Mytravel Group Plc, Re Companies Act 1985

This is the hearing of an application by Mytravel Group Plc (“the company”) seeking the convening of meetings of shareholders and certain creditors to consider a Scheme of Arrangement under section 425 of the Companies Act 1985. Apart from giving formal and procedural directions, the principal issue arising is as to whether any direction should be given in relation to a meeting of bondholders. Mr Michael Crystal Q.C. appeared for an ad hoc committee of the relevant bondholders; Mr Richard Sheldon Q.C. appeared for the company. The main issue, so far as the company is concerned, is whether or not the bondholders have a sufficient interest in the assets of the company to require them to be given an opportunity to vote at a meeting. The bondholders, as well as joining issue on that point, also take a technical point as to whether or not the proposed arrangement could be brought within the strict wording of section 427 of the Act, whose operation is essential to the scheme as currently propounded.

Section 425 of the 1985 Act provides (so far as relevant) as follows:

Also relevant to the hearing before me is section 427 of the Companies Act 1985, the relevant provisions of which are as follows:

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

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

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.

the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company,

the dissolution, without winding up, of any transferor company,

the provision to be made of any persons who within such time and in such manner as the court directs, dissent from the compromise or arrangement,

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

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

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

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

The company is the holding company of a number of companies incorporated in the UK, Canada, USA, Sweden and a number of other countries. It was incorporated on 3^rd December 1962 and for a considerable period of time was known as Airtours Plc until it adopted its present name on 8^th February 2002. The group operates in the travel industry – it sells holiday and travel services to the public. It operates both chartered and non-chartered tours, has its own fleet of leased aircraft, operates a low fares airline and has a portfolio of hotels. The current position is that the business is carried on by subsidiaries; the company does not trade. The UK part of the operation is regulated by the Civil Aviation Authority (“The CAA”), which licenses the operating company by Air Travel Organisers’ Licenses (“ATOL’s”) and operating licences for aircraft.

Over the past two or three years the company has made considerable losses which have brought it to its present insolvent position. It is unnecessary for me to go into the details of how it got there. It is sufficient for present purposes to note that the group’s net liabilities as at 31^st March 2004 were £877.6 million. Steps have been put in train to improve the performance of the company, and it is believed that it is close to breaking even during the year to 31^st October 2004. Nevertheless, unaudited projections of the consolidated balance sheet still show consolidated net liabilities of £867.4 million as at that date.

The company has four major finance facilities. They are as follows:

A £250m multi-currency credit facility agreement. The term of this facility has been extended and the due date is now 31^st May 2006. It is fully utilised.

A US$100m private placement of unsecured loan notes constituted by an agreement dated 31^st July 2001. The maturity date (having been shortened by the agreement) is now 31^st May 2006.

A £400m bonding facility made between the company and various banks and sureties. This is to provide bonds and guarantees to third parties (among other things for regulatory purposes). The maturity of this facility has been extended to 31^st May 2006.

Various bilateral facilities for letters of credit, guarantees and other instruments for a total amount of £168 million.

There is a significant number of other financing arrangements such as some financing leases for aircraft and ships, amounting to about £1 billion.

On 21^st December 1998 the company issued 5.75% subordinated convertible bonds due on 5^th January 2004. By virtue of an agreement reached in September 2003 the maturity of these bonds was extended to 5^th January 2007 and the coupon was increased to 7%. It is the holders of some of these bonds who have appeared before me represented by Mr Crystal. They are subordinated by a provision in clause 3 of the Trust Deed which reads as follows:

The main assets of the company are its investments in its subsidiaries and certain sums due from some subsidiaries. There are other assets but they are of no significant value (for present purposes). Its liabilities, in addition to liabilities under the facilities referred to above, are significant sums owed to subsidiaries (£1.7 million as at 30^th September 2003) and certain off balance sheet contingent exposures financing, debt and bonding liabilities. There are contingent liabilities under this latter head in a sum exceeding £400 million. There are some other guarantees in respect of the liabilities of various subsidiaries, and the company is party to a number of hedging contracts which are likely to lead to an aggregate net liability of £1.6 million. Trade liabilities amount to £6.8 million. Last, there are various claims made against the company by customers, some of which are insured.

Faced with the difficulties outlined above, in 2003 the company set about taking steps to improve the position. It is unnecessary to detail everything that has occurred. For present purposes I can content myself with referring to negotiations with major creditors which resulted in the re-scheduling of certain liabilities (including the liability under the Bonds), and a business plan was prepared. However, by this time the CAA, as regulator, was expressing concerns. The CAA has power to revoke or suspend licences if it thinks that the licensed person is not sufficiently financially sound, and it undertook a review of the situation. It carries out reviews in the low season in holiday terms (that is to say, the winter in this country) and indicated that it expected the company to restructure its balance sheet before the next low season review in 2004. Its concerns were expressed in a series of letters between December 2003 and October 2004. On 16^th February 2004 it set out guidance and said that in relation to the restructuring the CAA must be satisfied that the group had, and could maintain, a capital base that broadly meets the CAA’s policy on free assets to support the business sufficient to protect it against sudden shocks. The CAA remains extremely concerned at the matter and has a contingency plan in place against the possibility that it might revoke or suspend the group’s ATOL’s and/or the operating licence that it needs for its aircraft fleet.

If the licences were revoked, then the business of the group would, in effect, come to an immediate halt. It could no longer operate. The CAA’s concerns therefore have to be addressed. In that context the company has propounded the present scheme with its ancillary arrangements. In fact, the scheme does not meet all the requirements laid down by the CAA, but the company has kept in close touch with the CAA and the company’s board believes that the CAA will accept the plans for restructuring and will not suspend licences. However, there is, a large degree of urgency about the matter. The company believes that unless the present scheme or some suitable alternative is in place by the end of this year, the CAA will probably take action to suspend or revoke the licences. There may be a small amount of leeway into the New Year if the CAA is satisfied that the scheme will be implemented, but that is as far as it is likely to go. If at that point the CAA is not satisfied, then it is thought likely that revocation will take place, operations will cease and a liquidation is inevitable. I am quite satisfied on the evidence that I have seen that the Company’s beliefs and fears in this respect are entirely justified.

In order to try to bring about a restructuring, the Company has sought to make a consensual arrangement with creditors. It has negotiated a debt for equity swap with the creditors under the first four of the facilities listed above. An offer was made to the bondholders to convert their debt into equity, but it has not been accepted by the bond holders. Were the bond holders to accept then a consensual restructuring would be possible, and the company would no longer propound the Scheme. However, there are no signs of acceptance, and so the company propounds the scheme as its alternative method of restructuring.

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.

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

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.

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

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.

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.

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

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

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

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 principal.

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.

This is a hearing of 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 of 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 this context I adopt the extremely helpful summary given by David Richards J in In the matter of Telewest Communications PLC [2004] EWCH 924 (Ch.) at paragraphs 14 and 15:

There is no doubt that the operation of section 427 is vital to the scheme as currently propounded. It is therefore necessary to consider whether it is “a scheme for the reconstruction of any company, or companies, or the amalgamation of any two or more companies”. It was not suggested that this scheme involves amalgamation, so it is necessary to consider whether or not there is to be a reconstruction of the Company. The point taken by Mr Crystal can be expressed shortly. It is apparent from the figures given above for the proposed shareholding in Newco that those who are the current shareholders in the company will have only a very small minority stake in Newco. The vast bulk of the share capital will be allotted to the Converting Creditors. Mr Crystal says that it is essential to the concept of a reconstruction that the shareholders in the new company should be the same, or substantially the same, as the shareholders in the old. Since that is manifestly not the case in relation to the proposed arrangements in this case, there is not going to be a reconstruction within the meaning of section 427.

In order to see whether this line of argument is correct it is necessary to go back into the history of sections 425 and 427.

When originally enacted is in the last century, the then equivalent section 425 applied only to companies in winding-up. In 1907 that limitation was removed and the provision assumed substantially the same form as that in which it now appears today. The provisions now to be found in section 427 came later. They were first introduced in the Companies Act 1928 (in section 54), although they never took effect through that Act because that Act was not brought into force; it first had full legislative effect when consolidated into the Companies Act 1929. That legislation had its roots in a report of the Company Law Amendment Committee 1925 – 26 which considered stamp duty and amalgamation. It recommended that no ad valorem stamp duty should be charged on the transfer of property from one company to another “on a reconstruction under which at least 90% of the original capital of the new company was held by shareholders in the old company”. It also recommended that the court should be given power to sanction schemes for the amalgamation of two or more companies without the necessity of either of them going into liquidation. Any such scheme would have to provide for such things as the vesting of assets in the amalgamated company and the protection of creditors. The result of this report was two strands of legislation. The first was section 55 of the Finance Act 1927 which provided for relief from capital and transfer stamp duty in the case of reconstructions or amalgamations of companies. The second is what is now section 427. That became, first, section 54 of the 1928 Act and then section 154 of the 1929 Act. This common source of each strand of legislation has to be borne in mind in construing the expression “reconstruction” because that word appears in section 55 of the 1927 act and in other legislation. For that reason it is necessary to consider how that word has been construed in a fiscal context, and Mr Crystal has drawn attention to various authorities on the point. In addition, there are authorities in the corporate context.

Buckley J had to consider the point in a corporate context in Re South African Supply and Cold Storage Co [1904] 2 Ch. 268. The question arose in the context of construing the words “reconstruction or amalgamation” in the memorandum of association of a company. At page 281 Buckley J observed:

Pennycuick J had to consider the word “reconstruction” in a stamp duty context in Brooklands Selangor Holdings Limited –v- Inland Revenue Commissioners[1970] 1 WLR 429. At page 444 he said:

He then goes on to cite from Hooper –v- Western Counties and South Wales Telephone Co Ltd(1892) 68 LT 78, a decision of Chitty J and at page 445b he observes:

Then he cites the passage that I have already cited from South African Supply and observes:

The passages that I have cited from Brooklands Selangor have been applied in other cases in a stamp duty context – see eg. Baytrust Holdings Ltd –v- IRC[1971] 3 All ER 76 and Swithland Investments Ltd –v- IRC [1990] STC 448. This analysis of “reconstruction” was also applied by Millett J in the context of a proposed alteration in a pension scheme in re Courage Group’s Pension Schemes[1987] 1 All ER 538. At page 541b he observed:

A consideration of the expression came up again in Fallon v Fellows (Inspector of Taxes) [2001] STC 1409, where Park J had to consider whether a scheme was for the purposes of reconstruction or amalgamation in a capital gains tax context. He too cited from the South African Supply and Cold Storage Co case and observed (at paragraph 13):

What Mr Crystal says one gets from these cases is first, that the common source of the fiscal and corporate legislation indicates that the same approach should be adopted to the word “reconstruction” in both limbs, and second, that the notion of “reconstruction” seems to require that there should be a substantial identity between the body of shareholders in the old and new companies. They do not have to be precisely identical; but the cases do tend to indicate that they should be substantially identical. If that is the test then it is quite clear to me that state of affairs which would prevail were the Scheme to be brought into effect would not comply with that requirement. A state of affairs in which 4% by value of the shareholding in the new company is held by 100% of the shareholders in the old is not one in which there is a substantial identity between the two bodies of shareholders.

Mr Sheldon responded that there was no requirement in principle, under the legislation or in the authorities, to impose such a restriction. As to basic principle he points first to the citation from South African Supply cited above in which Buckley J found that the term “reconstruction” had no exact meaning and that one had to decide whether commercial men would describe a transaction as a “reconstruction”. As to the authorities, most of them tax are cases, and most of those are stamp duty cases. If “reconstruction” has acquired a narrower meaning in that context (requiring a substantial identity of shareholders) that is because of the particular statutory provisions relating to stamp duty, starting with section 55 of the Finance Act, 1927 which seemed to have anticipated such a requirement. Section 55 (1) reads:

that a company with limited liability is to be registered, or that since the commencement of this Act a company has been incorporated by letters patent or Act of Parliament, or the nominal share capital of a company has been increased;

that the company (in this section referred to as “the transferee company”) is to be registered or has been incorporated or has increased its capital with a view to the acquisition either of the undertaking of, or of not less than ninety per cent. Of the issued share capital of, any particular existing company;

that the consideration for the acquisition (except such part thereof as consists in the transfer to or discharge by the transferee company of liabilities of the existing company) consists as to not less than ninety per cent. thereof –

where an undertaking is to be acquired, in the issue of shares in the transferee company to the existing company or to holders of shares in the existing company; or

where shares are to be acquired, in the issue of shares in the transferee company to the holders of shares in the existing company in exchange for the shares held by them in the existing company;

The reasoning which is particularly appropriate to stamp duty cases is apparent from another of the cases cited by Mr Crystal, namely Oswald Tillotson Limited –v- ORC[1933] 1KB 134 at page 155:

Mr Sheldon submitted that one could therefore distinguish the context in which the dicta (or most of them) relied on by Mr Crystal were uttered. In the company law context the legislation did not start by explicitly assuming a substantial identity shareholders. Nor did the Report out of which the legislation came. The report did not in fact make any recommendations about “reconstruction” so far as corporate transactions were concerned. Its recommendations were in relation to “amalgamation”, and it recommended in general terms the sort of powers which become those within section 427. So far as authority in the corporate context is concerned, the authority did not support Mr Crystal as clearly as Mr Crystal maintains. If one looks at South African Supply, and reads Mr Crystal’s message correctly, Mr Sheldon says it supports him and not Mr Crystal. He relies in particular on the sentence:

Mr Sheldon was unable to point to any authority where this point has been directly considered, but he was able to point to an authority where it might be said the point was dealt with in his favour sub silentio. In In re Ocean Steam Navigation Company Limited[1939] 1 Ch. 41 a petition was presented under the then equivalent of sections 425 and 427 in circumstances in which a company which was wholly insolvent proposed a transfer of its entire undertaking to a new company, the shares in the new company being allotted to the creditors of the old. No shareholder in the old company was to take shares (or indeed any other interest) under the scheme. It is quite clear that section 154 of the Companies Act 1929 (the equivalent of the modern section 427) was invoked and in the minds of the parties to the debate. The opening words of the facts recited in the report read as follows:

Thus Mr Sheldon seeks to rely on that authority and to distinguish the cases which are ostensibly against him. He therefore says that what is proposed in the present scheme is a “reconstruction” within the meaning of section 427, and that so to hold would be consistent with the modern rescue culture, and policy considerations dictate a wider rather than a narrower construction. He was, however, unable to provide any other instances, reported or unreported, where the court has sanctioned a scheme and invoked section 429 in relation to a scheme where there was such a dilution of the original shareholder interests as appears in the present case, apart from Oceanic.

Despite Mr Sheldon’s submissions, I cannot hold in his favour on this point. I consider that I am constrained by authority not to do so. I do not consider that the authorities can be dismissed in the manner which Mr Sheldon suggests. Although the stamp duty cases were obviously decided in their own legislative context, and whilst I accept that the statutory provisions in issue in those cases contain express qualifications in relation to shareholdings, the remarks made by the judges are general in their nature and they make sense in conceptual terms. The thrust of them involves treating the company for these purposes as the same as its corporators. The company is reconstructed when those corporators, who for these purposes are treated as carrying on the business of the company, are the same in both the old and the new companies. In the present case, where that substantial identity is not present, what might be said to be reconstructed is not so much the company as its debts. The undertaking of the company is, for these purposes, different from the company itself. It is true, as Mr Sheldon pointed out, that when a company is insolvent the interests of creditors come to the fore. As was said in Kinsela –v- Russell Kinsela Pty Ltd(1986) 4 NSWLR 722 at 730, (cited by Dillon LJ in West Mercia Safetywear –v- Dodd [1988] BCLC 250 at page 252):

Furthermore, and more importantly, the tax cases take as their parting point, either directly or indirectly, the dicta of Buckley J in South African Supply. Those remarks were uttered not in a fiscal context, but in a company law context, albeit not in the context of a statutory provision because the judge was their considering the meaning of the word in the memorandum of association of the company. In my view, despite the earlier words which suggest that the word has no definite meaning, and which suggest that it should be given its commercial meaning, when Buckley J considers what it means on page 286 he was elaborating some of the key features, or perhaps indicating what he thought that the term would mean to commercial men. Reading that passage fairly, it seems to me to be clear that he thought it was of the essence of a reconstruction that substantially the same shareholders should be involved in both old and new companies. He refers to the fact that “the persons now carrying it [i.e. the undertaking] on will substantially continue to carry it on”. It is clearly implicit that the persons who are carrying it on are the shareholders. It is true that he uses the expression “the persons interested” - an expression seized on by Mr Sheldon. However, in its context that seems to me to be a synonym for the shareholders. The sentence in which it is used follows immediately after a sentence in which he refutes the suggestion that “all the shareholders of the old company shall be shareholders in the new company”. He explains this by saying that “substantially” the same people must be involved. The emphasis in that section is on the word “substantially”. That is the point that he is addressing. I see no warrant for treating him as extending the class of people who should be treated as carrying on the undertaking. That means the shareholders. So when he says at the end of the passage in question, “you have to see whether substantially the same persons carry on the same business; and if they do, that, I conceive, is a reconstruction”, he is referring to the shareholders who he clearly treats as being the persons carrying on the business for these purposes. Of course, he was not considering an insolvent company, but I do not think that the persons who, for these purposes, are carrying on the business changes when a company becomes insolvent. The shareholders are still carrying on the business as much they were before (for these purposes), but the interests of the people who have to be taken into account change because the interests of the creditors intrude – see the passage from Kinsela cited above – this does not change the analysis of who is carrying on the business for the purpose of Buckley J’s exposition. I think that his emphasis on the identity of shareholders is reinforced by what he says at page 287 when, in the context of an amalgamation, he requires that substantially all the corporators should be parties.

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.

This conclusion on the principle of the matter makes it unnecessary for me to consider further submissions made by Mr Crystal to the effect that it is difficult if not impossible to work out which creditors should be treated as being the interested persons for the purposes of Mr Sheldon’s formulation. He pointed out that a significant body of creditors would not become shareholders in the new company, and made submissions as to the appropriateness of treating them as persons interested in both companies whether or not they were shareholders. I shall not express any view on this matter.

In the light of my decision in relation to section 427, it might be said that strictly this question does not arise. However, 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. However, before doing so, I should indicate the circumstances in which the matter arose and why it was that despite Mr Crystal’s submissions as to the unfairness of determining the point, I nevertheless heard evidence and submissions on it in order to reach a conclusion.

I have set out the elements of the scheme above. It will be noted from that that under the scheme no compromise or arrangement is being proposed with the bondholders. Their debt is simply to be left in the Company, without any assets to satisfy it. The company has made it clear that, subject to my decision, it did not envisage consultation with the bondholders because the company came to the view that the bondholders had no economic interest in the company; the only alternative to the scheme was a liquidation and in a liquidation their subordinated status and the deficiency of assets meant that they had no prospect at all of recovering any of the sums due under the bonds. The factual question of whether that assessment is right is the factual question which lies at the heart of this aspect of the case. Despite its view about this, the company also took the view that if it was wrong about that then it accepted that the bondholders would have to be (as it put it) consulted and would have to be catered for within the Scheme. With that in mind it served the bondholders committee with the application and evidence in this case and corresponded with solicitors acting for the committee. Slaughter and May, acting for the company, e-mailed Cadwaladers, the solicitors acting for the committee, as far back as 22^nd May 2003 asserting that the approval of creditors or a class of creditors with no interest in the winding up of the company would not be required for the purposes of a scheme. This view was clearly challenged by Cadwaladers in a letter dated 28^th May 2003 in which they said:

That correspondence took place in the context of earlier proposals for a scheme, in 2003; that scheme was not pursued at the time, but there is no evidence that anything occurred which indicated that the bondholders took a different view. In due course, the present scheme having been negotiated with the major creditors, it was propounded and the application for an order calling the meetings was issued and served. On 1^st November 2004 Slaughter and May wrote to Cadwalader (now called Cadwalader Wickesham and Taft LLP), referring to the difference of opinion of the previous year and going on to say:

The evidence from the company comprised a long witness statement from Mr McHugh, the Chief Executive Officer of the company, with exhibits, and a report from Miss Margaret Mills of Ernst & Young. Mr McHugh’s evidence set out the history of the matter, the financial state of the company (giving details of its debts and assets), the steps that the company had taken to try to retrieve its financial position, giving the view of the board as to what the future would be absent a reconstruction, and the view of the CAA if financial stability was not achieved (namely, that it was likely that the licences would be revoked or suspended), and putting forward the Scheme. The report of Miss Mills gave her view as to whether, if the scheme was not approved, and on the assumption that some form of insolvency proceeding would become necessary, an administration order would achieve the rescue of the company and/or whether such an order would be likely to achieve a better result for the company’s creditors as a whole than would likely if the company were wound up. She was also asked to opine as to whether the bondholders would receive any payment were the company to go into liquidation. Her view on this last point was that they would not.

Service of the proceedings and evidence on the bondholders’ committee was achieved on 3^rd November 2004. On the next day, 4^th November, the parties appeared in front of me and I made directions effectively by consent (although the order does not record itself as being a consent order) for the exchange of further evidence, setting a timetable for the bondholders to file and serve evidence and a very short period for the company to reply thereafter. It also contained directions for the service and lodging of skeleton arguments. All this was with a view to a hearing to take place (as it did take place) on Thursday 18^th November before me. At no stage during the running of this timetabled period was it suggested that the issue which the Company wished to have addressed, that is to say whether it was appropriate to treat the bondholders as being creditors who would need to be consulted, could not or should not be addressed at the forthcoming directions hearing.

When the bondholders’ skeleton argument was served the day before the first day of the hearing before me it sought to argue that on a proper view of the legalities and facts of the matter, the bondholders would be prejudiced by the scheme and expressly stating that the bondholders did not accept that there were no circumstances under which they might receive value in respect of their claims. That case was elaborated. It was expressly submitted that it would not be appropriate to give directions for the calling of meetings in relation to a scheme which postulated the transfer of assets to another company to the potential prejudice of the bondholders. That case was elaborated. Then tucked away in a summary in paragraph 66 the following appeared:

The effect of my ruling was that the application was to proceed, but Mr Crystal then applied for permission to cross-examine Mr McHugh on his witness statements (Mr McHugh had filed a statement in reply to the evidence of the bondholders). He did not apply to cross-examine Miss Mills on her report. The cross-examination took half a day – the whole of the afternoon of Friday 19^th November. It is, of course, unusual to have cross-examination on these applications, but bearing in mind that Mr Crystal’s case raised issues of disputed fact, it seemed to me to be right to allow it. Mr Crystal outlined five areas on which he sought to cross-examine, and Mr Sheldon, having heard those areas, did not oppose the application for permission to cross-examine. The cross-examination was due to resume on the following Monday morning, but before it did Mr Crystal made an application for disclosure of board minutes relating to contingency planning arising out of the company’s insolvency since November 2002. There had been an exchange of correspondence between the parties’ solicitors over the weekend about this. I refused that application and Mr Crystal indicated that in the light of that he would not pursue any further cross-examination. The hearing then continued with Mr Crystal completing his submissions on the law and facts and Mr Sheldon replying.

During the course of his continued submissions Mr Crystal continued to submit that it would not be fair for me to reach a conclusion (at least one adverse to his clients) on the question of whether the bondholders had an economic interest in the company. He pointed out the normal ways in which issues of fact (which he claims were raised) were normally resolved in civil litigation in this country, which involved a proper opportunity to challenge the other side’s case and such things as disclosure and cross-examination. He urged on me that it would not be fair for me to rule in favour of the company in the absence of those safeguards. It is to that point that I was referring when at the head of the section of this judgment I referred to the question of whether it was right for me to deal with this point at this stage of the proceedings, bearing in mind the nature of these proceedings. I shall dispose of this point first.

These proceedings were brought pursuant to the Practice Direction referred to above which is designed to deal with class issues at the directions stage. In most of those cases there will not be serious disputes of primary fact which will have to be resolved. Had it been apparent from the outset that there might be serious disputes of fact then the directions given at the outset might have been different. The position might also have been different had the point been raised during the running of the directions leading up to the hearing before me. However, neither of those things occurred. I have already referred to the fact that both parties arrived before me apparently intending to deal with the sort of questions which arose out of the evidence. Even as late as 17^th November 2004, after the exchange of skeleton arguments, Cadwaladers wrote to Slaughter and May suggesting a meeting of experts to look at the data underlying the Mills report but observing:

It is in that context that I consider the submissions of Mr Crystal as to the unfairness of determining the issues that arise on the issues raised by the company. I do not think that it is unfair. Mr Crystal is right in much of what he says about the normal way of resolving these issues. However, he raises the point too late. It was apparent from the evidence that this was a matter which had to be dealt with urgently. It might have been possible to address some of the points if they had been raised earlier, but they were not. A party sometimes has the opportunity of having effect given to its second thoughts about whether it is ready to deal with a point by being given an adjournment to deal with matters which are the result of further reflection, but not always. Sometimes it is too late to take that course while being fair to the other party. This is such case. Mr Crystal did have the opportunity of cross-examining the witness he sought to cross-examine, and it was his choice as to how far to take this. To that extent his clients were accommodated. That having been done, it is right to go on and consider where the totality of the evidence leaves the matter and to decide the issues which had arisen even if it were the case that if one had been starting from a different starting point then the procedures might have been different. I shall therefore deal with the issues. It is quite apparent from the evidence that counsel (being some of the same counsel who appeared before me) have been on board for the bondholders for well over a year. Mr Crystal complained that his clients had been ambushed. They certainly were not. The Company’s general battle plan and even the general nature of its ammunition had been indicated a long time ago. That is not characteristic of an ambush. It makes no material difference to that that some of the detail was seen for the first time in Mr McHugh’s evidence.

I shall therefore deal with the issues which the Company wishes to have resolved. At one stage I did wonder whether it was necessary to do so, since the terms of the scheme do not involve a compromise or arrangement with the bondholders (they are simply left behind) and Mr Crystal indicated that his actual clients would not seek to say that they should technically have been brought within those who should have voted. However, Mr Crystal cannot deliver the binding concurrence of all the bondholders since he represents only some of them, so some of the bondholders could take the point. Since the Company wishes to know at this stage whether it is obliged to consult the bondholders on the footing (if true) that they have an economic interest in the company, then while perhaps not wholly aptly described as a class issue, it is nonetheless the sort of issue which it is appropriate to determine at this directions stage. This is in effect what happened in British & Commonwealth.

The Company’s case on this is as follows. It says that on a scheme of arrangement as a matter of principle it is not necessary to consult any class of creditors (or shareholders) who have no economic interest in the company. The votes of those who have no interest can and should be disregarded. On the facts, that described the position of these subordinated bondholders. For this purpose one had to look at the position as it would be on an insolvency, and on such an insolvency the figures were such that, even on the most optimistic view, there would no return for the bondholders.

In support of the first limb of this reasoning (that those with no interest do not have any relevant status) he relied on Re Tea Corporation[1904] 1 Ch 12. In that case a scheme was proposed in a liquidation (the then equivalent of section 425 only applying when a company was in liquidation) and a meeting of, inter alia, ordinary shareholders was proposed. Under the proposed scheme they were to be given shares in the new company in place of their shares in the old, so to that extent they were affected by the scheme. The shareholders voted against the scheme; the other relevant participants voted in favour of it. On the hearing for sanction the scheme was held to stand. At first instance the amount of the company’s assets was the subject of an agreement and that amount negatived as a fact the notion that there could be any return to shareholders, so they had no financial interest. The Court of Appeal held that in those circumstances the vote of the shareholders could be disregarded. Vaughan Williams LJ said (at p23):

I shall follow those principles in this case so far as the facts allow me to do so.

In support of his proposition that the right test for these purposes was what the bondholders would receive in an insolvency Mr Sheldon relied on what was said by David Richards J in the Telewest case. That was a case in which the judge was asked to consider whether certain bondholders should be treated as forming a separate class because their rights were said to be affected by virtue of the proposed scheme adopting a different currency conversion rate from that which would apply on a winding up. In that case it was accepted that the only alternative to a scheme was an insolvent liquidation, and the judge held that in those circumstances it was necessary to test the effects of the proposed scheme against what the bondholders would receive on such a liquidation. At para 29 he said:

Mr Crystal had a number of ripostes to all this, both factual and legal. I shall deal with them in turn.

First, he did not dispute the principle in the Tea Corporation case, but that case had to be properly understood and applied only in a proper factual context. There were a number of reasons why it should not be applied in the present case. The first was a question of fact. In that case the level of the assets was agreed, and it seems to have followed easily from that that it could be (and was) determined that the figures were such that there was no possibility of creditors getting a dividend in the liquidation. It helped that the company was already in liquidation. Mr Crystal contrasted that with the present case. The assets are not agreed, and cannot clearly be seen to be insufficient to allow a return to the bondholders if one imagined a winding up. (As a separate point he disputed that it was appropriate to ascertain the position by reference to a winding up – I will deal with that below.) He pointed to the decision of Vinelott J in In re British & Commonwealth plc (No 3) [1992] 672. In that case there were bonds which were subordinated in a winding up, and the company was in administration in which the administrators were proposing a scheme of arrangement. The judge was invited to apply the Tea Corporation principles in order to arrive at a conclusion that the bondholders would recover nothing and so would not have the right to vote at a meeting to consider the relevant scheme. At page 679 he drew attention to the fact that in the Tea Corporation case there was a finding that the assets would not suffice to meet the claims of shareholders and that there was a concession to that effect in Oceanic. He went on to say:

However, despite his unwillingness to proceed on that assumption, the learned judge still came to the conclusion that the bondholders’ consent was not required, and at page 680H seems to have been minded to conclude that the bondholders had no interest in the assets of the company:

It is not clear how he arrived at his final conclusions in the light of his observations on the evidence as to assets. He explained his decision in In re Maxwell Communications plc [1993] 1 WLR 1402 at page 1405B:

That being his explanation, Mr Crystal relies on the judge’s refusal in British & Commonwealth to act on the footing of an insufficiency of assets in the absence of a concession by the relevant party to that effect, and says that the present case is the same – there is no concession, and indeed he has made suggestions that there are grounds for supposing that there may be more assets than the Company has relied on (and the possibility of reducing some of the liabilities). He urges that I should be no more willing to find an insufficiency of assets than was Vinelott J.

I certainly accept that the court has to be careful in relation to these matters and not embark on a casual or glib exercise in a complex situation. I also acknowledge the possibility that the facts before the court, on a hearing such as this, might indicate that there are further investigations that have to be made in order to be in a position to determine the matter – this is in substance what Mr Crystal was saying about the fairness of the procedure in this particular case. However I do not think that the Tea Corporation principle can only be applied in circumstances of concession or absolute clarity arising out of what Mr Crystal called a simple mathematical calculation. The question in this case, as in every case involving factual evidence, is what does the evidence show on the correct standard of proof. With all due respect to Vinelott J, for my part I do not think that the court has to treat a mere theoretical or fanciful possibility of a sufficiency of assets as meaning that it has not been established that the relevant class has no interest in the assets of the company. Courts act on evidence and they make findings based on evidence. If the relevant possibility of a surplus is purely theoretical or merely fanciful then it seems to me that the party alleging an insufficiency will have established its case on a balance of probabilities (or even to a higher standard). I therefore consider that I have to consider what the evidence shows in this respect. I shall in due course do so.

The next question is the question of the hypothesis on which it has to be calculated whether the bondholders have an economic interest. The Company says that this question should be tested on the assumption that the company is in winding up because the company is currently insolvent and the only alternative to this scheme or a similar scheme is an insolvency procedure culminating in a winding up in which the bondholders will receive nothing. The bondholders’ committee disputes this and says that that is not the right comparison.

Mr Crystal says that the basis on which the company approaches this matter treats the bondholders as if they are subordinated when in fact they are not. They are only subordinated if there is a winding up. Until then their debts rank pari passu. This is not a case in which the bondholders are limited in their remedy to winding up (contrast the British & Commonwealth case, where there was such a limitation). Accordingly what the company is proposing amounts to re-writing the contract between the bondholders and the company. Insofar as the Company relies on Telewest to justify its approach, that use is not correct because that case concerned a different issue, namely whether one class of creditors was sufficiently distinct from another to make it inappropriate for them to vote together. That, says Mr Crystal, is a different point to the point arising in the present case.

I do not consider Mr Crystal is correct about this, and I consider it to be clear that the hypothesis of an insolvency (for the purposes of testing the economic interest of the bondholders in the company) is the correct one. The question is whether the bondholders have any real economic interest in the company and its assets. That involves looking at reality. Economic interests for these purposes are real, not theoretical. Mr Crystal went so far as to suggest that the bondholders had a claim which was worth £216m because that was the face value of the bonds and at the moment they were unsubordinated. That demonstrates the fallacy in his argument. The claim cannot conceivably be worth £216m on the current facts even if a judgment could be obtained for that amount, because there is no way in which that sum could in practical terms be recovered from this insolvent company. The question of the bondholder’s economic interest in the company is a different question (as Mr Crystal actually went on to concede). The reality on the facts (to which I will come) is that the liability on the bonds cannot be enforced, and they will not be repaid, outside a winding up. If they were treated as repayable now, there is absolutely no evidence that they could be repaid, and therefore an administration and a winding up would be inevitable. The prospect that they would be paid short of such a proceeding is fanciful and therefore to be disregarded for these purposes. Accordingly the conceptual debate as to whether or not they are subordinated now, or rank pari passu now, is a sterile one. The evidence establishes clearly, and to my satisfaction, that this is a case in which the only alternative to a consensual scheme such as the one proposed in this case is an insolvency proceeding. That is what determines the economic value of the interest of the bondholders in the assets of the company in this case. Mr Crystal relied on the fact that bonds such as this are traded, and have some value in the market. That may be so (though there was no evidence of what their market value is at the moment), but even if it is true the value of the bonds in the market and the nature and value of the bondholders’ economic interest in the company are two different things. Many factors go to determine what a purchaser in the market is prepared to pay for a bond, and speculation will certainly be one of them. Even if that market value somehow reflects to an extent what might be anticipated to be got out of the assets of the company, it reflects merely the view of the purchaser of that fact, which is of no assistance in ascertaining what the real position is as between the bondholders and the company.

The fact that winding up was the only alternative to the scheme was doubtless the reason why the parties in Telewest accepted that it was relevant to test the rights of the bondholders by what they would get out of a winding up. Mr Crystal says that that case, and Re Hawk Insurance [2001] BCLC, which adopted a similar comparison, concerned points which differed from that with which I am faced because they both involved a determination of the question of whether certain creditors formed a different class or not. There is no doubt that he has correctly described the issues in those two cases, but I do not think that he is correct to distinguish them on that basis. First, the question involved in the present case is very similar – the question is whether the position of the bondholders is such that they have valuable rights in relation to the company so as to give them an economic interest in it. The question in Telewest and Hawk was whether the rights of creditors were sufficiently dissimilar from the rights of others to require them to be in a different class for voting purposes. That inquiry involved ascertaining what their real rights were, which involved them being put in a real context. That real context involved an acknowledgement that absent the scheme the creditors’ rights would have to be enforced in a winding up and in no other way. In the case of Hawk that was because a winding up petition had already been presented against the company, and in Telewest because it was acknowledged that the only alternative to the scheme was a winding up. Those cases therefore demonstrate that when it is necessary to ascertain the real rights of a creditor, one is entitled to see if the rights could realistically only be enforced in a winding up, and if so to use the notional winding up as the method of assessing what those rights were. That corresponds to the present case. The relevant inquiry is as to the economic interest of the bondholders in the company. If in reality the only way in which the bondholders would ever be repaid is through a winding up then the method of valuing that interest must be to predicate a winding up. The principles are the same.

That being the case, it is therefore necessary to consider whether, on the facts, it can be said that the only way in which the bondholders could realistically be repaid is via a winding up. The evidence on this is quite clear. Mr McHugh deposes to the board’s belief, based on discussions with the CAA, that if there is no satisfactory restructuring the CAA is likely to revoke the operating licences at the end of the year or the beginning of next year. That would bring the company’s business to an end and make liquidation inevitable. In addition, cashflow problems make it unlikely that the company can carry on into the medium term, (there will be serious cashflow deficits from October 2005 onwards) and there seems to the board to be little prospect of necessarily facilities being renewed when they expire in 2006 and 2007. It has a massive deficit on current liabilities over assets, and the board feels it to be inappropriate for the subsidiaries to keep on taking bookings without confidence that an overall solution could be found to ensure that obligations can be met. Accordingly the board consider that absent a scheme it would be inappropriate for the group to trade for any significant period into the New Year. If it does not trade then liquidation, whether or not preceded by an administration, would be inevitable. I accept that factual scenario. What that means is that there is no prospect of the bondholders being paid outside a winding up, which in turn makes it appropriate to measure their economic interest by reference to a winding up. That means that their subordinated status has to be taken into account.

Mr Crystal sought to avoid this conclusion by saying that an alternative to winding up would be a consensual restructuring. It is impossible to determine the likelihood of that (though attempts to do so with the bondholders have so far proved fruitless) but even if it were possible that does not make the winding up an any less appropriate measure of the value of the bondholders’ economic interest. The fact that the creditors might be prepared to do a deal does not confer an economic interest in the company. It means that, as between the parties, the bondholders might be able to extract some value, whether as a matter of bargaining, ransom, conscience or otherwise, but that is a different question. That value does not necessarily reflect an economic interest in the company. This latter question involves assessing what the bondholders would receive if they enforced their bonds against the company. Since the facts show that that would occur outside a winding up, then a winding up is the appropriate hypothetical scenario.

I turn therefore to the question of what the evidence shows as to the likely recovery in any liquidation of the company. This question has been considered by Miss Mills in her report. She was operating on the basis of certain assumptions which were given to her by the company. They were:

That if the restructuring was not completed before the end of the year the CAA would revoke the licences.

In that event the company would go into some form of insolvency proceeding.

Even if the licences are not revoked the company will still have to enter into some form of insolvency proceedings since the board could not allow the Company to continue to trade anyway.

If the company were to enter into some form of insolvency proceedings prior to the revocation of licences, the CAA would at that point revoke the licences anyway.

Based on these assumptions Miss Mills created various models and made various calculations. It is not necessary to provide all the detail of those matters here, and in any event it would be impossible to do so in the time allowed to me for the writing of this judgment bearing in mind that an urgent judgment is required in this case. It is sufficient to provide an outline. She concluded:

The company would be best advised to enter into administration, probably for the purpose of achieving a better realisation than would be likely by a winding up.

An administrator would require funding to continue trading; but she does not consider that funding would be available.

Because of lack of customer confidence and the integrated nature of the group’s business, the operations would to a large extent disintegrate on the administration of the company, so rescue would not be possible.

On a liquidation basis of the whole group without an administration first returns to the unsecured unsubordinated creditors would be 2p in the £. With an administration first the recoveries are enhanced, depending upon the level of success in realising assets. The range is between 16p and 21p in the £.

The range referred to in the previous point leaves out of account the value of a claim against the European Commission. If that claim were recovered in full (£517.8m) then the dividend for the unsecured unsubordinated creditors would be 53p in the £, assuming other recoveries were at the top of the range.

In broad terms, assuming recoveries at the high end of the range, and assuming recovery in full of the claim against the European Commission, there would still be a shortfall in relation to ordinary unsubordinated creditors of £435m.

A distribution to the bondholders within the administration would be unlikely because the ordinary creditors would block such a distribution because it would give the bondholders an unwarranted priority.

If these conclusions are right then unless the liabilities taken into account are reduced very significantly, and/or unless some additional assets are found from somewhere, the subordinated bondholders will clearly get nothing from a winding up and their economic in the company is therefore nil.

Mr Crystal (while protesting that he could not fairly be expected to deal with these points at the hearing bearing mind the lack of disclosure, lack of evidence and lack of an opportunity to cross-examine with the benefit of proper disclosure) set about seeking to undermine these conclusions in several ways. He sought to undermine some of the assumptions, he sought to identify possible further asset recoveries, and he sought to suggest that certain liabilities might be reduced.

As to assumptions, Mr Crystal criticised the assumption that the CAA licences would be revoked at the end of year, either before or after an administration. He pointed out that Mr McHugh could not say any more than that it was “likely” that the CAA would revoke the licences if a satisfactory restructuring had not taken place by the end of the year or perhaps shortly thereafter; and he pointed out that the draft scheme documentation uses the word “may”. He says that that is too equivocal to justify the assumption. I think that for present purposes the assumption is sound. It is not surprising that the CAA have not said that they will definitely revoke – one would not expect them to be that categorical in their expression. However, the board have clearly come to the view, as a result of prolonged contact and various discussions, that “likely” is the attitude of the CAA, and it is a sensible business assumption that it will happen. So far as revoking licences after an administration commences is concerned, Mr Crystal relied on a statement by Mr McHugh in a letter to the bondholders in which he said that he did not believe that there was any prospect of the CAA “allowing the Group’s ATOLs to continue through an administration of the company” (my emphasis) as demonstrating that it was far from clear that the CAA would revoke immediately on an administration. However, that reliance is misplaced. In the next sentence but one in the same letter Mr McHugh says that he believes “that the CAA’s plans assume that if the Company were to go into administration the Group’s ATOL would be revoked”. There is nothing equivocal about that, and it is in line with the rest of his evidence. In cross-examination Mr McHugh confirmed that he thought the assumptions given to Miss Mills were factually correct. I am satisfied that for business modelling purposes they were.

Mr Crystal challenged the view that funding would not be available in an administration. Mr McHugh admitted that the company had not made any inquiries about that but pointed out that to do so would cause great damage to creditor confidence and the board had considered the matter with the benefit of the current lenders with whom there has obviously been close co-operation. Accordingly the failure to make those inquiries does not undermine the opinion of Miss Mills that such funding would not be available; and Mr Crystal did not seek to cross-examine Miss Mills on the point (or at all).

Next he challenged the valuation assumptions of the accountants as being based on a fire sale. This is unfair. The accountants have built in a range of possible realisation figures into their calculations which assume an administration. The top of the range figures do not, as I understand it, assume fire sale values – quite the contrary in fact. I am prepared to approach this matter on the assumption that maximum possible realisations will be achieved; but that still leaves the £435m shortfall (even assuming recovery of the whole of the claim against the European Commission, which is a very favourable assumption so far as the bondholders are concerned).

Next Mr Crystal turned to the possibility of unidentified assets. His principal suggestion here was that there may be claims against the directors and auditors and such claims are not reflected in the calculations of Miss Mills. It is true that her figures do not take account of any such recoveries. There is no positive material in the papers before me which would indicate that there are any such claims, or indeed that there are no such claims, but Mr Crystal submitted that these are the sort of claims that are made, and in respect of which recoveries are made, in companies which go into insolvency procedures with the sort of losses and deficits that this company has sustained. He is probably right about the fact that such claims are not infrequently made in these sort of circumstances, but for him to make a dent in the £435m shortfall that he has to eliminate in order for his bondholders to have any prospect of recovery in a liquidation then such claims have to be related directly to losses or deficits of that order (in aggregate) and they would have to be good claims to those sort of sums against people who could afford to pay. In cross-examining Mr McHugh Mr Crystal established that the company had insurance cover for its directors and officers, and that two individuals that he identified as potential targets were wealthy men. However, he also elicited the answer that claims against directors have been evaluated by the board and the board decided that it would be “inappropriate” to bring them. So far as claims against the auditors are concerned, Mr Crystal asked Mr McHugh whether the board had taken advice about claims against the auditors in relation to one particular matter of accounting system deficiencies. Mr McHugh said that it had, but the point was not pursued. Even if there is a good claim there the figures involved cannot (on the evidence) be more than £30m or so – certainly nothing like enough to start bridging the £435m gap. The possibility of other claims was not pursued. In the light of all the evidence I think that the suggestion of claims against directors, officers and auditors is at best pure speculation, and the evidence available does not demonstrate that any such claims as there might be would make any sufficiently significant contribution towards getting a return for subordinated creditors.

In addition to suggesting those additional assets, Mr Crystal suggested that certain guarantee liabilities ought to be looked at in order to see if they could be reduced on the footing that they were in breach of directors’ duties or transactions at an undervalue, or because they might be capped. Again, on the state of the evidence before me any such suggestion is pure speculation both as to existence of rights and to their value. And I would have expected an honest exposition of the company’s liabilities (and no-one has suggested dishonesty in the presentation of the company’s case) to have taken any caps on guarantees into account. There is no reason to suppose that those liabilities might be significantly reduced.

Mr Crystal investigated other areas with Mr McHugh in cross-examination. Overall he did not elicit any information from Mr McHugh which in any way would begin to suggest that the company has omitted any relevant assets from the figures before me, that any valuations are or may be erroneous, that any assumptions are or might be wrong, or that any liabilities are or may be overstated, and there was nothing in Mr McHugh’s evidence which would suggest that even a respectable beginning could be made to bridging the £435m gap which has to be bridged if the bondholders are to enjoy any recovery from a putative liquidation of the Company (which, I remind myself, is the gap which exists making the most favourable assumptions in favour of the bondholders in terms of recoveries). In addition Mr Crystal submitted that it must be generally perceived by the creditors that the company has a value, because otherwise the Converting Creditor would not be prepared to convert their debt into equity in Newco, and he invited me to proceed on the footing that it was more likely than not that if there were a successful restructuring there would be a substantial value of several hundreds of thousands of pounds in the Newco, which reflected a real value in the present company. This argument does not assist him on the facts of this case. Obviously the creditors think that the company as it stands has some value to them in that they are likely to receive some, but not all, of their debts if there is a winding up. They also obviously think that a restructuring is potentially a better way of recovering more of their debt at some point in the future. However, to go on to say that this proves that the present company presently has a value which exceeds the amount of the unsubordinated debt is an enormous leap. Where is that value said to come from? All the evidence that I have seen demonstrates that it does not exist. The hopes of the other creditors as to the future prospects for another company (Newco) do not generate extra value in the present company.

In the circumstances I accept the conclusions of Miss Mills as being fair and accurate. As a result it is quite clear to me that the economic interest of the bondholders in the Company is nil. There is no serious prospect of their getting anything out of a liquidation. I bear firmly in mind that this conclusion depends on some fairly complex modelling and a large number of assumptions and valuation exercises that have not been fully tested by the bondholders, though they were given an opportunity to have supervised access to one of the major models while they were preparing their evidence and they turned it down. Bearing in mind the very large deficit figures in this case, I can conclude, as Vinelott J seems to have concluded in the British & Commonwealth case, that the bondholders’ prospects of recovery in a liquidation are fanciful or theoretical, but unlike him I find myself able to conclude that that means that the bondholders have no economic interest in the Company. In coming to that conclusion I have borne in mind all the submissions of Mr Crystal. If I have not referred to all of them it is because of the time constraints involved in producing this judgment with the degree of promptness that the situation requires.

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.