How far-reaching are schemes of arrangement? (Re Welcome Financial Services Ltd)

How far-reaching are schemes of arrangement? (Re Welcome Financial Services Ltd)

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.

Original news

Re Welcome Financial Services Ltd [2015] EWHC 815 (Ch), [2015] 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:

  • the test for contingent debts propounded by Lord Neuberger in Re Nortel GmbH (in administration) [2013] UKSC 52, [2013] All ER (D) 283 (Jul), and
  • the reasoning in Re Lehman Brothers International (Europe) (in administration) [2009] EWCA Civ 1161, [2009] All ER (D) 83 (Nov) that an arrangement between a company and its creditors means an arrangement which deals with their rights inter se as debtor and creditor

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:

  • this relationship resulted in the creditor being vulnerable to applications under the relevant provisions of CCA 1974, and
  • it was consistent with the regime under which the liability was imposed to conclude that the entering into the credit agreement gave rise to an obligation under the Insolvency Rules 1986, SI 1986/1925, r 13.12(1)(b)

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 [2013] EWHC 324 (Ch) at para [37]. They can be summarised as follows:

  • the court must consider the language used and ascertain what a reasonable person would have understood the parties to have meant—a reasonable person in this context is someone who has all the background knowledge which would reasonably have been available to the parties in the situation they were in at the time of the entry into the instrument
  • the words used in an instrument should be given their natural and ordinary meaning—this means that the court will not readily accept that the parties have made linguistic mistakes in formal documents
  • if detailed semantic and syntactical analysis of words is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense
  • an over-literal interpretation of one provision without regard to the whole may distort or frustrate the commercial purpose—accordingly, the wording must be interpreted as a whole in light of the commercial intention which may be inferred from the face of the instrument and from the commercial context
  • in cases where the language is ambiguous or there are two possible constructions, it is generally appropriate to prefer the construction which is more consistent with business common sense and reject the other

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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First published on LexisPSL Restructuring and Insolvency

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