Fidelity Investments International Plc v Mytravel Group Plc

MyTravel Group plc (formerly known as Airtours plc and, hereafter, “the company”) is engaged through subsidiaries in the provision, as tour operator, of packaged holidays and related services. The group has suffered adverse trading conditions during the past two years, leading to trading losses in each of the financial years 2002 and 2003 and a substantial excess (£672.6 million) of balance sheet liabilities over assets. Amongst the factors contributing to this position the company has identified the war in Iraq, the SARS epidemic in the Far East and unusually hot weather in the United Kingdom and Scandinavia; all of which are said to have had the effect of depressing demand for overseas travel and foreign holidays.

The group’s ability to continue to trade is dependent upon it continuing to hold Air Travel Organisers Licences (“ATOL’s”) issued by the Civil Aviation Authority (“CAA”), as the industry regulator. Following discussions with the CAA, the directors of the company take the view that ATOL’s are likely to be withdrawn – with the consequence that the group will cease to trade – unless refinancing proposals acceptable to the CAA are implemented by the end of this year. It is said that “if the Company is not able to restructure its balance sheet in a timetable acceptable to the CAA it is inevitable that the company will cease trading and enter into insolvent liquidation, whether or not preceded by administration.” If that occurs, the directors believe that there will be no assets available for distribution to shareholders or to subordinated creditors.

It is in those circumstances that the company has put forward proposals for the refinancing – or, as it would say, for the restructuring - of its undertaking. Central to those proposals is the transfer of the company’s undertaking to MyTravel Holdings plc (“Holdings”) which will become the parent company of the group. Shares in Holdings will be issued to certain institutional creditors of the company on terms that the debts of the company to those creditors will be released. Shares in Holdings will be issued to shareholders of the company in exchange for their existing shares. Holdings will assume the company’s liabilities to its general creditors. The effect would be to leave the company without assets – other than rights which it may have in respect of customer claims under public liability policies and such shares as it may have in Holdings – and without liabilities other than (i) liabilities in respect of customer claims, (ii) liabilities to Holdings under a £50,000 convertible loan note, (iii) liabilities in respect of unpaid dividends, and (importantly in the present context) (iv) its liability to bondholders under 7% subordinated convertible bonds issued by the company and due for repayment in 2007.

In broad terms the company’s creditors fall into three classes. First, institutional creditors who provided finance or facilities to the company or its subsidiaries under note purchase agreements, loan or credit agreements or finance leases. Those creditors have agreed – or are expected to agree – to convert their debt into equity, by taking shares in Holdings in exchange for a release to the company. They are conveniently described as “converting creditors”. Second, the bondholders under the subordinated bonds to which I have referred. Third, the general creditors – that is to say, creditors other than converting creditors, subordinated bondholders and group companies in respect of intra-group debts. As I have said, it is proposed that the converting creditors exchange their debts for equity in Holdings; and the general creditors become creditors of Holdings. The subordinated bondholders have been offered terms under which they could exchange their bonds for shares in Holdings; but, to date, they have not agreed to do so. If the company proceeds with the proposals, the subordinated bondholders will be left with claims against the company which the company will have no assets to meet.

It is important, therefore, to have in mind the subordination provision contained in the trust deed under which the bonds are issued. It is in these terms:

“If any order of a court of competent jurisdiction is made or any effective resolution is passed for the winding-up of the Company, the Company shall, if and to the extent required to make a payment in respect of the Original Bonds, make payment only to the extent of such amounts as would have been payable if the holders of the outstanding Original Bonds had, on the day immediately preceding the date of commencement of the winding-up, become holders of shares in the Company of a class having a right to receive (pari passu with the holders of any other classes of securities which, following the issue of the Original Bonds may be issued by the Company, subordinated on a similar basis) in a winding-up of the Company (in priority to the holders of all other classes of shares in the Company, issued or to be issued) an amount equal to the redemption monies and/or unpaid interest expressed to be payable in respect of the Original Bonds up to but excluding the date upon which the holders thereof are treated as having become holders of the shares in the Company as aforesaid.”

The effect is that, in an insolvent liquidation of the company, the subordinated bondholders will rank after the unsubordinated creditors and cannot expect to recover anything in respect of their claims until after the unsubordinated creditors have been paid in full. So, it is said, leaving the subordinated bondholders with claims against the company which (if the proposals are carried into effect) the company will have no assets to meet, does not affect them adversely. That is the position in which they would be if the company ceased trading and entered an insolvent liquidation; as, it is said, would be the inevitable consequence if the proposals are not carried into effect.

The proposals require the consent of the converting creditors; but that consent has been, or (it is assumed) will be, obtained. The proposals require, also, the consent of the general creditors – whose debts are to be assumed by Holdings. And they require the consent of the company’s shareholders – who are to exchange their shares in the company for shares in Holdings. But the company takes the view that the proposals do not require the consent of the subordinated bondholders. On the basis that the consent of subordinated bondholders cannot be obtained on the terms which the company has been willing, or advised, to offer – and, in that context, it must be kept in mind that (in practice) terms could not be offered to the subordinated bondholders which were not acceptable to the converting creditors and the general creditors (in so far, at least, as the rights of those creditors under the proposals would be diluted or affected by the rights afforded to the subordinated bondholders) – the company seeks to proceed with the proposals without their consent.

The company could not hope to obtain the consent of each and every one of the general creditors, or of the shareholders. But it hopes to bind each general creditor, and each shareholder, by obtaining agreement to the arrangements proposed at meetings convened under section 425(1) of the Companies Act 1985; and, thereafter, by obtaining the sanction of the court under section 425(2) of the Act. Subsections (1) and (2) of section 425 are in these terms (so far as material)

“(1)

Where a compromise or arrangement is proposed between a company and its creditors, or any class of them, or between the company and its members, or any class of them, the court may on the application of the company . . . order a meeting of the creditors or class of creditors, or of the members of the company or class of members (as the case may be), 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 or members or class of members (as the case may be), 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 or on the members or class of members (as the case may be), and also on the company . . .”

There are - as I sought to point out in In re BTR plc [2000] 1 BCLC 740, at page 742 - three stages in the process by which a compromise or arrangement becomes binding as between the company and all its creditors (or all those creditors within the class of creditors with which the compromise or arrangement is made) and as between the company and all its members (or all those members within the relevant class). First, there must be an application to the court under section 425(1) of the Act for an order that a meeting or meetings be summoned. It is at that stage that a decision needs to be taken as to whether or not to summon more than one meeting; and, if so, who should be summoned to which meeting. Second, the scheme proposals are put to the meeting or meetings held in accordance with the order that has been made; and are approved (or not) by the requisite majority in number and value of those present and voting in person or by proxy. Third, if approved at the meeting or meetings, there must be a further application to the court under section 425(2) of the Act to obtain the court’s sanction to the compromise or arrangement. This Court adopted that analysis In re Hawk Insurance Co Ltd [2001] EWCA Civ 241, [2001] 2 BCLC 480 – see paragraph [11] of my judgment in that appeal (ibid, 510h-511b) with which the other members of the Court agreed. At paragraph [12] of my judgment in Hawk Insurance (ibid, 511 b-g), I went on to say this:

“It can be seen that each of those stages serves a distinct purpose. 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 they are to be considered and voted upon. The second stage ensures that the proposals are acceptable to at least a majority in number, representing three-fourths in value, of those who take the opportunity of being present (in person or by proxy) at the meeting or meetings. At the third stage the court is concerned (i) to ensure that the meeting or meetings have been summoned and held in accordance with its previous order, (ii) to ensure that the proposals have been approved by the requisite majority of those present at the meeting or meetings and (iii) to ensure that the views and interests of those who have not approved the proposals at the meeting or meetings (either because they were not present or, being present, did not vote in favour of the proposals) receive impartial consideration.”

At paragraphs [13] to [17] of my judgment in Hawk Insurance (ibid, 511g-512h) I addressed the need to identify correctly, at the first stage, those between whom and the company it is proposed that a compromise or arrangement is to be made. As I put it, at paragraph [23] (ibid,514c-d):

“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 the scheme to be regarded, on a true analysis, as a number of linked arrangements? The question may be easy to state; but, as the cases show, it is not always easy to answer.”

I pointed out that, if that question were not addressed and answered correctly at the first stage, the court would find, at the third stage, that the condition precedent to the exercise of its power to sanction the arrangement was absent. None of the linked arrangements would have been approved by the requisite majority at a relevant meeting because there would not have been meetings of the distinct classes.

It is for the applicant to identify, when making the application, with whom it is proposed that the compromise or arrangement is to be made; and to identify the class or classes of creditors (or members, as the case may be) who are to be summoned to a meeting or meetings convened under section 425(1) of the Act. But, as I pointed out in Hawk Insurance at paragraph [18] of my judgment (ibid, 512i), it might be thought that the structure of the statutory provisions required the court to consider, at the first stage when deciding whether or not to order a meeting or meetings to be summoned, whether the class or classes which the applicant had chosen were (on a true analysis) properly constituted. As I have said, the danger was that a scheme which, at first sight, appeared to involve a single compromise or arrangement with all the creditors with whom it was to be made (or all the members, as the case might be) might be seen (on closer analysis) to be two or more linked compromises or arrangements with creditors (or members) whose rights put them in several and distinct classes.

The effect of the practice followed in the Companies Court at the time of the application in Hawk Insurance - set out in a Practice Note [1934] WN 142 issued by Mr Justice Eve some 65 years earlier - was that the court gave no consideration to that question at the first stage. The fact that the court had made an order under section 425(1) of the 1985 Act for a meeting or meetings to be held could not to be taken to imply that the court has addressed its mind at all to the question whether those were the meetings which the scheme proposed actually required before sanction can be given under section 425(2) of the Act. The question whether or not those were the meetings which the scheme actually required was left to be decided at the third stage; by which time a wrong decision by the applicant at the outset would have led to a considerable waste of time and expense.

I suggested, at paragraph [22] of my judgment in Hawk Insurance (ibid, 514a-b), that the practice then followed in the Companies Court merited re-examination. That suggestion bore fruit. On 15 April 2002 the Vice-Chancellor issued a statement of the practice to be followed in future – Practice Statement (Companies: Schemes of Arrangement) [2002] 1 WLR 1345. The purpose of the revised practice was “to enable issues concerning the composition of classes of creditor and the summoning of meetings to be identified and if appropriate resolved early in the proceedings.” Paragraphs 4 and 5 of the practice statement were in these terms:

“4.

It is the responsibility of the applicant by evidence in support of the application or otherwise to draw to the attention of the court as soon as possible any issues which may arise as to the constitution of meetings of creditors or which otherwise affect the conduct of those meetings (‘creditor issues’). For this purpose unless there are good reasons for not doing so the applicant should take all steps reasonably open to it to notify any person affected by the scheme that it is being promoted, the purpose which the scheme is designed to achieved, the meetings of creditors which the applicant considers will be required and their composition.

5.

In considering whether or not to order meetings of creditors (‘a meetings order’) the court will consider whether more than one meeting of creditors is required and if so what is the appropriate composition of those meetings.”

In the present case, the company’s application for an order under section 425(1) of the Companies Act 1985, convening meetings of shareholders and general creditors was made under CPR Part 8 by a claim form issued and dated 1 November 2004. The relief sought was described in these terms:

“. . . permission to convene meetings of all holders of Ordinary shares in MyTravel Group PLC and all General Creditors (as that term is described in a proposed Scheme of Arrangement pursuant to S.425 Companies Act 1985 between the Claimant and its Scheme shareholders and General Creditors) such meetings to consider that Scheme and to consider the transfer of the undertaking of MyTravel Group PLC pursuant to S.427 of the Companies Act 1985.”

Section 427 of the 1985 Act contains provisions ancillary to section 425. Those provisions include the following, so far as material:

“(1)

The following applies where application is made to the court under section 425 for the sanctioning of a compromise or arrangement proposed between a company and any such persons as are mentioned in that section.

(2)

If it is shown –

(a)

that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of any company or companies or the amalgamation of any two or more companies , and

(b)

that under the scheme the whole or any part of the undertaking or the property of any company concerned in the scheme (“a transferor company”) is to be transferred to another company (“the transferee company”),

the court may either by the order sanctioning the compromise or arrangement or by any subsequent order, make provision for all or any of the following matters.

(3)

The matters for which the court’s order may make provision are-

(a)

the transfer to the transferee company of the whole or any part of the undertaking and of the property or liabilities of any transferor company,

(b)

the allotting or appropriation by the transferee company of any shares, debentures, policies or other like interests in that company which under the compromise or arrangement are to be allotted or appropriated by that company to or for any person,

. . .

(f)

such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation is fully and effectively carried out.

(4)

If an order under this section provides for the transfer of property or liabilities, then –

(a)

that property is by virtue of the order transferred to, and vests in, the transferee company, and

(b)

those liabilities are, by virtue of the order, transferred to and become liabilities of that company;

and property (if the order so directs) vests freed from any charge which is by virtue of the compromise or arrangement to cease to have effect.”

The company had been in discussion for some time with members of an ad hoc committee of subordinated bondholders; and so it knew of the bondholders’ opposition to the proposals which it had put forward. It served a copy of the claim form on the members of that committee On 4 November 2004, at a hearing at which four bondholders who were members of the ad hoc committee were represented by counsel, the judge gave directions for the committee to serve evidence in answer to the evidence filed by the company in support of its application for permission to convene meetings; and adjourned the hearing of the application to 18 November 2004.

The application for permission to convene meetings, which was opposed by the committee, was heard by the judge on 18, 19 and 22 November 2004. The judge handed down a full judgment on 24 November 2004. If I may say so, he addressed the issues before him with obvious care. He described the scheme – in the form in which it then was – at paragraphs 11 and 12 of that judgment:

“11.

In outline, the scheme and its associated agreements is intended to produce the following effect. The assets and undertaking of the company will be transferred to a new company - “Newco”. A limited quantity of the company’s debts will be assumed by Newco, but the large bulk of the above facilities (but, crucially, not including the company bonds) will be turned into equity in Newco. The bonds will be left behind.

12.

In a little more detail, the relevant elements of the proposals are as follows:

(i)

The existing shares in the company are to be transferred to Newco. The existing shareholders will be allotted a small percentage (4%) of Newco’s shares.

(ii)

The undertaking and assets of the company will be transferred to Newco pursuant to section 427 of the 1985 Act.

(iii)

The liabilities owing to what are described as the General Creditors will be transferred to Newco pursuant to section 427. Those creditors comprise principally trade creditors, the Inland Revenue, certain hedging counterparties and certain guaranteed creditors where the guarantee is to remain in place.

(iv)

The first four major creditors listed above will take 94% of the shares in Newco and the Company will be released from its obligations to them. They are described as the Converting Creditors.

(v)

The liabilities to intra-group creditors will be assumed by Newco and the Company will be discharged from its obligations to them.

(vi)

The liabilities to customers will remain with the Company; Newco will undertake to discharge them.

(vii)

Newco will make an offer to the bondholders to acquire their bonds in exchange for Newco shares. The bondholders will be offered up to a maximum of 2% of the issued share capital of Newco. This is less than they were offered under the attempted consensual arrangements.

(viii)

New bonding, guarantees and letter of credit facilities will be made available to Newco, and new working facilities will be made available. These arrangements are being made outside the scheme and have all been agreed in principle.

(ix)

It will be noted that in addition to the invocation of section 425, the Scheme requires the application of section 427 to transfer assets and liabilities. It is in relation to the application of this section that the first of the bondholders’ points arises.”

The point to which the judge referred in that final sub-paragraph was the bondholders’ contention that, on the basis of the scheme which was before him, the court had no jurisdiction to make an order under section 427 of the 1985 Act. It was said, the proposals did not constitute “a reconstruction” of the company, or of any companies, within the meaning which was to be given to that phrase in the context of that section.

At paragraph 13 of his judgment the judge sought to identify the matters which he ought to consider on application under section 425(1) of the 1985 Act. He said this:

“This is a hearing of the Company’s application for leave to convene meetings to consider the Scheme. However, “creditor issues” were identified and it was considered appropriate to deal with those issues at this stage in accordance with Practice Statement (Companies: Schemes of Arrangement) [2002] 1 WLR 1345. On 4^th November 2004 I gave directions for the filing of evidence in order to deal with what were perceived as creditor issues raised by the bondholders. At the time it was apparently believed that the bondholders would be raising class issues and/or issues as to whether they were or were not entitled to be consulted (if those issues are different from class issues), because, as appears above, the liability to the bond holders was intended to be left untouched by the Scheme. It is the case of the company that the company’s insolvency means that on a liquidation (which the Company says is the only alternative to this [or] a similar restructuring) the bondholders have no prospect whatsoever of receiving any money because of the subordinated nature of the Bonds. Evidence was produced which was directed to that point. The bondholders’ committee has put in some limited evidence which is said to go to that point. However, in the committee’s skeleton argument an additional point was taken as to the applicability of section 427 to this scheme. I have to consider the extent to which the issues should be dealt with at this hearing.”

In that context the judge reminded himself of the observations of Mr Justice David Richards in In the matter of Telewest Communications PLC [2004] EWHC 924 (Ch.). Mr Justice David Richards had said this:

“14.

In considering the primary position of the Opposing Bondholders, it is important to keep in mind the function of the court at this stage. This is an application by the companies for leave to convene meetings to consider the schemes. It is emphatically not a hearing to consider the merits and fairness of the schemes. Those aspects are among the principal matters for decision at the later hearing to sanction the schemes, if they are approved by the statutory majorities of creditors. The matters for consideration at this stage concern the jurisdiction of the court to sanction the scheme if it proceeds. There is no point in the court convening meetings to consider the scheme if it can be seen now that it will lack the jurisdiction to sanction it later. This is principally a matter of the composition of classes. Under section 425, the court will have no jurisdiction to sanction the scheme if the classes have been incorrectly constituted. It is perhaps unfortunate that this is the case and there is much to commend an approach which enables the court to sanction a scheme in an appropriate case, where the classes have been incorrectly constituted in a way which would not have affected the outcome of the meetings. But that is not the position under section 425 and the practice now is to deal so far as possible with issues of class composition at the first stage of the application for leave to convene meetings. There might exceptionally be other issues which would go to jurisdiction and could properly raised at this stage: see re Savoy Hotel Ltd [1981] Ch. 351. What the court should not do is consider the fairness of the scheme with a view to deciding whether at the later hearing it will or will not sanction it.

15.

If the Opposing Bondholders’ position is that the inclusion of the Average Exchange Rate produces so unfair a result that no court would sanction the scheme, that as it seems to me can and should be considered at the hearing to sanction the scheme. . .”

With those observations in mind, the judge went on to say this:

“It seems to me that the point raised in relation to section 427 is like a jurisdictional point for these purposes. Mr Crystal’s case is that even if the meetings vote in favour of the Scheme by the necessary majorities, this Court cannot make an order under section 427 because it does not amount to a reconstruction or amalgamation within the meaning of that section, so the full sanction of the court, including the necessary order under section 427, could not be obtained. This, he says, is a jurisdictional issue which should be dealt with at this stage. I agree that this approach is correct. The point falls within the range of points anticipated by David Richards J in the penultimate sentence of paragraph 14 of his judgment. It is also capable, in a sense, of falling within the first sentence of paragraph 15 – if it is said that the court cannot in due course sanction the Scheme because parts for which the operation of section 427 is necessary cannot be brought within that section, then that can and should be considered at this stage.”

At paragraphs 15 to 31 of his judgment, the judge addressed the question: “Would the court have power to make an order under section 427?”. His conclusion was that the scheme, as presented, did not amount to a reconstruction or amalgamation for the purposes of that section; and that, accordingly, there was no power to make an order under section 427 of the Act. At paragraph 32 of his judgment he said this:

“It follows, therefore, that this is a scheme to which approval could not be given under section 427 as the scheme stands. Mr Sheldon indicated if that were to be my conclusion then the Company might wish to present an amended scheme. That may or may not happen, but I have to deal with the scheme as it appears before me. Since the scheme cannot attract approval, there seems no point in holding any meetings and therefore I decline to order them.”

That conclusion is reflected in paragraph 1 of the first of the orders which the judge was to make on 24 November 2004:

“The Company shall not be permitted to convene meetings of all holders of Ordinary shares in the Company and all General Creditors pursuant to section 425 of the Companies Act 1985 in respect of the Scheme of Arrangement under which the transfer of the undertaking of the Company was to be made pursuant to section 427 of the Companies Act 1985.”

As the judge observed, at paragraph 33 of his judgment, his decision that there was no jurisdiction to make an order, or orders, under section 427 of the 1985 Act made it unnecessary for him to consider further submissions made on behalf of the ad hoc committee of subordinated bondholders. Nevertheless, he did go on to consider what he described as “class issues and consultation with the bondholders”. He did so for the reason, as he explained at paragraph 34, that:

“I heard extensive argument on it, despite an attempt by Mr Crystal to get the point adjourned, and in all the circumstances of this case it seems to me to be right that I should express some conclusions upon it, not least in case my judgment on the first point should be challenged elsewhere.”

It is not difficult to understand why the judge thought it right to address issues which, as he himself recognised, were of no direct relevance to the basis upon which he had dismissed the application for permission to convene meetings. It is, I think, arguable that - had the judge taken a different view as to the jurisdiction conferred by section 427 of the 1985 Act – the issues would have arisen in the context to which Mr Justice David Richards had referred in the first sentence of his judgment in Telewest Communications. And the judge was not to know, at that stage, that the company would choose not to challenge his view on the section 427 point.

The judge handed down his judgment on the morning of 24 November 2004; and the first of the orders made that day was made at or about noon. By the afternoon the company had decided – no doubt for pragmatic and commercial reasons – that it would not challenge the judge’s decision that there was no jurisdiction to make an order under section 427 of the 1985 Act. It chose to amend the proposals, so as to remove references to a transfer of the undertaking pursuant to that section. Instead, the scheme provided, in its amended form, that upon approval by the meetings of shareholders and creditors – and the sanction of the court to the arrangements binding those classes – and with the consent of the converting creditors, the company would enter into an asset transfer agreement pursuant to which it would transfer to Holdings all its assets (other than assets excluded under the scheme) in consideration for the assumption by Holdings of all the company’s liabilities (other than the excluded liabilities). Amongst the excluded liabilities, of course, were the liabilities of the company to the subordinated bondholders.

The effect of the amended proposals is as I have described earlier in this judgment; and, save in one important respect, is indistinguishable from the effect of the proposals embodied in the scheme originally put before the court by the application made on 1 November 2004. The important distinction is that, under the scheme as originally proposed, the undertaking of the company would have been vested in Holdings by order of the court. Under the scheme as amended, the transfer will be effected by the company; and will, of course, be open to challenge by those who have not consented to it or are not bound by approval given by the court under section 425(2) of the Act. In particular, the transfer will be open to challenge by the subordinated bondholders. That is not, of course, to say that such a challenge would succeed. It is simply to note that the challenge would not be precluded by an order made under section 427 of the 1985 Act.

The judge gave permission to amend the claim form of 1 November 2004 – so as to delete so much of the claim as referred to the transfer of the undertaking and liabilities of the company pursuant to section 427 of the 1985 Act – and he gave permission for meetings to be convened. This is reflected in the second of the two orders which he made on 24 November 2004; the operative part of which includes the following paragraph:

“It is ordered that the Company be at liberty to convene separate meetings to be held in London of its General Creditors and of the holders of its Ordinary Shares for the purpose of considering and if thought fit approving (with or without modification) the Scheme. ”

In that context “the Scheme” means “the Scheme of Arrangement proposed to be made between the Company and its General Creditors and the holders of its Ordinary Shares amended such that no order pursuant to section 427 of the Companies Act 1985 was required and produced to the Court on the hearing of this further application” – as appears from the third recital to the second order. The order went on to give directions, in the usual form, as to the manner in which the meetings were to be convened. It is important to keep in mind that, under those directions, there is no provision for a separate meeting of subordinated bondholders; and the bondholders are not included in the class to be summoned to the meeting of general creditors. The company proposes no compromise or arrangement, under section 425 of the Act, with the subordinated bondholders. If the meeting of general creditors approves the proposals put before it by the requisite majority and the court, at the third stage, sanctions those proposals, the proposals will be binding as between the company and its general creditors. But they will not bind the subordinated bondholders. The company has decided to proceed on that basis; and on the basis that it will meet any challenge by the bondholders to the transfer of the undertaking if and when that challenge is made.

As I have said, the judge decided that he would consider, in his judgment on the original application which was before him, what he described as “class issues” and consultation with bondholders. He did so notwithstanding opposition to that course expressed on behalf of the bondholders. That opposition was advanced on the basis that it was unfair to decide the issue without the procedural safeguards – including disclosure and the opportunity to adduce expert evidence – which would normally have effect in cases where the court was to decide issues of primary fact. Although, as I have said, it is not difficult to understand why the judge thought it right to decide that issue – and why he thought it right to do so in the absence of the usual procedural safeguards – he did not need to do so; and, with hindsight, it may be said that it would have been wiser to resist the company’s invitation to decide an issue which (on the view which the judge had taken on the section 427 point) did not arise at that stage and which might, thereafter, have to be addressed in a different context.

The judge’s analysis is set out in paragraphs 34 to 71 of his judgment. He held, on the evidence before him, that “the economic interest of the bondholders in the Company is nil”. He expressed his conclusion at paragraph 72:

“It follows, therefore, that were it necessary to make a finding as to whether the bondholders have an economic interest in the company sufficient to require them to be a party to the scheme or a member of a relevant class then I would have concluded that they did not. If I had decided the section 427 point in favour of the company I would have ordered the summoning the meetings as asked by the company.”

That, of course, is what he went on to do once the section 427 point had fallen away as a result of the amendments made to the scheme following that judgment.

The judge’s finding that the subordinated bondholders had no economic interest in the company finds expression in the eighth recital to the first order of 24 November 2004:

“And upon the Court having decided that the Bondholders have no economic interest in the Company and are thus not proper parties to the Scheme or members of a relevant class of creditors in relation to the Scheme.”

That first order contains two other recitals – the fourth and sixth recitals – which record decisions made by the judge in the course of the hearing. They are in these terms:

“And upon the Court on 19 November 2004 having dismissed the application made on that date by the Ad Hoc Committee for an adjournment of that part of the Company’s application fixed for hearing on 18 and 19 November 2004 that related to the issue as to whether the holders of the 7 per cent subordinated convertible bonds due 2007 issued by the Company (the “Bondholders”) have an economic interest in the Company and for directions for a trial to determine that issue.

. . .

And upon the Court on 22 November 2004 having dismissed the application made on that date by the Ad Hoc Committee for disclosure of those parts of all relevant board minutes of meetings of the Board of the Company at which matters relating to the options, implications and actions relating to the Company’s insolvency since November 2002 were discussed.”

The eighth recital to the first order has been carried over (in substantially the same form) into the second order of 24 November 2004 – in which it appears as the fourth recital:

“And the Court having decided that the holders of the 7 per cent subordinated convertible bonds due 2007 issued by the Company (the “Bondholders”) have no economic interest in the Company and are thus not proper parties to the Scheme or members of a relevant class of creditors in relation to the Scheme (the “Economic Interest Issue”).”

In that context it should be kept in mind that the terms in which the Scheme is defined, in the third recital to the second order, make it clear that the scheme in relation to which the court was invited to give directions for meetings to be convened was not a scheme of compromise or arrangement between the company and the subordinated bondholders. The company had chosen not to make the bondholders parties to the scheme; and it was not said – and, in my view, could not have been said – that the relevant class of creditors with whom the scheme was to be made (the general creditors) was improperly constituted if the bondholders were not included within that class. Whether or not the subordinated bondholders have an economic interest in the company, it is (to my mind) beyond argument that whatever interest they do have (absent the scheme) is materially different from that of the general creditors; and, in any event, their rights under the proposed arrangements are different from those of the general creditors. On the basis that the applicable test is that set out in paragraph [30] of my judgment in Hawk Insurance (ibid, 518c-d) and adopted by this Court in Sea Assets Limited v Perusahaan Pereroan (Persero) Pt Perusahaan Peneerbangan Garuda Indonesia [2001] EWCA Civ 1696, at paragraph [43], the answer to the question whether the general creditors and the bondholders are members of the same class for the purposes of the amended scheme is obvious – they are not.

There is no appeal by the company from the first of the two orders made on 24 November 2004. It is unnecessary, therefore, for this Court to express any view (and I do not do so) on the question whether the proposals originally put before the court constituted a reconstruction for the purposes of section 427 of the 1985 Act.

The appellants’ notice with which this Court is concerned was filed on behalf of the four members of the ad hoc committee of subordinated bondholders who were represented before the judge. They seek to appeal (i) from the order of 19 November 2004 – refusing directions as to a trial of the economic interest issue and an adjournment for that purpose – as recorded in the fourth recital to the first order of 24 November 2004, (ii) from the order of 22 November 2004 - dismissing their application for specific disclosure – as recorded in the sixth recital to the first order of 24 November 2004 and (iii) from those parts of the two orders made on 24 November 2004 which reflected the judge’s finding that the bondholders had no economic interest in the company – as recorded in the eighth recital to the first order and in the fourth recital to the second order.

There are before us applications for permission to appeal – the judge having refused permission. Those applications have been listed for hearing on notice to the company with appeals to follow if permission is granted. At the conclusion of the oral hearing we indicated that we would give permission to appeal from so much of the second order of 24 November 2004 as recited the judge’s conclusion, reached following the hearing of the original application, that the bondholders had no economic interest in the company; and that we would allow that appeal to the extent of setting aside the fourth recital to the second order. We made it clear that we were expressing no view on the question whether the judge was correct to make the findings of fact which had led him to the conclusion reflected in that recital. We were setting the recital aside because it was unnecessary and might give rise to problems in the future.

The short reasons which we gave at the conclusion of the oral hearing require little elaboration. It is, to my mind, clear that the judge did not need to determine the economic interest issue in order to reach the conclusion, reflected in his second order of 24 November 2004, that the scheme meetings – in the context of the amended scheme which was then before him – were properly constituted. It is not at all clear that, by that stage in the proceedings, it was being contended that the meetings were not properly constituted; but, even if that contention was still being advanced, at that stage, the answer to it was obvious. As I have said, it was beyond argument that whatever interest the bondholders do have in the company (absent the scheme) that interest is materially different from that of the general creditors, because of the subordination provisions which would apply in the event of an insolvent liquidation; and, in any event, their rights under the proposed arrangements are different.

Further, as it seems to me, it could not be said, in the future, that a determination of the economic interest issue, in the context of the amended application, gave rise to an issue estoppel. The issue to which the supposed estoppel would relate was not material to any question which the judge had to decide, at that stage, in relation to the amended scheme. The question before him was whether the class meetings of those creditors and shareholders with whom the company intended to make an arrangement or compromise under the scheme were properly constituted. The wider question, whether the bondholders had an economic interest in the company was not before the judge in that context. And, in any event, there would be little or no purpose in seeking to set up an issue estoppel. The bondholders who were before the judge were not there in a representative capacity. The judge’s findings could not affect other subordinated bondholders, who were not before him. If bondholders do wish to challenge the proposed transfer, there is nothing to suggest that they will not be able to find a suitable claimant who was not a party to the proceedings before the judge.

I would refuse permission to appeal from the first order of 24 November 2004. The judge reached the conclusion which he did on the basis of his construction of section 427 of the 1985 Act. His findings in relation to the economic interest issue were plainly obiter dicta. The interlocutory decisions made on 19 and 22 November 2004 relate only to those findings. The findings cannot be relied on as creating an issue estoppel. It is not, I think, suggested that the eighth recital to the first order can be relied upon, as against the appellants, as res judicata. The first order of 24 November 2004 is no longer of any relevance in the context of a future application for sanction under section 425(2) of the 1985 Act; and an appeal from that order could serve no useful purpose.

I agree

I also agree.