Uniq Plc, Re

On 18 March 2011 I sanctioned a scheme of arrangement (the scheme) under s.899 of the Companies Act 2006 between Uniq plc (Uniq) and its members. In this judgment I give my reasons for doing so.

The scheme, and the restructuring of which it forms an integral part, are both complex. Their purpose is to provide a solution to the financial problems posed by the deficit on Uniq’s pension scheme. Without a solution it seems inevitable that Uniq and its main subsidiary would become insolvent within a year. The principal feature of the scheme and restructuring is that members will cede a 90.2% interest in the equity of Uniq which, it is hoped, will be sold for the benefit of the defined benefit part of the pension scheme. In consideration of this and a cash payment of approximately £14m, Uniq and its participating subsidiaries will be released from their obligations to the pension scheme in respect of defined benefits. The proposals have been approved by the Pensions Regulator and the Pension Protection Fund (PPF) and are structured in a way which will ensure that members of the pension scheme will not lose the protection of the PPF. The proposals are considered to be the only viable solution.

The proposal is further evidence of the utility of schemes of arrangement as a means of achieving a wide range of purposes including, as in this case, securing the long-term future of a company or group which would otherwise in due course face insolvency: cf. Re Cape plc [2006] 3 All ER 1222.

In addition to the complexity of the proposals themselves, there are a number of further issues to be addressed. These include: whether the scheme involves sufficient benefit to members to avoid the difficulties posed by the judgment of Brightman J in Re NFU Development Trust Ltd [1972] 1 WLR 1548; whether there was a sufficient turn-out of members at the meeting held to consider and vote on the scheme; the provision of financial assistance for the acquisition of shares; and an error in the special resolution necessary to provide for the reduction of capital and other steps involved in the scheme.

Uniq was formerly called Unigate plc and, at its peak in the 1980s, it was a multinational conglomerate with over 30,000 employees in the UK, Europe and North America. It had its origins in door-to-door milk deliveries in the UK but it had grown so as to be involved in a range of businesses, including as its primary business the processing of dairy-based products. It had a large defined benefit pension scheme with over 40,000 members in the UK, including active members, deferred members and pensioners.

In 2000 Uniq sold its dairy business but retained responsibility for the pensions of about 21,000 members currently and previously employed in the dairy business. Overall, it retained responsibility for a defined benefit pension scheme with a total of over 40,000 members. The chairman comments in his letter to shareholders:

“At the time, this seemed reasonable given the then prevailing regulatory environment for defined benefit pension plans and the fact that the Pension Scheme appeared well funded on the basis of valuation assumptions reasonably prevalent at the time. Both the regulatory environment and approaches to pension plan funding have changed significantly in recent years and, if material divestments were to take place today, it is perhaps unlikely that a similar approach would be adopted.”

With the de-merger of its logistics business in 2001, the pension scheme was divided approximately in half, with Uniq’s pension scheme retaining about 21,000 members, most of whom were deferred members or pensioners. This and later disposals meant that Uniq had a smaller business base from which to fund any deficit in its pension scheme. The defined benefit section was closed to new members in 2002 and to existing members in 2009.

The pension benefit obligations recognised in Uniq’s group balance sheet as at 31 March 2006 were £125m. Disposals of some businesses in 2006 and 2007 enabled the group to repay bank debt and set aside £87m in a secure account to provide for pension scheme deficit. The benefit obligations were reduced to £76m in the group balance sheet as at 31 December 2007 but, as a result of the financial crisis of 2008 and changing assumptions, they rose to £170.9m as at 31 December 2008 and £235.1m as at 31 December 2009.

The chairman’s letter explains the statutory framework for the valuation of pension scheme liabilities:

“Part 3 of the Pensions Act 2004 requires the Trustee, having taken actuarial advice, to determine appropriately prudent assumptions to value the liabilities of the Pension Scheme. Those assumptions must be agreed with the Company or, in default of such agreement, determined by the Pensions Regulator. This process determines the value of the Pension Scheme’s liabilities for statutory ongoing funding purposes and, to the extent there is a shortfall in the Pension Scheme’s assets as against that value, the Trustee must agree with the Company (or have set by the Pensions Regulator) a recovery plan setting out a programme for clearing the deficit. The relative imbalance between the scale of the Pension Scheme and the scale and profitability of the Company led the Trustee to propose insurance company buy-out assumptions to calculate the deficit in the Pension Scheme as at 31 March 2009 for statutory funding purposes. ”

Applying the “best estimate” assumptions used in the IAS 19 accounting valuation basis, the deficit on the pension scheme as at 30 June 2010 was £229m, against which £97m remained in the secure account. On the buy-out basis, adopted by the trustee for statutory funding purposes, the net deficit was estimated at £428m, rising to £473m at 31 July 2010, net of the sum of £97m in the secure account.

In arriving at a solution to this problem, the company must reach agreement with the trustee of the pension scheme (the trustee) and gain the approval of the Pensions Regulator. Any agreement must ensure the continued benefit of protection from the PPF. An agreement reached with the trustee in April 2010 was rejected by the Pensions Regulator. The proposals to be implemented by the scheme and restructuring have the support of the Pensions Regulator, as well as the trustee’s agreement, and preserve PPF protection.

The consequences if the scheme and restructuring do not take place are very serious indeed. The chairman describes them as follows:

“If the Restructuring does not take place, the Board considers that several detrimental events are likely to take place, including, most significantly, that the Trustee and the Pensions Regulator would seek at least the minimum level of pension contributions needed to ensure that the pension funding position does not deteriorate further, which the Company is unlikely to be able to afford or, alternatively, the Trustee and the Pensions Regulator would seek to recover the full pension deficit, which is in excess of £400 million on the basis of the valuation assumptions adopted by the Trustee. Each of these events would, in all likelihood, result in the Company becoming insolvent. In addition, the Bank has informed the Company that, if the Scheme does not become effective, it would not provide a new loan facility. While the Company has adequate cash at the present time, this is unlikely to be sufficient to fund the Group’s expected working capital requirements for the whole of the next twelve months.

If the detrimental effects described above occur, their timing and severity will depend upon actions taken by the Trustee and the Pensions Regulator which will be outside the Company’s control. While the Company’s cash resources might allow the Company to continue trading until these actions and their effects become clear, the Board considers that the Company is likely to cease trading and the insolvency of the Company would be inevitable within the next twelve months because the Company would have insufficient working capital. This means that the likelihood of there being any value for Shareholders is remote.”

The group companies had unsecured trade debts of £46.9m at 30 June 2010, on which only a small dividend would be likely to be paid in an insolvency.

The steps involved in the restructuring, including the scheme, may be summarised as set out below. A number of them relate to the issued share capital of Uniq which was, before the scheme became effective, £11,483,381.70 divided into 114,833,817 ordinary shares of 10p each, all of which were credited as fully paid.

The principal steps in the restructuring are:

The steps under sub-paragraphs 4 – 10 above were taken in accordance with the scheme and, as regards sub-paragraphs 3 to 8, in accordance with a special resolution of Uniq, which also approved the entire restructuring and all the steps involved in it.

The administration is expected to trigger the start of a PPF assessment period. The effect of this is described in the circular to shareholders:

“The PPF pays compensation to members of eligible defined benefit pension schemes whose employer has become insolvent, where there are insufficient assets in the scheme to buy benefits at PPF level of compensation or above. During the assessment period the PPF looks to establish if a scheme is eligible for PPF compensation. The PPF aims to complete assessments for most schemes within two years.

Once assessment is complete (on the assumption that the scheme is eligible for PPF entry), a scheme will, depending on the outcome of the valuation of the Scheme under section 143 of the Pensions Act 2004, either enter the PPF or be required to wind-up outside of the PPF. Broadly, a scheme will transfer to the PPF only if there are insufficient assets left in the scheme to buy members’ benefits of equivalent value to PPF protected liabilities. If there are sufficient assets to buy the PPF level of benefits, the scheme will not transfer to the PPF but will seek an insurer willing to “buy-out” its liabilities and make payments to the scheme’s members. This means, provided the scheme is eligible for PPF entry, members can generally receive at least PPF levels of compensation (and, possibly, payments that are higher than PPF compensation levels).”

The administrators will seek to sell all or part of Newco’s shareholding in Uniq to raise funds for payment of its liabilities to the trustee. They will appoint a corporate finance adviser nominated by the PPF for this purpose. If an offer is made to acquire all of the shares held by Newco or such lower number as triggers the mandatory bid provisions under the City Code on Take-overs and Mergers (the City Code), the offeror will be required to offer the same terms to all shareholders, unless this requirement is waived in accordance with the provisions of the City Code. If all the shares held by Newco are acquired, it will trigger the right under s.979–981 of the Companies Act 2006 of the offeror to acquire all the public shares on the same terms and the right under ss.983–985 of the public shareholders to sell their shares to the offeror on those terms.

In the meantime, the Uniq shares can be dealt in on the Alternative Investment Market of the London Stock Exchange. Before the scheme, Uniq’s shares were listed on the Official List but, once the proportion of shares in public hands fell below the threshold of 25% as a result of the scheme, the listing had to be cancelled.

For the purpose of giving effect to the scheme and the restructuring, Uniq, the trustee, Newco and the PPF have entered into an Implementation and Relationship Agreement. It provides, among other things, for the arrangements between Newco and Uniq after the scheme and pending any disposal of Newco’s shareholding in Uniq. These provisions seek to balance Newco’s requirement for information as regards the conduct of Uniq’s business with the independence of the board of Uniq and its ability to manage the business in the interests of all shareholders.

The statutory requirements for the scheme to be sanctioned have been satisfied. A meeting of members was convened pursuant to an order made under s.896 of the Companies Act 2006 and a circular containing an explanatory statement in accordance with s.897 and notice of the meeting, as well as a notice of a general meeting to consider the special resolution required for the restructuring, was sent to members. Section 899(1) requires the scheme to be approved by a majority in number representing 75% in value of the members voting at the meeting. Of the 1,695 members holding 58,333,463 shares who voted at the meeting, 1,646 members holding 58,290,359 voted to approve the scheme.

While members holding over half the issued shares voted in favour of the scheme, the turnout by number was 14.8%, leaving 9,773 members who did not vote. The court is concerned to see that the class to be bound by the scheme was fairly represented at the meeting. Depending on the circumstances, a low turn-out in terms of value or number may be a matter of concern. It would certainly be a matter of concern if there were cogent evidence to the effect that a substantial number of members were opposed to the scheme but had not voted, particularly if their opportunity of doing so had been curtailed in some way. But, as Mr Thornton submitted, a failure to vote may indicate nothing more than indifference or a belief that other members would vote through the scheme.

As a result of its history, Uniq has an unusually high number of members with very small shareholdings. The accounts for 2009 show that out of 11,993 members on 31 December 2009, 10,176 members had holdings of up to 1,000 shares, totalling just 2.69% of the issued shares. Against this background, it is neither a surprise nor a matter of concern that the turn-out by member was not larger.

Sections 895 and 899 require a scheme to constitute a compromise or arrangement between the company and its members or creditors, or classes of members or creditors. Where members or creditors give up all their rights and receive no benefit, there is no compromise or arrangement: Re NFU Development Trust Ltd [1972] 1 WLR 1548. If regard is had only to the terms of the scheme itself, the existing members see their 100% equity interest diluted to 9.8%, without any benefit to Uniq or themselves unless the restructuring as a whole is completed. If the restructuring is completed, a very substantial benefit is conferred on Uniq and, while the existing members’ interests are reduced to 9.8%, they retain an interest in a viable company. It would, in my judgment, be artificial to confine the analysis to the terms of the scheme itself when the scheme forms an integral part of a restructuring which confers substantial benefit on the members bound by the scheme. I agree with the approach of Mann J in Re Bluebrook Ltd [2010] 1 BCLC 338 at [72] to [74].

It is true that it was possible for the scheme to come into effect but for the rest of the restructuring not to do so. This was neither intended nor likely, and it would not in my view be sensible or realistic to ignore the benefits flowing from the restructuring on the basis of this possibility.

The various changes in the share capital of Uniq involved in the scheme required the authority of a resolution in general meeting. A single special resolution provided for each change. Paragraphs (a) and (b) were in these terms:

“(a)

each of the ordinary shares of 10 pence each in the capital of the Company then in issue be divided into 100 ordinary shares of 0.1 pence each;

(b)

The Directors be and are hereby empowered to capitalise any part of the amount then standing to the credit of any of the share premium account for the purpose of paying up in full at par up to 14,993,817 new shares to be issued to the Shareholders, such shares to be allotted and issued credited as fully paid up to and among such Shareholders in the proportion of one new share for every 100 ordinary shares held.”

There is no scope for amending a special resolution in the light of s.283(6)(a) of the Companies Act 2006 that a resolution passed at a meeting “is not a special resolution unless the notice of the meeting included the text of the resolution”. However, if it appears from the text of the resolution, when read with the accompanying circular, that an error has been made, the resolution can be read as a matter of construction as if the error had not been made: Re Willaire Systems plc [1987] BCLC 67 at 75.

It is clear from the terms of the resolution, read in the light of the number of issued ordinary shares, that the correct number in sub-paragraph (b) is 114,993,817. There is no ambiguity or room for doubt about this. The resolution should be construed so as to correct the error.

The error was noticed before the meeting and notified by the chairman to the meeting. The resolution was proposed and passed as set out in the notice, but with the meeting agreeing, and the minutes stating, that it should be read as relating to the correct figure. This was, in my judgment, a correct procedure and the resolution takes effect as clearly intended.

There are two provisions of the scheme which need to be considered in this context. Clause 6 makes provision, as does the Regulated Apportionment Arrangement Deed, for the payment of the Uniq Share Amount by Uniq to Uniq Holdings, by Uniq Holdings to UPF and by UPF to Newco. Newco then applies that sum in subscribing for the new shares in Uniq which give it 90.2% of the enlarged issued share capital. Clause 9 permits Uniq to “pay all costs and give all indemnities which are necessary or desirable in connection with the implementation of this Scheme”. Uniq has given certain indemnities and agreed to pay certain costs to which I shall refer.

Section 678 (1) of the Companies Act 2006 makes it unlawful, where a person is acquiring or proposing to acquire shares in a public company, for the company or any subsidiary to give financial assistance directly or indirectly for the purpose of the acquisition before or at the same time as the acquisition takes place. Section 678 (2) provides an exception:

“(2)

Subsection (1) does not prohibit a company from giving financial assistance for the acquisition of shares in it or its holding company if–

(a)

the company's principal purpose in giving the assistance is not to give it for the purpose of any such acquisition, or

(b)

the giving of the assistance for that purpose is only an incidental part of some larger purpose of the company, and the assistance is given in good faith in the interests of the company.”

Further exceptions are provided by s.681, including anything done in pursuance of an order of the court sanctioning a scheme of arrangement: s.681(2)(e).

The categories of “financial assistance” to which s.678 applies are set out in s.677(1):

“(1)

In this Chapter “financial assistance” means–

(a)

financial assistance given by way of gift,

(b)

financial assistance given–

(i)

by way of guarantee, security or indemnity (other than an indemnity in respect of the indemnifier's own neglect or default), or

(ii)

by way of release or waiver,

(c)

financial assistance given–

(i)

by way of a loan or any other agreement under which any of the obligations of the person giving the assistance are to be fulfilled at a time when in accordance with the agreement any obligation of another party to the agreement remains unfulfilled, or

(ii)

by way of the novation of, or the assignment (in Scotland, assignation) of rights arising under, a loan or such other agreement, or

(d)

any other financial assistance given by a company where–

(i)

the net assets of the company are reduced to a material extent by the giving of the assistance, or

(ii)

the company has no net assets.”

For these purposes, “net assets” means the aggregate amount of the company’s assets less the aggregate of its liabilities: s.677(2). This refers to the actual, rather than book, value of assets and liabilities, save that liabilities include provisions made in its accounts: s.677(3).

I shall take first the successive payments of the Uniq Share Amount for which clause 6 of the scheme provides. In the account which follows I shall ignore some small deductions made at each stage. Clause 6.1 provides that Uniq will pay that amount plus £13.345m to Uniq Holdings “in part in repayment of an existing, on demand loan from Uniq Holdings to [Uniq] and in part in payment of an advance to Uniq Holdings”. Under cl.6.2, Uniq Holdings makes a loan of the Uniq Share Amount plus £13.345m to UPF. Under cl.6.3 UPF pays the Uniq Share Amount plus £897,000 to Newco “in consideration for Newco assuming UPF’s liability to the Salary Related Section in accordance with the Regulated Apportionment Arrangement Deed”. The balance of £13.345m over £897,000 is to be paid to the trustee in respect of its s.75 debt. Clause 6.5 provides for Newco to pay the Uniq Share Amount to Uniq in consideration for the issue of the new shares to it.

The potential for these payments to contravene s.678(1) is therefore clear. Each of the payments under sub-clauses 6.1- 6.4 is made by Uniq or by a subsidiary in an amount calculated as being the amount required to pay up the new shares and with a view, as shown by cl.6.5, to its application by Newco for that purpose.

Each payment must be examined having regard to the circumstances of each paying company, while of course having regard to the overall scheme both of cl.6 and more generally. As often observed, the two main questions as regards any transaction in the context of s.678 are: is it “financial assistance” and is it given for the purpose of the acquisition of shares in the company giving the assistance or in its holding company. For these purposes, it is necessary to look at the transaction as it affects the company which may be said to be giving the financial assistance: Charterhouse Investment Trust Ltd v Tempest Diesels Ltd [1986] BCLC 1.

As to what constitutes “financial assistance”, Hoffmann J said in that case, in a passage subsequently approved by the Court of Appeal in Barclays Bank plc v British & Commonwealth Holdings plc [1996] 1 BCLC 1 and in Chaston v SWP Group plc: [2003] 1 BCLC 675:

“There are two elements in the commission of offence under s.54 [of the Companies Act 1948]. The first is the giving of financial assistance and the second is that it should have been given ‘for the purpose of or in connection with’ in this case, a purchase of shares… There is no definition of giving financial assistance in the section, although some examples are given. The words have no technical meaning and their frame of reference is in my judgment the language of ordinary commerce. One must examine the commercial realities of the transaction and decide whether it can properly be described as the giving of financial assistance by the company, bearing in mind that the section is a penal one and should not be strained to cover transactions which are not fairly within it.”

If a company makes a payment for full consideration received by it or its subsidiary and with the genuine purpose of advancing its own interests and not in order to provide financial assistance, it could well be said that it was not, in the ordinary language of commerce, financial assistance, notwithstanding that it knows that the recipient will use the money paid to fund the acquisition of shares in the company or its holding company. In the light of Belmont Finance Corporation Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393 (CA) and Chaston v SWP Group plc, that maybe controversial. Better then to consider whether each payment falls within any of the categories of financial assistance in s.677(1) and, if so, its purpose.

The payment by Uniq to Uniq Holdings is partly the repayment of an on demand loan and partly the making of a loan. The former does not fall within any of the categories and is indeed not capable of constituting financial assistance as it is simply the performance of an unconnected obligation. The making of loans by Uniq to Uniq Holdings and by Uniq Holdings to UPF is, of course, within a defined category. The payment of the Uniq Share Amount by UFP to Newco in consideration for the assumption by Newco of UFP’s liability to the salary related section could fall only within s.677(1)(d) but then only if it reduced UPF’s net assets. On the evidence, it is clear that it will not do so. The total payment of £79,951,377, including the Uniq Share Amount of £66.9m, to Newco and the trustee will result in the release of actual and prospective liabilities in respect of the salary related section for which a provision of £231.7m was made in UPF’s latest audited accounts, for 2009.

Turning to purpose, I am satisfied on the evidence that the purpose of the payment to Newco is to obtain that release. The release is overwhelmingly in the interests of UPF, and of Uniq and Uniq Holdings as holding companies of UPF and as obligors in respect of the salary related section. It follows, and I am satisfied, that their purpose in making loans of all or part of the Uniq Share Amount under cl.6 is to put UPF in funds to secure that release. This is the case, notwithstanding that it is known and intended that it will be used by Newco to pay up the new shares. Even if that could properly be regarded as a purpose of the loans and payment, I would be satisfied that the principal purpose was to obtain the release and that they were made in good faith in the interests of the relevant companies, so falling within s.678(2).

There was the possibility under the arrangements that the loans and payments could be made and the proceeds applied by Newco in paying up the new shares, without the releases taking effect. This would have occurred if certain conditions had not been met. However, the risk is considered very low and I am satisfied that the true purpose remained securing UPF’s release.

Turning then to the indemnities and expenses, Newco will require certain corporate administrative services to be performed, for which Uniq has agreed to pay, together with certain professional fees, and it has provided indemnities against tax and other indemnities to Newco and others in connection with the restructuring. Some of these indemnities and payments relate to or arise directly as a result of Newco’s acquisition of shares in Uniq.

Assuming that they constitute the giving of financial assistance for the purpose of the acquisition, they will not be unlawful, if done in pursuance of an order under s.681(2)(e).

In his submissions, Mr Thornton drew attention to an approach, adopted by the court in respect of previous schemes which involved the provision of financial assistance, of applying by analogy the provisions of the “whitewash” procedure in s.155 of the Companies Act 1985 which permitted private companies to give financial assistance. The conditions were (i) a statutory declaration that there were no grounds on which the company could be found to be unable to pay its debts and (ii) the financial assistance either did not reduce the net assets of the company or, to the extent that it did, the reduction was covered by distributable profits. Mr Thornton submitted that these conditions were in fact satisfied, treating the evidence as equivalent to a statutory declaration as was always done, but suggested that a different and broader approach, centred on the interests of creditors and members, should be applied now that s.155 had been repealed and not replaced.

It is, I consider, important to note that the power of the court under s.681(2)(e) to sanction financial assistance as part of a scheme is not qualified by reference to particular criteria. Satisfaction by analogy of the conditions of s.155 was never, in my view, a necessary pre-condition to the exercise of the power. Rather, it was the other way round: if those conditions were satisfied, there would in general be no reason not to exercise the power.

I am not going to attempt some test for the exercise of this unqualified power. A general approach will develop as a result of its exercise in the particular circumstances of individual cases. However, I am satisfied that in this case the approval of the indemnities and the payment of costs, which in reality can come only from Uniq but are commercially necessary for the restructuring, are for that reason in the interests of both creditors and members. The restructuring will substantially improve the position of both creditors and members. On that basis, I will exercise the power to approve them.

With these individual difficulties resolved, it remains to consider the most important question on any scheme: whether to exercise the discretion of the court to sanction it.

The classic formulation of the court’s approach remains that stated in successive editions of Buckley on the Companies Acts, based on Court of Appeal authority and cited in decided cases too numerous to mention:

“Once the meetings have approved the scheme, the sanction of the court must be sought. The sanction of the court is not a formality. The court has an unfettered discretion as to whether or not to sanction the scheme, but it is likely to do so, so long as (1) the provisions of the statute have been complied with, (2) the class is fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent, and (3) that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve…

The Court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting, but, at the same time, the court will be slow to differ from the meeting, unless either the class has not been properly consulted, or the meeting has not considered the matter with a view to the interests of the class which it is empowered to bind or some blot is found in the scheme, or if the Chairman did not conduct the meeting substantially in accordance with the procedure laid down by the court.”

I am in no doubt that these conditions are satisfied and that this is a scheme which an intelligent and honest member acting in his interests as such might reasonably approve. The effect of the scheme is to dilute heavily the members’ present interests and to leave them in a position where their shares may be compulsorily acquired if a general offer is made and accepted by Newco in respect of its 90.2% interest. These and other features are clearly explained in the circular, but the restructuring represents the only viable means of enabling the group to continue in business, free of the pension deficit, and thereby permitting the existing members to retain some value in their shares.

Accordingly, I sanctioned the scheme and confirmed the reduction of capital for which it provides.