EQUITABLE LIFE MEMBERS
Judge Lloyd S425 Judgement
here for previous part
Equitable Life Assurance Society
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
Moss QC, D Richards QC, M Moore and B Isaacs for the Society
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.
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.
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,  1 AC 408,  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).
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.
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.
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,  2 BCLC 480, at 508.
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
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.
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.
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
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
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:
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."
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.
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.
Lord Justice Chadwick's suggestion of that kind, while undoubtedly
helpful in general terms, is of no relevance to the present case.
that is not feasible, going on from this suggestion, he says this at
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."
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
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.
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.
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:
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
carries that further, to an extent, in para 33 in his judgment when,
after referring to the question, he says:
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
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.
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
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
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.
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
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.
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
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.
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.
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
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.
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
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.
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.
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
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.
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  BCC 503 where, of course,
creditors also have votes according to the value of their debt or their
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.
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.
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.
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.
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.
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
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.
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.
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
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.
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
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.
will appoint as Chairman of the meeting Mr Treves or, failing him, Mr
Smith or Sir Philip Otton, as asked.
will authorise the Society to engage Computershare Investor Services plc
to count the votes cast and KPMG to scrutinise the counting of the vote.
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.
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.
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.
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
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.