Marconi Corporation Plc (now Telent Limited), Re

This is my judgment on an application to the court for directions by the supervisors of two schemes of arrangement pursuant to section 425 of the Companies Act 1985 (“the Schemes”), entered into between Marconi Corporation Plc (“Corp”), Marconi Plc (“PLC”) and their respective creditors, which were sanctioned by the High Court on 12 May 2003 and came into effect on 19 May 2003.

Corp was the principal trading company of the former Marconi Group. PLC was the holding company of the Group and the parent company of Corp. The broad purpose of the Schemes was to give effect to a proposed restructuring of the Marconi Group whereby the claims of all the creditors of Corp and PLC (with specified exceptions) (“the Scheme Creditors”) were cancelled in consideration of specified distributions of assets (“the Scheme Consideration”) pro rata to their claims. The potential claims of the Scheme Creditors which were thus extinguished amounted in total to approximately £9.9 billion (£5.2 billion in relation to Corp, and £4.7 billion in relation to PLC).

The present supervisors of the Schemes (and of an amendment scheme in relation to PLC and its creditors which was sanctioned by the court on 3 October 2006) are Samantha Bewick and Richard Heis, respectively a director and a partner in KPMG LLP. The application is made pursuant to clause 55(6) of each Scheme, which empowers the supervisors “to apply to the Court for directions in relation to any particular matter arising in the course of the Scheme”. The evidence in support of the application consists of a witness statement by Samantha Bewick dated 26 October 2012, in which she sets out the background, explains the problem on which the guidance of the court is now sought, and exhibits the relevant documents.

The application is unopposed, and is supported by the trustees (“the Bond Trustees”) of the two classes of bonds to which the application relates, namely the Eurobonds and the Yankee Bonds (in each case as defined in the Schemes). Law Debenture Trust Corporation Plc is the Eurobond Trustee in respect of the Eurobonds, while Bank of New York Mellon is the Yankee Bond Trustee in respect of the Yankee Bonds.

The problem concerns the distribution of the comparatively small residue of the Scheme Consideration which will still be held within the Schemes, to the order of the Eurobond and Yankee Bond Trustees, immediately before the final distribution is made to the Scheme Creditors. It is convenient to use the term “the Remainder” to describe this residue and the interest that has accrued on it. The existence of the Remainder has come about because, put shortly, a distribution of Scheme Consideration to Scheme Creditors in respect of the Bonds may be made only where a valid Account Holder Letter has specified a Designated Recipient. There are two types of situation where, despite the making of lengthy and exhaustive enquiries, these conditions remain unsatisfied. The first is where no Account Holder Letter has ever been submitted in relation to the relevant Bonds. The second is where Account Holder Letters have been submitted, but crucial information which would enable a distribution to be made (such as details of the Designated Recipient’s bank account) is either incomplete or inaccurate, with the result that no transfer of money to the Designated Recipient can be made.

Bondholders in these two categories are referred to in the evidence as “Silent Bondholders” and “Bounce-Back Bondholders” respectively. It is the money which is earmarked for distribution to these two categories of bondholders which comprises the Remainder, and the question is what should now be done with it. When appropriate directions have been given, the Scheme supervisors will be in a position to cause the penultimate, and shortly thereafter the final, distributions to be made under the Schemes, which can then be terminated.

I have had the benefit of full and careful submissions, both written and oral, from the single counsel instructed on behalf of the Scheme supervisors, the Eurobond Trustee and the Yankee Bond Trustee, Mr David Allison. I am grateful to him for his expert assistance.

For present purposes, the detailed background to the Schemes is unimportant. As Ms Bewick says, they were necessarily complex arrangements, dealing as they did with creditors with potential claims (expressed in sterling) of approaching £10 billion. It was a condition of the principal financial creditors’ support for the Schemes that an early distribution of the majority of the Scheme Consideration should be made to those creditors whose claims were known and had been admitted. Such a distribution (the “First Initial Distribution”) took place as soon as reasonably practicable after the Schemes became effective on 19 May 2003. Ms Bewick gives details of the extensive steps which were taken to publicise the Schemes, and which led Mr Justice Lindsay to comment, in the course of his judgment approving the Schemes on 12 May 2003, that:

“massive inquiries have been made over a long period to establish who are the scheme creditors and what are the debts due to them that fall within the scheme. The nature of the inquiries, the length of time over which they have been made and the wide publicity given to the scheme all make the sudden emergence of a scheme creditor with uncertain claims less likely than would commonly be the case in comparable schemes.”

The most significant groups of Scheme Creditors of Corp were as follows:

The most significant groups of Scheme Creditors of PLC comprised the lenders of the Bank Debt, the holders of the Eurobonds and the holders of the Yankee Bonds, in respect of each of which PLC had guaranteed the obligations of Corp, together with other third party claims.

The largest contingent claim within the Schemes was an alleged claim in a US class action against Corp and other co-defendants, brought by the Millionerrors Investment Club and other former shareholders of FORE Systems Inc (“FORE”). FORE had been acquired by Corp in April 1999, and the claim alleged that, as part of the acquisition, Corp had paid amounts to directors and officers of FORE in breach of SEC regulations. The amount of damages claimed was never fully quantified, but could have been as much as US $450 million. In accordance with the principle of full provision against contingent claims, an amount of US $450 million was reserved against the claim, but in early 2004 the dispute was settled in Corp’s favour with no amount due to be paid to the claimants. Shortly afterwards, the Scheme supervisors directed that a further distribution of Scheme Consideration be made, in an amount equivalent to the reserve. This further distribution was called the “Millionerrors Further Distribution”.

The key operative provisions of the two Schemes are summarised in the evidence as follows:

The Scheme Consideration available for distribution to Admitted Scheme Creditors of Corp initially comprised £340 million in cash, plus new senior and junior notes and 995 million new ordinary shares in Corp, representing 99.5% of Corp’s share capital following implementation of the restructuring. The Scheme Consideration available for distribution to creditors of PLC was almost entirely derived from the Corp Scheme, with the result that the Admitted Scheme Creditors of PLC were also entitled to a mixture of cash, new notes and new shares. Since the Effective Date, the new notes have been redeemed and the new shares were sold in 2007, with the result that the undistributed balance of the Scheme Consideration now consists only of sterling and US dollar cash.

The Bonds were initially issued in global bearer form, with the immediate interests of persons (defined as “Account Holders”) in the Bonds being recorded in records maintained by three clearing systems, namely Euroclear, Clearstream (Luxembourg) and DTC. Arrangements were later made, however, for the Bonds to be held in so-called definitive, or individual, global form. The purpose of this was to enable the underlying investors with the ultimate economic interest in the Bonds to participate fully as creditors at the Scheme Meetings, and for their individual votes to count in determining whether or not there was a majority in number voting in favour of the Schemes.

Each Account Holder was required to submit an Account Holder Letter in a prescribed form. The Account Holder Letter had several functions, of which the most important for present purposes were:

It is important to note, however, that the individual Account Holders (who themselves were not necessarily the same persons as either the Definitive Holders or the Designated Recipients of their holdings of Bonds) were not treated as Scheme Creditors in respect of their holdings. That role was fulfilled by the Bond Trustees, that is to say the Eurobond Trustee and the Yankee Bond Trustee. The Bond Trustees therefore participated in the Schemes as creditors in respect of all the issued Bonds, and received a pro rata share of the Scheme Consideration accordingly, whether or not duly completed Account Holder Letters had been provided for the individual bondholders.

It is this feature of the architecture of the Schemes which has given rise to the Remainder. The Remainder represents the difference between (a) the pro rata share of the Scheme Consideration attributable to the collective body of bondholders by reference to the Scheme claims submitted by the Bond Trustees for the full face value of the Bonds, and (b) the Scheme Consideration actually distributed, or to be distributed, to properly nominated Designated Recipients in respect of whom all necessary information to enable distributions to be made to them has been supplied.

As at 28 September 2012, the Remainder amounted to approximately £1,309,000 and US $2,899,000. This was the balance left after the First Initial Distribution in May 2003, the Millionerrors Further Distribution in May 2004, and a series of subsequent supplementary distributions, in diminishing amounts, down to August 2012 which were made to reflect the receipt of additional Account Holder Letters. Although a substantial amount by normal standards, the Remainder represents only a tiny proportion of the total Scheme Consideration. According to Ms Bewick, the Remainder represents less than 0.4% of the total amount of Scheme Consideration attributed to the Bond Trustees under previous distributions; and the proportion is of course even smaller if one includes the distributions made to creditors other than the bondholders. According to a helpful calculation contained in counsel’s skeleton argument, if the sums of £1,309,000 and US $2,899,000 were to be shared pari passu among all the Scheme Creditors (i.e. bondholders and non-bondholders alike), this would lead to additional distributions of 0.033% and 0.072% respectively; while if the sums were shared pari passu among the bondholders (i.e. the Designated Recipients who have complied with the necessary conditions) the additional distributions would still be of only 0.071% and 0.156% respectively.

I have already explained how the existence of the Remainder is attributable in part to holdings of Bonds for which no Account Holder Letter has ever been submitted (the Silent Bondholders), and in part to holdings in respect of which the Account Holder Letters are either incorrect or incomplete, as a consequence of which attempted payments to the Designated Recipients have “bounced back” (the Bounce-Back Bondholders). I will now say a little more about these two categories.

The Silent Bondholders represent approximately 0.29% in value of the Bonds. The amount of the Remainder attributable to them, as at 28 September 2012, was approximately £313,000 and US $462,000, together with an appropriate share of the accrued interest, still held in bank accounts maintained by the Distribution Agent. Since the last valid Account Holder Letter was submitted as long ago as 19 September 2006, it is the view of Ms Bewick, and also of Bondholder Communications, that it is now unlikely that any Account Holder Letters will ever be submitted on behalf of Silent Bondholders. I was informed at the hearing on 4 December 2012 that, in a final effort to elicit such letters, a notice was sent by Bondholder Communications to all Account Holders on 24 November 2012, warning them that failure to submit a duly completed Account Holder Letter would mean that the relevant Scheme Consideration would not be distributed. Three responses to this communication had been received by the date of the hearing, one of which said that consideration was being given to submission of an Account Holder Letter, while the other two merely said that they were considering their position. It is possible that a handful of further Account Holder Letters may yet emerge, whether pursuant to the notification sent on 24 November 2012 or otherwise, but I am satisfied on the evidence that it is safe to assume that the overwhelming majority of the Silent Bondholders will remain unknown.

The existence of the Bounce-Back Bondholders only became apparent when attempts were made to distribute the First Initial Distribution and the Millionerrors Further Distribution and payments “bounced back”. As Ms Bewick explains, efforts were subsequently made to obtain the necessary bank account details from the Relevant Account Holders, with some measure of success; but there remains a substantial number of Bondholders for whom there is no reasonable prospect of obtaining the necessary information, despite the best efforts of Bondholder Communications and the Distribution Agent. As at 28 September 2012, the amount of the Remainder attributable to the Bounce-Back Bondholders was approximately £606,000 and US $1,945,000, together with accrued interest.

Each of the Schemes is in materially identical terms, so I will confine myself to the provisions of the Corp Scheme. I have already summarised the general effect of many of the relevant provisions, and as one would expect for a scheme of this size the documentation is voluminous. I will therefore focus on a few key provisions which have a particular bearing on the question of what to do with the Remainder.

Recital H of the Scheme recorded that its purpose was:

“… to constitute a compromise and arrangement between the Company and the Scheme Creditors by:

(1)

the Scheme Creditors exchanging their Admitted Scheme Claims for the Scheme Consideration; and

(2)

providing full and effective releases of all of the Company’s Liabilities in respect of Scheme Claims.”

Recital I was headed “The Bonds and the Scheme”, and provided that:

“With the agreement of the Eurobond Trustee, the Yankee Bond Trustee and the Book-Entry Depositary respectively:

(1)

Claim Forms in relation to the Bonds are to be returned by the Eurobond Trustee … and the Yankee Bond Trustee … respectively;

(2)

persons with interests in or in respect of Bonds have been invited to instruct their Account Holders as to the manner in which the Account Holder Letter delivered in respect of each of the Bonds in respect of which they have an interest should be completed including, in particular, as to the identity of the Definitive Holder and any Designated Recipients;

(3)

[This provided that the Definitive Holders would be the persons entitled to attend and vote at the Scheme meetings];

(4)

Scheme Consideration which is to be distributed in relation to the Bonds is, with the authority and at the direction of the Eurobond Trustee and the Yankee Bond Trustee (as the persons with Submitted Scheme Claims in relation to the Bonds which will have been Admitted), to be distributed to Designated Recipients;

(5)

as a result, and subject as provided in Recital I(6) below, references in this Scheme to Scheme Creditors shall, in relation to the Bonds:

(a)

in the context of entitlements to make a Scheme Claim, submission of Claim Forms and receiving or directing the receipt of Scheme Consideration in respect of that Scheme Claim be construed as references only to the Eurobond Trustee and the Yankee Bond Trustee in relation to the Bonds; and

(b)

in the context of entitlement to be appointed to the Creditors’ Committee and attend and vote at meetings of Scheme Creditors be construed as references only to the Definitive Holders; …”

“Designated Recipient” is defined in recital A as meaning:

“a person specified in the valid Account Holder Letter … relating to a particular principal amount of Bonds as being the recipient of any part of the First Initial Distribution and of any further Distribution in respect of those Bonds …”

Part III of the Scheme deals with the determination of Scheme Claims and the procedure for distribution to Scheme Creditors, in terms which (so far as material) reflect the recitals which I have quoted. Clause 23(10) is of particular significance, because it expressly recognises the possibility of the Remainder arising and provides for its treatment as follows:

“In the case of a Scheme Claim in respect of Bonds which is Admitted where the aggregate total of all Distributions to Designated Recipients in respect of that claim is less than the Distribution to which the Eurobond Trustee or the Yankee Bond Trustee as appropriate in respect of that claim is entitled, the remainder of the Scheme Consideration shall be held by the Escrow Trustee and dealt with in accordance with the Escrow and Distribution Agreement.”

Clause 25 deals with the making of further distributions after the expiry of the Waiting Period, i.e. one year after the Effective Date (or in certain events a shorter period). By virtue of sub-clause (3), the Undistributed Scheme Consideration is then to be used to make further Distributions to Eligible Recipients on the following basis:

“(a)

…

(b)

the Supervisors’ approach to further Distributions shall be in accordance with the approach a liquidator would take following Liquidation Distribution Principles including the following concepts:

(i)

the setting of final dates by which a creditor must claim if it wishes to participate in a planned dividend;

…

(iii)

generally, the concept of pari passu distribution;

…”

“Liquidation Distribution Principles” are defined as meaning “English law relating to dividends paid to creditors in a liquidation under English law”.

Part V of the Scheme is headed “Escrow and Distribution Arrangements”. By virtue of clause 33, the Escrow and Distribution Agreement came into force on the Effective Date, in so far as it had not already done so. Clause 34 provides that the Escrow Trustee is to hold the Scheme Consideration on trust for the Scheme Creditors:

“All of the Scheme Consideration allotted, issued and/or transferred to the Escrow Trustee or its nominee shall be held by the Distribution Agent or the Escrow Trustee’s nominee as the case may be as custodian for the Escrow Trustee. The Escrow Trustee shall hold that Scheme Consideration on bare trust absolutely for the Scheme Creditors on the basis set out in the Escrow and Distribution Agreement … Subject to the provisions of the Escrow and Distribution Agreement, the Escrow Trustee shall at no time whatsoever, either present or future, have any beneficial interest in the Scheme Consideration …”

The Escrow and Distribution Agreement was entered into on 27 March 2003 between parties who included Corp, PLC, the Escrow Trustee, the Bank of New York in its capacity as the Distribution Agent as well as its capacity as the Yankee Bond Trustee, the Eurobond Trustee, Bondholder Communications, and the future supervisors of the Scheme.

Recitals (E) and (F) were in the following terms:

“(E)

Each Scheme provides for the appointment of an escrow trustee and a distribution agent who will be responsible for, amongst other things, holding the Scheme Consideration (as separately defined in each Scheme) on trust for and distributing the Scheme Consideration to the relevant Scheme Creditors and Designated Recipients … who become entitled thereto pursuant to the operation of the relevant Scheme.

(F)

The Escrow Trustee has been incorporated and will act as trustee in respect of the Scheme Consideration under the Schemes. The Distribution Agent will agree on the terms of this Agreement to act as custodian of the Trust Funds for the Escrow Trustee and to distribute the Scheme Consideration to Admitted Scheme Creditors and Designated Recipients in accordance with the terms of the Schemes and this Agreement.”

Clause 3(2) provided that the Escrow Trustee should apply the Scheme Consideration received by it “in accordance with the terms of the Scheme pursuant to which it was received”. By virtue of clause 5(7), the Escrow Trustee undertook to hold various components of the Scheme Consideration on bare trust for the Scheme Creditors. Clause 5(8) provided that it should be a term of each such bare trust constituted by sub-clause (7) that:

“(a)

the Supervisors of each Scheme shall have authority to give instructions to the Escrow Trustee and the Distribution Agent in order to give effect to the terms of the relevant Scheme and that the Distribution Agent shall have authority to act on the instructions of the Supervisors of the relevant Scheme … with regard to the distribution of the property the subject of such trust;

…”

Clause 7 dealt with distributions under the Corp Scheme. In respect of each distribution, it provided for the supervisors to deliver a duly completed Distribution Notice to the Escrow Trustee identifying each Admitted Scheme Creditor, which in this context included the Bond Trustees, but did not include Account Holders or Designated Recipients who were to be dealt with as provided in sub-clause (6). Clause 7(5) provided for the Scheme Consideration attributable to the Bond Trustees to be delivered to the Designated Recipients, and contained detailed undertakings by Bondholder Communications to take steps to collate and provide all necessary information to the Distribution Agent for that purpose. Clause 7(6) then directed the Distribution Agent, acting on behalf of the Escrow Trustee, to make payments of the various components of the Scheme Consideration referable to the Bonds in accordance with the relevant directions contained in the relevant Account Holder Letters.

Clause 7(6)(d), read with the definition of “Relevant Conditions” in sub-clause (6)(e), is of particular importance, because it deals with the application of Scheme Consideration in circumstances where the necessary information to make a distribution to a Designated Recipient is lacking:

“(d)

… if the Relevant Conditions (as defined below) have not been satisfied in relation to a Designated Recipient of Scheme Consideration initially attributable to the Eurobond Trustee or BoNY, as the case may be, (whether in the Initial Distribution or any Further Distribution) before the termination of the Scheme, [the Distribution Agent is directed] to (i) (in the case of the Eurobond Trustee) hold that Scheme Consideration to the order of the Eurobond Trustee pending any directions from it, which directions will be given by the Eurobond Trustee if and to the extent that it is authorised or directed by an extraordinary resolution passed at a Eurobond Meeting or by court order and (ii) (in the case of BoNY) transfer all such Scheme Consideration to BoNY or to its order (including, but without limitation, by way of a payment into court);

(e)

in this sub-clause (6), “Relevant Conditions” in relation to a Designated Recipient means that (i) a duly completed Account Holder Letter naming that Designated Recipient and (ii) confirmation satisfactory to Bondholder Communications that corresponding Custody Instructions have been given have been received by Bondholder Communications and confirmed by it to the Distribution Agent and all information necessary to make the relevant Distribution has been provided by Bondholder Communications to the Distribution Agent … For the avoidance of doubt, once the Relevant Conditions are met in respect of a Designated Recipient, the Distribution Agent will pay or transfer to that Designated Recipient all Scheme Consideration (and any income accrued in respect of it) to which that Designated Recipient would have been entitled had the Relevant Conditions in relation to it been met prior to 17 April, 2003 without further direction from any of the parties to this Agreement; …”

Clause 8 then deals with distributions under the PLC Scheme, in terms which are in all material respects identical to those of clause 7.

It is convenient to note at this point that, although clauses 7(6)(d) and 8(6)(d) of the Escrow and Distribution Agreement contemplate the Eurobond Trustee seeking the directions of its bondholders at a Eurobond Meeting, the Eurobond Trustee considers that it would no longer be feasible to convene such a meeting. The reason for this, as explained in a letter sent by the Eurobond Trustee to the Scheme supervisors on 25 October 2012, is that over nine years have now passed since the Effective Date of the Schemes, but Euroclear was obliged to hold records of Account Holders for a period of only five years. It follows that Euroclear no longer has records of those Account Holders who had bonds credited in their accounts with the Euroclear clearing system on the Effective Date. Euroclear has also informed Bondholder Communications that it is no longer able to help in identifying those Silent Bondholders who were participants in the Euroclear clearing system.

It is also clear from investigations made by Bondholder Communications that, for various reasons, neither Clearstream nor DTC is able to assist in the identification of the Silent Bondholders who were participants in their respective clearing systems.

The relevant principles of interpretation which I need to apply are helpfully summarised by Mr Allison in his skeleton argument, in terms which for present purposes I am content to adopt:

Against this background, I now consider what directions the court should give to the Scheme supervisors in relation to the treatment of the Remainder.

Although the question is initially one of construction of the Schemes and the Escrow and Distribution Agreement, the answer is not to be found in any particular provision of the Scheme documentation. The possibility of the Remainder’s existence was clearly contemplated in clause 23(10) of the Corp Scheme and in clauses 7(6)(d) and 8(6)(d) of the Escrow and Distribution Agreement; but clause 23(10) merely provides that the Remainder is to be “dealt with in accordance with the Escrow and Distribution Agreement”, while clause 7(6)(d) of that Agreement says that if the Relevant Conditions have not been satisfied in relation to a Designated Recipient the relevant part of the Scheme Consideration is to be held, in effect, to the order of the Eurobond Trustee (where the holding is of Eurobonds) and to the order of the Yankee Bond Trustee (where the holding is of Yankee Bonds).

The only express guidance about the directions which the Bond Trustees may then give is again to be found in clause 7(6)(d). In the case of the Eurobond Trustee, it is provided that “directions will be given … if and to the extent that it is authorised or directed by an extraordinary resolution passed at a Eurobond Meeting or by court order”. As I have explained, it is no longer feasible to convene a Eurobond Meeting, so it is left to the court to give appropriate directions. In the case of the Yankee Bond Trustee, there is no express limitation on what the Trustee may direct, and the words “without limitation” appear to suggest that a wide discretion was intended, but one possibility which is expressly mentioned is payment into court. It is fortunately unnecessary for me to explore what significance, if any, should be attached to these differences in the wording of the options open to the Bond Trustees under clause 7(6)(d), because they have both agreed to abide by the directions that the court gives to the Scheme supervisors, and have indeed agreed to support the present application and instruct the same counsel as the supervisors.

In these circumstances, it seems to me that the task of the court is to give such directions as will best promote the purpose of the Schemes, viewed in their commercial context, and will enable the administration of the Schemes to be terminated without undue further delay.

Following discussions between the Scheme supervisors, the Bond Trustees and Corp, the following options in relation to the treatment of the Remainder have been identified:

In agreement with the submissions of counsel, I consider that Options 1 and 2 are, at this late stage in the administration of the Schemes, the only realistic contenders. I will therefore begin by briefly reviewing the other options, and explaining why I think they should be rejected.

Option 3 (payment of the Remainder to Corp for its own benefit) could be supported on the basis that Corp is the settlor of the trust of the initial Scheme Consideration under the Corp Scheme, and it also indirectly provided the Scheme Consideration under the PLC Scheme. It might therefore be argued that, in relation to the Remainder, the trusts have in substance failed, and the property should revert to Corp under, or by analogy with, the doctrine of resulting trusts. It could also be said that such a treatment would be consistent with the approach adopted under the Schemes in relation to uneconomic distributions, where the sums in question revert to Corp. Against this, however, a distribution to Corp would in my judgment run directly contrary to the fundamental purpose of the Schemes, which was to distribute the Scheme Consideration among the Admitted Scheme Creditors in return for the release of their claims against the Scheme companies. Furthermore, the Remainder is in aggregate a significant sum, and in my view it could not sensibly be said that its distribution would be uneconomic, or that the amounts in question fall to be disregarded as de minimis. In one way or another, it seems to me that the Remainder must be applied for the benefit of Scheme Creditors, and that it would be wrong in principle to allow Corp (or indeed PLC) to benefit from the failure of certain creditors to provide the necessary Account Holder Letters, or to provide the necessary information in such letters.

Option 4 (distribution to the Bond Trustees for their own account) is even less attractive. Their participation in the Schemes in that capacity is purely as trustees, owing fiduciary duties to their beneficiaries, namely the bondholders. In any event, the Bond Trustees have very properly adopted the position that they do not wish to accept the Remainder for their own account. This possibility can therefore be dismissed.

Option 5 (payment to the Crown) was included merely for the sake of completeness, presumably on the basis of a far-fetched analogy with bona vacantia. In my view its adoption could only conceivably be appropriate if there were no other practical way of dealing with the Remainder consistently with the purpose of the Schemes.

Option 6 is included in case the court thinks it appropriate to adopt a solution, to any extent, which the parties have either not thought of or not put forward for consideration. It is convenient to consider it together with Option 7, payment into court, which does at least have the merit of being expressly contemplated in clause 7(6)(d) of the Escrow and Distribution Agreement.

I was at one stage attracted by the thought that the court should, if possible, adopt a solution which would preserve the entitlement of the missing or untraceable Designated Recipients, by analogy with the well-established jurisdiction of the court to make a Re Benjamin order when administering a trust or the distribution of a deceased person’s estate: see Re Benjamin [1902] 1 Ch 723, Snell’s Equity, 32^nd edition, para 33-006, and Lewin on Trusts, 18^th edition, paras 26-45 and 27-15 to 27-16. Another possibility would be to direct that at least a proportion of the Remainder should be paid into court, or continue to be held in an escrow account, in order to meet the claims of any Designated Recipients who may subsequently come to light.

On reflection, however, I accept the submission of counsel that expedients of this nature would be inappropriate in a commercial context of the present type, where the Schemes were approved by the court the best part of ten years ago, where it was made abundantly clear to Scheme Creditors that the submission of a valid Account Holder Letter was a prerequisite to the receipt of Scheme Consideration as a bondholder, and where it was always envisaged that the Schemes would be terminated when the Scheme Consideration had been distributed. I am satisfied on the evidence before me that exhaustive efforts have been made to trace the missing bondholders, and that it would be an unjustifiable waste of time and resources to embark on yet further enquiries. The notice that was sent to Account Holders last November represented a final opportunity, and if any further Designated Recipients have by now emerged as a result of it, they will be included in the final distribution when it takes place.

Having eliminated the other contenders, I now return to Options 1 and 2. The arguments in favour of Option 1 are briefly as follows. First, it would be consistent with the underlying commercial purpose of the Schemes, which is to distribute the Scheme Consideration to Eligible Recipients pro rata to their respective claims. Secondly, it would also be consistent with the Liquidation Distribution Principles which are to be applied to the Schemes and, in particular, with the principle of pari passu distribution: see clause 25(3)(b)(iii) of the Corp Scheme, quoted in paragraph 27 above. Thirdly, it would ensure that Designated Recipients who have satisfied the Relevant Conditions receive the same percentage return on their claims as all the other “non-bondholder” Scheme Creditors, but no more. Fourthly, pari passu distribution would reflect the fact that all of the creditors formed a single class for the purposes of the court meetings that were convened to sanction the Schemes. The well-established test which the court applies in deciding whether the creditors should meet as a whole or in one or more separate classes is whether the rights of those concerned “are not so dissimilar as to make it impossible for them to consult together with a view to their common interest”: see Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583, per Bowen LJ, and Gower & Davies, Principles of Modern Company Law, 9^th edition, para 29-7. Finally, it may be thought that Option 1 accords with business common sense, and that Option 2 would give those Designated Recipients who have satisfied the Relevant Conditions an unmerited benefit at the expense of the non-bondholder creditors.

The strongest argument in favour of Option 2 is that the Schemes provide for the Bond Trustees themselves to be treated as Scheme Creditors with Admitted Scheme Claims equal to the full amount of the sums outstanding in respect of the bonds. When a distribution is made, it is the Admitted Scheme Claims of the Bond Trustees that are used to calculate the pro rata share to be made available to the bondholders. Thus the key principle of pari passu distribution is satisfied, albeit at the level of the Bond Trustees rather than the individual bondholders. Furthermore, no express provision can be found in clause 23(10) of the Schemes or clauses 7 and 8 of the Escrow and Distribution Agreement to the effect that the Remainder is to be divided among all the Scheme Creditors. It may therefore be said that the Remainder should be taken to be earmarked for the bondholders collectively, by virtue of the “higher level” pro rata distribution to the Bond Trustees, and that the discretion of the Court to give appropriate directions should be exercised subject to that overriding principle. On that basis, Option 2 would be the obvious solution to adopt.

The position of the interested parties on this question is as follows. The supervisors consider that the most appropriate way in which to distribute the Remainder would be in accordance with Option 1. The Eurobond Trustee and the Yankee Bond Trustee each consider that either Option 1 or Option 2 should be adopted, without expressing any preference between them. The Escrow Trustee and the Distribution Agent have both confirmed that they will abide by any directions of the court on this application, without expressing any view on which Option should be preferred.

Having carefully considered the rival arguments, I agree with the supervisors that Option 1 is preferable to Option 2. The principle of pari passu distribution is a potent one in insolvency proceedings of all kinds, and it is expressly incorporated in the Schemes as a principle which is to govern the making of distributions. It is true that the principle is satisfied at the higher level of distribution to the Bond Trustees, but in my judgment that does not by itself answer the question whether the principle should again be applied, in favour of the whole body of individual creditors, in relation to the Remainder. In that context, Option 1 has the great merit, to my mind, of preserving equality of outcome between all the known and traceable individual creditors, who were treated as a single class for the purposes of the proceedings to sanction the Schemes in 2003.

Clauses 7 and 8 of the Escrow and Distribution Agreement appear to me to give the court an unfettered discretion in relation to the distribution of the Remainder, and I am unable to find any implicit limitation which would confine the distribution to bondholders or to persons with an interest in the bonds. In the absence of any such limitation, either express or implied, I consider that it is right to accord primacy to the pari passu principle at the level of the individual bondholders in actual receipt of distributions, and then to treat them on the same basis as the non-bondholder creditors, with the result that they will all benefit alike from the Remainder.

For these reasons, I will direct that the Remainder be distributed in accordance with Option 1.