling claim; those are the claims which it is proposed they should give up in exchange for a different uplift of their policy values.

Moreover, as regards that third meeting, the second Non-GAR Policyholders' meeting, although the benefits offered to the class under the scheme are the same, it is proposed that their voting rights should be differentiated on the basis that the view is taken that before a date in 1988, which, if I remember right, is 29 April - the date on which the Financial Services Act came into force - those Non-GAR Policyholders whose mis-selling claims would have accrued before that date have significantly and clearly weaker prospects than those whose claims arise on or after that date and, therefore, a difference is to be made as regards the value of their claims when it comes to counting the votes and establishing whether the necessary majority by value has been achieved.

Those are the three class meetings that are proposed.  In my judgment, looking at the matter in a preliminary way, which is all the Court can do at this first stage, the formulation of those classes has proceeded on a proper and rational basis and it is appropriate that I should order that meetings of those classes of creditors be summoned, and I will so order.

I therefore come to the question of what directions should be given, because the section says "to be summoned in such manner as the court directs".  The first question that arises is the valuation of each creditor's claim for voting, bearing in mind that in order that the scheme may proceed at each class meeting there has to be 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, voting in favour.  The majority in number of course does not present a difficulty subject to a point to which I will turn, but the majority in value requires one to put a value on the creditor's claim.

The draft order that has been put before me sets out in para 6 the voting value.  At this stage, I should mention the reason for the 1 March target that I mentioned.  The assets of the Society, other than those of the with-profits fund, have been sold, at any rate the bulk of them, to Halifax plc, as it then was, or a subsidiary of it.  Under the terms of this transaction, if the scheme of arrangement comes into effect on or before 1 March next year, a further 250 million of consideration becomes payable.  Also, subject to various contingencies which are presently unforeseeable, a yet further   250 million may become payable in the year 2005.  That is obviously a highly desirable benefit for the Society and its policyholders and it is that in particular, apart from the general desire to end the uncertainty that has affected the Society in its affairs at the moment, that makes it necessary to proceed with this scheme, if it is to go ahead, with reasonable despatch.

So far as the voting value is concerned, different principles are to apply to each of the class meetings.  At the GAR Policyholders' meeting, or the GAR meeting, as it has been called, the voting value is to be the higher of the policy value or the guaranteed value in respect of each particular policy as at 11 January 2002, which is to be the date of the meetings, as those values are to be proposed to be uplifted by the scheme, but without taking into account the part of the uplift that will be attributable to the Halifax   250 million.  For the first Non-GAR meeting, the voting value is to be the higher of the Non-GAR policy value and Non-GAR guaranteed value in respect of that policy as at the date of the meeting, without taking account of any uplift because the uplift to the Non-GAR policies is not in respect of the surrender of the GAR rights.

At the second Non-GAR meeting, the voting value is to be a percentage of the higher of the Non-GAR policy value and Non-GAR guaranteed value in respect of the particular policy at that date.  The percentages are quite small, but the point about the percentages is not what they are but how they relate to each other.  The point is to differentiate between the pre-29 April 1998 claims, which are seen as distinctly less strong, from those which arise in respect of policies effected on or after that date which are stronger.

I am satisfied that that is a rational way of proceeding as regards determining the voting value for each of those classes.  Of course in a sense it does not matter so long as the basis of determining the voting value is consistent within each class, because the majority by value is determined class by class, but at all events I am satisfied that those are appropriate ways of proceeding for the purposes of directing the convening of the meetings.

These are, again, aspects of the scheme which, if a creditor wishes to object to them, can be the subject of submissions at the stage of the hearing seeking the Court's sanction.

There is a special point on which submissions have been made to me as regards voting, and that arises in this way.  Many policyholders, of course, are individuals who hold their policy for their own benefit and who will not, after due consideration, be in any doubt as to how they wish to cast their vote and will vote 100 % in favour or 100 % against.  But some policyholders may not be in that position, they may be representatives, either nominees or trustees, and may therefore represent different individuals, beneficially entitled, who may have different interests or different wishes as to how the vote should be cast.

The consultation exercise by the Society has drawn some attention to that and, as I understand it, there have been some discussions with trustees about this issue.

I am asked to direct that a particular scheme policyholder may, if so desired, vote either all of the voting value or only part of the voting value of a particular policy, ie may abstain in respect of part of the voting value, or may vote different parts of the voting value in different ways.  This is a point that has, as I understand it, arisen in practice on schemes under s 425 and has never been commented on adversely, but, equally, has never been the subject of a decision of a court that this sort of procedure can beapplied.  There has been a decision in the somewhatdifferent insolvency jurisdiction in a case Re Polly Peck International plc [1991] BCC 503 where, of course, creditors also have votes according to the value of their debt or their claim.

That was a decision by Mr Justice Morritt, as he then was, to the effect that the insolvency rules, which are not at all particularly explicit about the point, do permit a particular creditor either to vote in part and abstain in part, or to vote in part one way and vote in part the other way, so long, of course, as the particular creditor does not vote more than the value of the total claim.

Mr Moss points out to me that both as regards creditors and as regards members of a company, shareholders or members of some other kind, but particularly shareholders, it is increasingly common for the nominal creditor, or the registered shareholder, to hold the relevant interests as nominee for it may be (in the case of a bank), a large number of different individual beneficial owners who may have conflicting interests or conflicting wishes on a matter on which the actual shareholder or actual creditor is called upon to vote.

In the case, of course, of an ordinary company vote by members of the company being shareholders no problem arises; the shareholder casts votes in respect of such shares as it has and can vote different shares different ways.  But if the course that Mr Moss invites me to follow is not possible under s 425, nominees or trustees would find themselves in serious difficulties.  Nominees might be able to resolve the problem by transferring particular interests into the name of a different nominee, but that would by no means necessarily be possible and, even if it were possible, it would add an undesirable purely technical formality which might involve expense and might involve unforeseen difficulties.  He urges me to conclude that the general terms of s 425 permit the Court to direct that in calculating the majority by value, the proportion represented by the value of the claims of the creditors voting in favour, the Court can direct that a particular creditor may vote both for and against, or may vote in part one way and abstain as regards the balance of the debt and that the same could apply logically to members, if the scheme were promoted in respect of members.

It seems to me that Mr Moss's submission is justified.  The wording of the sub-s (2) is general.  It is certainly true that if one were reading it at a first reading, it might not occur to one that, of the however many numbers of creditors there might be in the particular class according to a headcount, you could find one of those, or any given number of those, voting different ways in respect of different parts of his claim.

However, reviewing the section in the context of the widespread practice of nomineeship and trusteeship, both for debt, for example bonds, and rights under policies, many of which are held by trustees, for example under group pension schemes and, likewise, in respect of shares, especially in an increasingly paperless securities world, it seems to me that it would be inappropriate to construe these general words as not permitting a particular member or creditor to cast different parts of the value of his claim or his membership rights in different ways.

That does, in a sense, produce an oddity, because if you had, let us say, in an extremely simple case, ten members, one of whom wished to cast a split vote, you would really have to count that person on the headcount both for and against.  So you would have on the face of it 11 members voting.  But since that person would be on both sides of the head count, both in the "yes" and the "no" lobbies, that makes no difference to the calculation of the majority in number, whereas it permits an appropriate way to achieve and calculate the true majority in value.

For those reasons it seems to me that it is possible and would be right to permit split voting.  Mr Moss points out this is something that will only be relevant to a very small number of policyholders and, accordingly, the appropriate special forms of proxy appointment are not to be issued automatically.  They will be available to those who wish to have them on request from the Society.

I then have to consider the service of the notice.  The notice period that is proposed is at least 21 clear days before the day appointed for the meetings, namely 11 January.  One of the communications I have received today asks for a longer period, but it seems to me that in the context of the time constraints to which this exercise is subject and, in particular, in the context of the substantial consultation exercise that has gone on, as result of which these points are not coming out of the blue, it is proper to direct the giving of notice on the basis of 21 clear days' notice to be served by first-class mail, air mail or courier, as appropriate.

I have been shown the forms that are intended to be used for the appointment of proxies, both in relation to each of the three meetings, and both the non-split and split votes, and I approve those for the purpose.  One feature of them is that they include, by referential text, a warranty that any person who signs on behalf of the particular policyholder warrants that he has authority to do so.  I propose to direct that the Chairman may act upon the basis of that warranty.

As I have mentioned, the two Non-GAR meetings will, in all probability, have exactly the same class, or entitled to attend.  Although there is some possibility of a theoretical discrepancy, for practical purposes they will have the same class, though, as I have mentioned, there is a difference in the valuation of the claims as between the one meeting and the other.

What I am asked to authorise is that, in effect, those two meetings be held concurrently.  In fact the notices which have been prepared, and which it is too late to alter, will give notice of the first Non-GAR meeting for 2 o'clock on 11 January 2002, assuming that the GAR meeting is concluded by then, and for the second Non-GAR meeting at 2.05, or as soon thereafter as the first Non-GAR meeting has been concluded.  That therefore envisages non-concurrent meetings, but Mr Moss has put forward a slightly different formula which has the result that basically all the discussion can be held in the context of the first meeting.  The first meeting will then be adjourned without the poll having yet been taken.  The second meeting will then formally be opened.  It will probably not proceed to anything other than formal business, because all the discussion will have taken place, but the first meeting will have been adjourned, for the purpose of taking the poll, to the end of the second meeting, so after whatever short period is necessary to explain to those attending the slightly complex position, the poll can then be taken and that will be one poll on both meetings.  I shall approve that course.

I should have said that with the notice will go what I gather will be a very large and weighty and, no doubt, complex package, including a copy of the scheme and a copy of the statutory explanatory statement.  These are long and technical documents, but there will also be a short joint letter from the Chairman and the Chief Executive of the Society, and a question and answer booklet which is intended to make it easier for those receiving it and having to read the documents to get the gist of them.  I have seen what is the latest version of those documents and I approve the service of packages including those and, of course, the proxy forms, other than the proxy forms intended for split votes.

I will appoint as Chairman of the meeting Mr Treves or, failing him, Mr Smith or Sir Philip Otton, as asked.

I will authorise the Society to engage Computershare Investor Services plc to count the votes cast and KPMG to scrutinise the counting of the vote.

I will also direct the Society to send to any scheme policyholder who requests it a copy of theIndependent Actuary's report, given by Mr Michael Arnold, which I have read and which gives support to the basis on which the scheme has been put forward.

I should perhaps have mentioned, although in a sense it is obvious and inevitable, that because the voting value attributable to each scheme policy is to be determined as at 11 January 2002 and, for example, will take the benefit of premiums paid up to that date, it will not be possible to know on that date exactly what the voting value is.  The Society has, as I understand it, issued indications to policyholders of what their value is or will be, but the final calculations will have to be done after the event.  That is one reason why it will take longer that it normally would to work out the result of the meeting.

The envisaged timetable is that the result of the meetings will be known and declared in the window 21 to 28 January and, assuming that all the classes vote in favour by the necessary majority in number and value, the Society will then immediately issue a petition for the sanctioning of the scheme.  That then will bring us to stage 3 of the statutory exercise.  As I say, that is a hearing which will be on notice to policyholders and at which it may very well be the case that some will wish to be represented and submit arguments to me as to whether, notwithstanding what I have said today, and notwithstanding the passing of the necessary votes, the scheme should not be sanctioned.

That, I think, covers the matters that I need to deal with today.  I will make an order substantially in the terms of the draft put before me.  There is, I think, one query on para 1, subpara 2, but it is obvious what needs to be said there in principle.  There is a new text for para 5, which I have had and which I approve.  As I say, I think that covers all the points I need to at this stage.

The only other thing I need to say, is to reiterate that those are provisional conclusions as to the appropriateness of the scheme, the appropriateness of the classes and the appropriateness of the way of proceeding towards the meetings, all of which will be matters which can, if thought fit, be made the subjectof submissions at stage 3.



Judgment accordingly.