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What impact might the ruling in Re Welcome Financial Services have on the construction of schemes of arrangement? Barry Isaacs QC, a barrister at South Square, discusses the ruling and its significance for those drafting schemes of arrangement.
Re Welcome Financial Services Ltd  EWHC 815 (Ch),  All ER (D) 329 (Mar)
The company and the administrators of the scheme (the applicants) sought declarations concerning the proper construction of a scheme of arrangement in respect of the company and its parent. Following the passage of the ‘bar date’, there were two main groups of people whom it was thought might have claims—those who had lost money investing in shares in the parent company and customers who had been mis-sold payment protection insurance (PPI). The Chancery Division (Companies Court) made various declarations on the basis of whether the respondents were creditors of the scheme.
How did the issues arise?
The company was in the business of making loans to individuals, particularly those whose poor credit records meant they could not obtain loans from banks. A large number of customers and former customers asserted claims against the company arising out of their credit agreements. The questions for the court were whether the claims were barred because they were covered by the scheme of arrangement which had been sanctioned in relation to the company and the customer had not submitted a claim in accordance with the terms of the scheme.
What guidance was given on the interpretation of schemes generally?
The case is a useful example of the application of:
What guidance was given on the meaning of claims arising from an obligation incurred before the effective date of the scheme?
The liabilities covered by the scheme were those which had arisen by the effective date or might arise after that date ‘as a result of an obligation incurred’ by that date. The court held that claims under the Consumer Credit Act 1974 (CCA 1974) arose as a result of obligations incurred before the effective date. Applying the test in Re Nortel GmbH, the entering into the credit agreement was the taking of a legal step which imposed legal duties under CCA 1974 and created a legal relationship between the creditor and debtor:
Did the scheme bind the five categories of claim (CCA claims, non-PPI liabilities, overpayment claims, uncashed cheques claims, charges claims)?
Applying the reasoning in Re Lehman Brothers International (Europe), CCA claims were not compromised by the scheme where the customer making that claim was not doing so in the capacity as creditor but in the capacity as a debtor. The fact that the same customer might have a claim as creditor as well as a claim as debtor did not convert all their claims in whatever capacity into claims as a creditor. The other categories of claim were (with minor exceptions) bound by the scheme.
What does this mean in practice for those drafting schemes of arrangements?
The court construed the scheme by applying the principles of construction set out by Henderson J in Re Marconi Corporation plc  EWHC 324 (Ch) at para . They can be summarised as follows:
Barry Isaacs QC is a barrister at South Square. He specialises in insolvency and restructuring, banking and finance, and commercial litigation. He is an associate of the Society of Actuaries. In recent years, Barry has appeared in numerous cases in the Supreme Court/House of Lords (eg Lehman Brothers/Nortel, Rubin/New Cap Reinsurance, Sigma Finance, Mainstream Properties, Three Rivers v Bank of England), in the Court of Appeal (eg Lehman (Waterfall Application), Woolworths, Davenham Trust, FKI v Stribog, Golden Key, Whistlejacket Capital, OT Computers), and at first instance, including several major trials and arbitrations. Barry was named as Chambers and Partners Insolvency/Restructuring QC of the Year 2013.
Interviewed by Lucy Karsten.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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Schemes of arrangement—overview
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First published on LexisPSL Restructuring and Insolvency
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